The impact of Covid-19 in the last two years has seen and will continue to see some permanent changes occur in the small to medium business sector.
As businesses and advisors navigate the challenges of forecasting (or guessing) what the future may hold for their client and even their own business, one must think about a variety of issues including whether the industry within which their client’s business operates has shrunk or even changed permanently..
As businesses face new challenges from competitors to ever-changing consumer behaviour to a change in the way sales are achieved, it’s important that for those businesses that are heading into a period of financial distress that they explore all the different kinds of options available to them.
In some of my previous articles we discussed insolvency and restructuring options like the small business restructuring process. But what is the conversation that you have with your clients prior to exploring these insolvency options?
How do you, as an advisor, or even as a business owner look at a business that is suffering financially and determine what the right option is?
We’ve also seen many legislative changes around the world as a result of this pandemic with Governments scrambling to provide insolvency and restructuring solutions that are fit for today’s dynamic economic environment.
Debt restructuring, for example, is one tool available to businesses that can be implemented in a variety of ways, including:
Seeking a new financier to deal with a current financier that no longer wants to invest in, or support, your business.
Considering a change in facilities from an overdraft to factoring, or even a new solution like Afterpay.
The options available to business owners today have never been broader and as a result, can be confusing.
Non-bank financiers range from property funders to development funders and from invoice factoring financiers to overdraft facilities – these are the facilities that have been provided by the major banks. But what is on offer now is quite simply like trying to keep up with the streaming services that exist on TV. As a result, the best approach to seeking a new funding solution is through an experienced and apt advisor.
We continue to see a changing approach from financiers and major commercial banks, particularly in the use of technology and the solutions it creates for customers that need urgent financial debt solutions and access to capital. Through access to clients online accounting software, financiers are now able to quickly calculate what can be lent. This significantly increases the speed with which their clients can get access to working capital.
For some of the medium to large businesses, when their operations fall into financial distress they often have more complex financing arrangements and start by trying to restructure their facilities. This process may involve engaging with stakeholders who are prepared to provide distressed debt funding, equity or even special situation funding (which might involve a combination of debt or equity and even management skill). These kinds of solutions are seen often in medium to large restructures and involve more sophisticated financiers or even investment bankers who can become involved quickly and provide immediate working capital in a distressed financial situation. The term coined “special situation” I suspect has arisen from such experiences.
Often when business owners need to focus on a debt restructure, it tends to happen as part of a greater process such as a Safe Harbour process or an informal restructure or turnaround. The skill set required to find advisers that can assist with such engagements is usually limited to those advisers that operate in the restructuring and turnaround space. The two associations that represent this body are the Australian Restructuring, Insolvency and Turnaround Association (ARITA) and the Turnaround Management Association (TMA). Advisors who are often members of these associations will have the qualifications, experience and industry nous that can provide businesses and their advisors with the right approach and funding that is required to ensure the survival of businesses.
It’s fair to say that the medium to large business operator are more likely to invest in a full blown turnaround and/or restructure process than a small business operator.
It is for this reason that the “rushed” attempt by the Federal Government to introduce the Small Business Restructuring Process was aimed at providing a cost-effective solution to business owners that were operating small businesses, and to also offer alternative mechanisms to dealing with distress other then straight liquidation. However, the reality for business owners is that the path back is very difficult and requires a lot of time invested by the operators and individuals to ensure that the restructure will be a success. In other words, business owners must be prepared for some difficult decisions and a lot of stress!
It is just as important that as advisers you speak with your client about what they’re wanting to achieve and whether they are prepared to invest the time and energy into what might be required to save the business. The business owner must be prepared to accept failure as not all restructures are successful.
There are many occasions and examples of where businesses have engaged advisers or attempted to fix the problem themselves but have failed because of a lack of investment or even technical skill to achieve their objective.
Advisors need to understand their clients objectives and in turn not be afraid to advise when these might be unrealistic, uncommercial or simply not achievable in the current environment. It is apparent now more than ever that we are seeing substantial shifts within industries and how they operate in their space.
I have met with many business owners in the last two years and one common theme is uncertainty. Many are exhausted and are suffering from high levels of anxiety. However, in industries that have been impacted heavily from the pandemic, these challenges create opportunities for growth moving forward.
What is difficult to predict is what the economy might look like in 12 to 18 months’ time. We are seeing early signs of inflation in other countries like New Zealand who have risen interest rates for the first time in seven years. In America, we are also seeing what has been dubbed the “Great Resignation”, as workers quit en masse to take advantage of new opportunities. Despite this, the labour market remains tight possibly due to low immigration, and a high demand for skilled employees placing upward pressure on wages. There is also a general trend towards customers focusing on their personal well-being and health caused by the impact of the pandemic. The changes are widespread and unpredictable.
The pandemic has also bought new challenges to interacting with customers, particularly when it comes to shops and offices where business owners must carefully consider how they choose to operate and balancing this with the wellbeing of their staff and customers.
So how does an advisor then sit down with their client and discuss how to plan for the future of a business that can navigate all these challenges?
It is important that business owners have agile financial forecasting methods and regular conversations with their advisors.
Businesses need to be close to what industry changes are occurring and plan for how they can adapt. It is important that they are in contact regularly with the representatives of their industries or even with their own competitors to continue to seek out any early signs of changes in the market. In the not-too-distant future, there will be a new frontier of challenges for businesses, for example climate change and an increasing global push towards net-zero. Businesses that have just experienced the pandemic, have deferred debt levels may well be presented with new challenges with respect to achieving carbon zero status either voluntarily or through government regulation.
As a result, we may see businesses rely on special situation or debt restructuring advisors more often, particularly in the small to medium-sized space.
Cathro & Partners are experienced restructuring, turnaround and insolvency practitioners that specialise in assisting small to medium businesses who are in financial distress and can quickly assist and assess business positions with advisors for their clients.