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When a business is facing financial issues, the first instinct for the directors is often to adopt a “wait and see” approach to try and trade their way out of problems. However, experience of insolvency tells us that early action towards restructuring can make a often make a significant difference as to the future of the business.
Business restructuring is often considered when a company is still trading, but cash flow, creditor pressure, falling profits or debt levels are becoming harder to manage.
It doesn’t always mean the business is insolvent, though. In many cases, it is a practical review of what can be changed to protect the company, improve cash flow and give the business a stronger chance of recovery.
This is Part One of a two-part series that explains the practicalities of a restructure. In this article, we look at why restructuring is considered and what an insolvency practitioner may review. Part Two will look more closely at the specific areas of a business that can be restructured.
As always, the specifics of any business choice will be based on the unique nature of your own operations. That said, it is possible to broadly define what we mean by a restructure. So, in general terms, what we are talking about when we say 'restructuring' is:
Business restructuring is the process of changing how a company operates, finances itself or deals with its liabilities. The aim is usually to improve stability, reduce pressure and preserve value.
Whatever else, though, for directors seeing early financial warning signs, restructuring should at least help answer a very key question…
‘Is the underlying business still viable?’
A viable business, and therefore one where restructuring may be an option, is one that has a realistic prospect of continuing if the right changes are made. For example, a company may have strong demand for its products or services, but be struggling because of historic debt, poor margins, expensive premises or slow customer payments. That is a common scenario, and one where we can look at the business as realistically being potentially viable if we can change those circumstances the extent that it moves to a more profitable situation.
It’s about viability.
Key points
To start with, restructuring will potentially be on the table if the current way of operating is no longer sustainable. This may be because costs have increased, sales have fallen, tax arrears have built up, or suppliers and lenders are becoming concerned. At this stage, the question will be around whether the company can survive these pressures before they reach a critical point.
Restructuring is considered if it will help directors deal with these pressures before the options become more limited and insolvency becomes the best (or only) option.
Key points
Someone who is there to advise, perhaps a licensed insolvency practitioner such as ourselves, will usually start by reviewing the company’s financial position and make an initial judgement as to whether the business can realistically continue.
This review may include:
current cash flow and short-term funding needs
aged creditor and debtor reports
HMRC arrears, including VAT, PAYE and Corporation Tax
bank lending, security and, of course, personal guarantees
lease commitments, supplier contracts and customer agreements
employee costs and staffing levels
asset values and whether assets are essential to trading
whether creditors are being treated fairly
Director conduct and decision-making as well as whether formal insolvency procedures may be needed will also be part of the process.
The reason the insolvency practitioner will also consider directors’ duties is about legal responsibility. Under the Companies Act 2006, the duty of a director is to “consider or act in the interests of creditors of the company”. So, when a company is approaching insolvency, directors must be careful not to worsen the position for creditors.
Key points
A company in financial difficulty will usually be reviewed in several areas. Part Two of this series will explore these in more detail, but common areas include:
There is too much to discuss in this article about these areas, but part two will be more granular about how we would approach the restructure.
It is about ending up with a more sustainable business, so the journey to that point will be focused on what creates the resilience needed for that.
Key points
Early advice gives directors more control. Once creditor actions begin, including winding-up threats, County Court Judgments or enforcement by HMRC, the pressure can, and usually will, increase surprisingly quickly.
Taking advice early may also help directors show that they acted responsibly. This is very important where insolvency is possible.
It should be then that restructuring should be considered when warning signs first appear and not when the business has run out of cash. By then, it may be too late.
Key points
Just to recap then:
Business restructuring is usually considered as an option when a company is under financial pressure but may still have a viable future. An insolvency practitioner will look at the company’s cash position, liabilities, trading performance, creditor pressure and the conduct expected of directors to make a decision about whether the business is suitable for restructuring.
The purpose of a restructure is to allow the business to remain trading and pull through its financial difficulties. However, there is no guarantee that a restructure will be enough, and if it doesn’t produce enough resilience to the pressures, then the directors will need to consider other options.
For directors facing early financial problems, the most important step is not to ignore the warning signs. A structured review can help identify whether the business can be rescued, what needs to change and whether formal insolvency options should be considered.
In Part Two, we will look at the specific areas of restructuring in more detail, including creditor restructuring, operational changes, cash-flow improvements, asset reviews and formal rescue procedures.
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