In the Post Covid Economy is it Time to Rebuild or Move on?

Friday November 13, 2020

As Government relief measures end businesses will face different choices. For some, this may mean a growth strategy, as competitors may have exited the industry. For others, the choice may be whether they wish to try to rebuild their business, perhaps through a restructure, or finalise their current business and move onto something else.

This month we look at a client who did not have the passion needed to rebuild and decided to exit their business in a controlled and organised manner.

I don’t think I want to do this any more

Our client, Joe and his wife Jill, operated a retail business in a popular tourist strip. The business was severely affected by restrictions during covid-19, but with some easing of these measures was starting to see customers returning. During the downturn, the business had accumulated quite significant debts, and Joe knew it would be hard work to get on top of these liabilities. Joe had been running the business for many years and did not feel he had the necessary drive to rebuild the business again. Jill had never been involved in the business and was pursuing her own career as a teacher.

Joe and Jill decided they wanted to move on. They approached a business broker about selling the business but were advised this could take a long time and in view of the current situation, the business would not command a high price in the market and certainly not sufficient to pay all company debts. On the advice of his accountant, Joe arranged a meeting with de Jonge Read. At that time, the snapshot of the business was as follows:

Stock: $200,000
Fixtures and fittings: $500,000
Motor vehicles x 3: $200,000
Total: $900,000

Bank loan: $400,000
Trade creditors: $100,000
ATO: $600,000
Loan owed to Joe: $150,000
Employee entitlements: $30,000
Rent arrears: $30,000
Total: $1,310,000

Some important points to note were:
  • The bank had an AllPAAP (All Present and After Acquired Property) security interest registered against the company.
  • Trade creditors had PMSIs (Purchase Money Security Interests) registered over stock.
  • While the fixtures and fittings had a book value of $500,000 in reality, these assets had minimal value in a close down scenario.
  • The bank also had a mortgage over Joe & Jill’s house in relation to the bank loan.
  • All ATO lodgements had been made by the due date.
  • Joe had personally guaranteed all trade creditors.
  • The premises lease had a further 18 months to run, with a potential liability of another $240,000. Joe had personally guaranteed the lease.

We note that new legislation, the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 has been proposed and is expected to come in effect on 1 January 2021. de Jonge Read believes this is a positive move and may enable small business owners to engage in the insolvency process where the costs associated has been a barrier in the past. However, in the case of Joe and Jill, they would not be eligible for a debt restructure or a simplified liquidation due to their particular circumstances based on the draft legislation.

What do I need to do to get out?

After considering all the options, and understanding what Joe wanted, we recommended the orderly exit from the business. Doing this in a controlled and organised manner is critical in order to achieve the best outcome for all parties.

Exiting a business is not as simple as turning the lights out and locking the door behind you. Sure, you can do this, but are likely to experience a far worse outcome than if arrangements were made in an organised manner. In this case, we carefully project managed the process and guided our clients every step of the way. So, what happened?

  • Trade creditors were approached and offered the return of their stock for a credit against the company account. While not all trade creditors agreed, the majority did.
  • Remaining stock was sold by agreement with secured trade creditors, who received the proceeds.
  • Trade creditors were paid out in full, with $20,000 left over.
  • Two delivery vans were sold to unrelated parties for a good price.
  • Jill bought the car for a fair price.
  • All proceeds from the sale of motor vehicles, stock and other assets were banked into the company’s bank account.
  • Employee entitlements were paid in full.

After the company had sold its assets for the best price possible the situation looked like this:

Fixtures and fitting: $500,000 (No realisable value in a close down)
Cash at Bank: $190,000
Total: $690,000

Bank loan: $400,000
ATO: $600,000
Loan owed to Joe: $150,000
Rent arrears: $30,000
Total: $1,180,000

All the security interests over the stock have been satisfied and the debts paid out. Employee entitlements have been paid out in full. So, now the company has to distribute the money it has available based on priority and security positions. This means the money on hand was paid to the bank as it has an AllPAAP security interest over the business. The company was able to reduce the bank loan to $210,000.

As the bank also held a mortgage over the family home, Joe and Jill were required to refinance the property in order to payout the business loan. When refinancing Joe and Jill borrowed a little more to fund an attempt at a settlement with the landlord. After these arrangements were made Joe appointed a liquidator to the company. It is important to note that strategic planning of a refinance is paramount as asking for a refinance pre liquidation can lead to a very different result than requesting post.

How do things look for me now?

Now, the personal negotiations with the landlord is probably the subject of a future case study, but the outcome for Joe and Jill here has been tremendous. The insurmountable debts of the company have been dealt with and all security interests satisfied. All employees have been paid their full entitlements, and this was very important to Joe. While they have a debt on their family home, they are in a position to move on with their lives. This was all a great relief to Joe, who can now look forward to the future with enthusiasm rather than feeling he is trapped running a business when he does not want to be there.

Sometimes the best option may be to restructure. Sometimes it may be a debt restructure or Deed of Company Arrangement. On other occasions it may be about protecting personal assets and setting up new ventures in an appropriate way. In this case it was managing a controlled exit from a business. Whatever it is, our only focus is on getting the best outcome possible for your clients and helping them achieve their goals.

Should you have clients or associates that you know are struggling with financial issues or need assistance in reviewing their business affairs in preparation for what’s around the corner, our team of Strategists would be pleased to discuss options that are available on how to best design and implement insolvency strategies. Contact us now on p. 1300 765 080 | ua.mo1721809155c.arj1721809155d@ofn1721809155i1721809155

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Phoenixing is another name of business restructure. Read more about business restructures and when this can be an option for you.

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