This month’s case study is a continuation from last month and looks at our client, Frank. Plan B was to negotiate some payment plans with key creditors. We were able to negotiate some affordable payment plans and give Frank some time, but this was not a total solution (Read more about Plan B >> ) Now it is time to get working on Plan C.
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. We were able to assist Frank by negotiating payment plans with five key creditors who had been exerting considerable pressure for payment.
Frank had a number of ways that he could have paid these key creditors: he could continue to trade and collect in his debtors, sell his manufacturing business and/or sell his interstate installation business. Each of these options would have taken time, though, and there was a degree of uncertainty associated with each.
Adapting the plan to changed circumstances
Frank was confident that he could work things out. What if something went wrong though? He had personally guaranteed his bank and a second tier lender. He had also personally guaranteed a number of trade creditors. He was concerned that his personal assets may be at risk and was looking for a way that these could be protected.
The major personal asset Frank had was equity in the family home he owned jointly with his wife, Margaret. Frank had borrowed quite heavily against the home to fund the business during covid. We recommended that Frank sell his equity to Margaret for a fair price. This was established by valuation and reference to the debt secured against the property. This showed that there was only around $100,000 in equity remaining, half of which was attributable to Frank. The sale was documented and Margaret began making payments from an account solely in her name to an account solely in Frank’s name.
Frank maintained payments to the creditors. Meanwhile, the broker we had introduced Frank to pursued the sale of the business. After some time, a buyer for the interstate installation business was located and favourable terms were negotiated. The buyer had a similar business and was looking to acquire market share. Frank’s business was a perfect fit.
This provided Frank with a way to exit the interstate business. Travel was difficult, and even in normal times, was not something Frank enjoyed. He would prefer to focus on his local manufacturing business. As always, we need to stay flexible, and adapt our strategies as circumstances and the needs of our clients change.
With the interstate business under contract, we assisted Frank to restructure the manufacturing component of his business. All physical assets and goodwill were valued and sold to a new entity for a commercial price. This enabled Frank to trade on a smaller scale and get back to that part of the business that he still enjoyed.
This whole process took some time to play out. At the end of the day:
Secured creditors were paid out from the proceeds of the sale of the installation business.
The personal asset protection strategy was finalised, with Margaret making full payment for Frank’s equity in the home.
The sale of the manufacturing business to a new trading entity was completed.
Local staff were re-employed by the new trading entity, with all their entitlements preserved and the amount of these offset against the purchase price of the business.
The company entered into liquidation in an organised and controlled manner.
Finality was brought to all unsecured creditors.
Now, Frank had provided personal guarantees to a number of unsecured creditors. Frank wished to avoid bankruptcy and engaged our firm to negotiate settlements with these creditors. In this case, Frank had very minimal personal assets that would be available to creditors if they chose to pursue legal action against him and have him made bankrupt. His equity in the family home had been sold, so all remaining equity belonged to his wife Margaret.
In view of these circumstances, and the groundwork laid in the earlier stages of the strategy, Frank was in a position to negotiate a settlement with personally guaranteed creditors for a few cents in the dollar.
In this case Frank ended up needing Plan A, Plan B and Plan C to achieve the best result possible. He used the time he had available to him wisely, and rather than sit back and wait, he took the initiative and dealt with his issues in a proactive manner. By staying flexible, and adapting the strategy as necessary, we were able to help Frank achieve an excellent outcome.
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