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Business Turnaround – Options to get your company back on firm ground 29 July 2009
Derek Cooper

The current economic climate is proving challenging for many businesses. According to figures published in July 09 by Begbies Traynor, around 200,000 British companies found themselves in financial difficulty between April and June 2009. If these businesses are allowed to fail, there may be wide ranging consequences for the economy in terms of loss of employment and the knock on effect for other suppliers.

Many businesses will be adversely affected either directly or indirectly by the economic situation. As such, it is vital for directors to anticipate this and understand the business turnaround options available which may prevent them from losing their company all together. Some of the main turnaround options and when they may be used are summarised below.

1. Business refinancing

Many businesses get into difficulty because they are starved of cash. Unfortunately, current bank lending policies are making it very difficult for companies to raise the finance they need through traditional sources. Business refinancing such as asset financing (raising cash against assets owned by the business), trade financing and invoice financing are good alternative ways to raise cash to maintain the operation of the business. It is important to recognise that simply raising additional finance may not be the only thing that is required to turn around a business. Significant operational changes may also be required.

2. Administration

If a company is struggling and under threat of being wound up by its creditors, the directors or shareholders can apply to put the business into administration. Once granted by the court, the company is protected from further creditor action for a period of time. This gives a breathing space for an administrator to review the business, make potentially significant operational changes and leave the remaining business as a viable operation.

3. Pre Pack liquidation

If the directors and/or shareholders of a business believe that a business is viable but cannot continue under the current weight of its creditors, pre pack liquidation (or business phoenixing) can provide a way forward. In essence, a new company is formed which then buys the assets from the old business. The new business is then free to trade without the burden of legacy debts. The old business is liquidated and the proceeds from the sale of its assets are distributed to the creditors.

4. Company Voluntary Arrangement (CVA)

This procedure involves the rescheduling of a company’s debts to allow for affordable repayments and the possible write off of some of the debt. It may be used when the business is a going concern but is unable to continue to trade successfully with the current burden of its debt. Many corporate insolvency experts believe that the CVA is ineffective as a corporate turnaround tool because the management and business processes employed by the company generally do not change. However, because the business is not wound up, there is no report on the director’s conduct which would be issued if the business was liquidated.

Clearly there are a number of business turnaround options available to directors who are facing business difficulties. Each of these has advantages and disadvantages and may or may not be suitable given a particular business’ circumstances. As such, before employing any of these solutions, directors must seek advice from a corporate insolvency expert. Most importantly, the likelihood of any of these options achieving their desired outcome will depend largely on whether they are employed in a timely manner. As such, if a business starts to get into difficulty, it is important that directors focus on the business turnaround options early to give them the best chance of success.