In this month’s case study we look at a client that needs a Plan B, or maybe even a Plan C. Even if you think everything will be fine it is always a good idea to have a back-up. After all, high wire artists don’t plan to fall. They expect to get to the other side. They know though, that if something goes wrong, it is best to have a net under you first. Business can be exactly the same.
Our client operated a sizeable manufacturing and installation business related to the construction industry. As the business operated in multiple states, Covid-19 lockdowns had a severe impact on the business. With the debtors similarly affected, collections were slow and cashflow started to grind to a halt.
While cashflow was tight, the situation got very serious when some creditors starting agitating for payment. Total trade creditors were in the order of $4.5m. The director, Frank, had arranged payment plans with the overwhelming majority of creditors. However, five key creditors owed a total of around $1.2m refused payment plans and were seeking payment in full. The business needed the continued support of these creditors to operate.
The director was interested in selling off the manufacturing component of the business. In the current environment though, he believed it would be difficult to achieve a reasonable sale price. Further, it may take some time to find the right sort of buyer for a business of this nature.
Another option Frank was considering was the sale of one of the interstate installation businesses. Interstate travel was almost impossible under covid conditions, and Frank was getting sick of the regular travel anyway. Again, finding a buyer would take time.
In developing a strategy for Frank we considered a number of options. Small Business Debt Restructuring was not an option as the company’s total liabilities exceeded $1m. Debt restructuring via Voluntary Administration would have been an option, but we believed it was too soon to take this major step. Further, a Voluntary Administration may have committed Frank to a certain course of action in the short term, and he was not really sure what he wanted to do yet.
After weighing all the options, we recommended informal negotiations with the five creditors pushing for payment. The challenge with informal negotiations is that it is often necessary to have all creditors agreement to a proposal to achieve the desired outcome. Sometimes, one aggressive creditor can derail the director’s plan for the business.
In this case, the fundamentals of the business were sound. The issue was timing and cashflow. Frank was confident the business could trade through its issues if it just had more time. The business was actually in a reasonably strong asset position. There was over $1m in retentions and significant debtors, albeit slow paying debtors.
We assisted the director by introducing him to business brokers in different locations that had a proven record of success. Our firm has developed excellent relationships with a wide range of professionals, including valuers, specialist lenders, finance brokers and business brokers. We knew who to talk to, and were able to put Frank in front of the right person to look after him.
We then made the initial approaches to the five key creditors. They were pushing hard for payment, and one had already engaged a solicitor to take the matter further. We often find that engaging a professional third party with expertise in negotiations can take the heat out of situations.
Frank, with the best of intentions, had made commitments to pay that he could not fulfill. He had been relying on debtors to pay in terms of discussions held with them, and when they did not, he was likewise unable to meet his commitment. These broken commitments had started to turn the situation more personal, with the creditors losing faith in Frank. It is highly unlikely that Frank could have retrieved this situation himself.
We were able to explain the various repayment methods that were available, being:
Clearance through continued trade and collection of debtors.
Sale of the manufacturing business.
Sale of the interstate installation business.
We also explained the likely outcome for these creditors if they pursued legal action now. While we considered the business to be in a strong asset position and to have potential, this can be adversely impacted in an insolvency situation. The distressed, or “fire-sale”, disposal of assets can often lead to disappointing results. Importantly, the position of secured creditors also needs to be considered. There are auction fees and legal fees to consider. A liquidator is also entitled to recover their professional fees from the proceeds of the sales of assets.
When presented with a detailed plan on how they were to be paid, and a detailed analysis of the likely outcome for them if they proceeded with legal action, the creditors agreed to continue to support the business in the short term. Now, this was not an open-ended agreement, and the creditors were looking for significant progress on the plan in the near future.
Will informal negotiations be enough? Will the business be able to meet the demands of creditors in the short term? How will the sale of the components of the business play out?
Right now we don’t know. For that reason we have already started developing a new strategy to prepare for the future – just in case.
Check in next month for an update and to find out if Frank needed a Plan C to get the result he was looking for!
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 | firstname.lastname@example.org