Too Much Debt & Not Enough Profit?
A Restructure May Be Your Answer
- Would it help your business get back on its feet if debts could be paused, or reduced, until the business can afford to pay them?
- Or, do you need to exit from some loss-making location leases?
- If your business had to pay all of its debts when the payment schedules or invoices say they should be paid, would that be stressful?
If you answered “Yes” to any of the above questions, read on because a Restructure may be your answer.
What is a Restructure?
A Restructure is a set of actions taken by a company (or group of companies) to significantly change its debt, operations and/or structure, usually when there is financial pressure, with the aim of limiting financial harm and improving the business.
What can Restructuring involve?
There are two main types of Restructuring – Informal Restructuring and Formal Restructuring. Businesses can do one or the other, or a combination of both.
Different types of restructuring are used to address different issues in a business.
In summary, an Informal Restructure usually involves talking with the business’s key creditors, financiers, management and investors and cutting deals, renegotiating agreements, and making improvements to make the business profitable again, or more profitable into the future. These discussions usually start with the frank admission that things cannot remain as they are, and change is needed in order for the business to survive and grow.
This can include:
- Landlord and lease negotiations
- ATO and supplier negotiations
- Seeking further bank or finance funding (or refinancing)
- Seeking new investors
- Market repositioning – product range, customer experience, refreshing locations etc.
- Operational improvements and cost reductions
- New management and key personnel changes
- New marketing strategies
However, sometimes it isn’t possible to get all of the key parties, especially all of the key creditors, including landlords and the ATO, on the same page by negotiation alone.
So, what do you do now if there’s still a good core business there that would be profitable, or more profitable, if it wasn’t so burdened by debt and maybe some loss-making locations?
A Formal Restructure enables certain further actions to be taken that aren’t available in an Informal Restructure, or to approach these in a more effective way.
These can include:
- Dealing with all debts that aren’t secured against assets together, rather than negotiating payment plans separately with each party, in a way which also binds any smaller dissenting creditors, saving valuable management time and energy to focus on the future of the company
- Exiting some leases and premises while retaining and continuing to trade from only the profitable locations
- A formal process for employee terminations and redundancies (or redeployment), especially for exited locations
- Terminating selected overhead and operational contracts and expenses to free up cash flow
- “Right-sizing” the business to optimise it for future profitability and growth
A Formal Restructure is commonly done through a Voluntary Administration process.
A Voluntary Administration typically runs for only about 5 weeks although this timeframe can be extended if needed. As the name suggests, this is generally done voluntarily by the company’s directors. The primary aim is to maximise the chances of the company, or as much of its business as possible, continuing in existence, and to get a better return for the company’s creditors and shareholders than if the company were to continue to struggle and be placed into liquidation.
Companies with a fundamentally good business, which may be impacted by too much debt and/or COVID-19 and lockdowns, are often well suited to a Formal Restructure. A successful restructure is more likely to occur if steps are taken early, rather than if the company was to wait until the business was in such a dire position that the only real option left was to close it down.
How a Voluntary Administration Saved a Business – Case Study
This case study looks at an ongoing matter where a Vincents Restructuring Director became the Voluntary Administrator in 2019 and is now the Deed Administrator of this group of companies.
The business operated 19 sites across four states, with the majority of sites situated in Victoria and Western Australia. All sites were operated through leased premises. The business was traded from five entities due to legacy issues as the business grew. For instance, most of the leases were in one company, and most of the employees were employed in another company. Equipment hire agreements were in another company again.
The business had revenue of about $12 million each year. Most of its venues were profitable but some were not and this contributed to an accumulated tax debt, including superannuation guarantee charge liabilities, of approximately $2.5 million. Most trade creditors were generally paid up to date.
The ATO eventually lost patience with the companies’ directors and it issued Director Penalty Notices, which meant that the directors either had to pay the outstanding liabilities in full (which was not possible), or they had to appoint a Liquidator or Voluntary Administrator to the companies within 21 days of the date of the Notice.
A Voluntary Administrator was appointed to the companies. He continued to trade the business, and exited two loss-making sites in NSW and one in Queensland. This left venues in Victoria and Western Australia, which were the business’ key markets. Staff in those venues that closed had their employment terminated. There were also some terminations of non-core middle management.
The main director put forward a Deed of Company Arrangement (or “DOCA”) proposal, which essentially was an agreement that obliged them to pay on average $40,000 each month to a Deed Fund for 21 months which was estimated to be enough to pay all of the Voluntary Administration costs, the unpaid superannuation owed to staff, and all unpaid annual leave and retrenchment entitlements to the staff who had been terminated.
The DOCA proposal was accepted by creditors as the alternative (i.e. liquidation) meant all staff would be terminated and the return to employees for their unpaid superannuation would have been far less, if anything. As a result, 101 employees kept their jobs and 16 landlords kept their tenants.
The business came through the process more profitable, more efficient, focused on its key markets and effectively it agreed to pay $840,000 in total over nearly two years as compared with $2.5 million being immediately payable to the ATO. By paying the outstanding superannuation, the company’s directors also avoided personal liability for that company debt.
The above case study was quite a large business with many locations but the process can equally apply to small, single-location businesses. Creditors are generally open to accepting a deal where the alternative is that they receive little or no return and lose a customer going forward.
Is a Restructure suitable for my business?
If you, or a client of yours, are experiencing financial pressure or even financial distress, and would like to discuss the options available to you, including what a restructure or voluntary administration may look like for your business – please call, SMS, or email us with your phone number using any of the contact details below and we will get in touch ASAP. All of our initial calls and meetings are confidential, free and no obligation. There’s nothing to lose from finding out if this is your best path forward.
Vincents is Australia’s 28th largest accounting firm with 40 directors and 240+ staff, operating nationally from 7 office locations and servicing our clients Australia-wide, or wherever their business interests take them. Vincents was a finalist in the prestigious Client Choice Awards for Best Accounting & Consulting Services Firm ($30-$50m revenue) in Australia in 2021, 2020 and 2019.
Louisa Sijabat is a Registered Liquidator and a Registered Trustee in Bankruptcy who has over 12 years of restructuring and insolvency experience, over 5 years of commercial experience, and a further 4 years of other professional services experience. Louisa has extensive experience working with and advising business owners and groups in the restaurant, catering and hospitality industries.
Registered Liquidator, Registered Trustee in Bankruptcy, CAANZ, ARITA, AIIP.
Henry joined Vincents as a Liquidator in 2019, and has over 20 years’ experience in restructuring, insolvency and corporate advisory services, as well as 2 years’ experience as a Risk Manager. He has worked in London, Sydney, and Brisbane. He joined our leadership team as a Director in 2020.
Henry has extensive experience with restructuring and saving businesses and groups in the restaurant, catering and hospitality industries.
Registered Liquidator, CAANZ, ICAEW, ARTIA, AIIP.
Andrew joined Vincents in 2020 and has over 5 years of restructuring and insolvency and experience. Prior to this, he successfully founded and sold a hospitality business in Brisbane. Andrew is a provisional member of Chartered Accountants Australia and New Zealand.
Andrew has experience working with and advising business owners and groups in the restaurant, catering and hospitality industries.
An Important Message
While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.