When Plan B means Surivival

When Plan B means Surivival

Solutions for companies and their directors in high pressure solvency situations

TABLE OF CONTENTS

INTRODUCTION

In this article, we provide a solution for those advisors whose clients may be facing the threat of insolvency.

As with most solutions, the following advice is critical:

  • Be pro-active if you want to save the financial position and reputation of your client’s directors.
  • Develop a solution which will benefit all the stakeholders – this makes any restructuring negotiations easier to sell if it is clear to the stakeholders that there is a proper plan in place to take the business forward.
  • When reputations have been soiled, even inadvertently, getting independent, objective input can be critical to ensuring a solution is accepted by sceptical stakeholders.

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BEFORE PLAN B – THE STRUGGLE FOR SURVIVAL

Having just finished reading Bill Bryson’s excellent book, ‘A Short History of Nearly Everything’, it is clear that just to exist is tantamount to success. To grow, to develop, to transform oneself into something better is a feat of incredible wonder. To those of you who are doing just that – congratulations – and may life continue to give you all the success you deserve.

What is also clear from Bill’s book is that every living thing is in a state of struggle to survive.

Does this also apply to your business? We think so. In fact, in many ways, a business is a living thing, made up of lots of people, complex structures – all with a focus on survival.

Part of the challenge to survive is to recognise that everything has its ups and downs. Nothing stays the same forever. Those who try and stick by the oft quoted principle of ‘if it ain’t broke, don’t fix it’ are often unwittingly in a state of denial.

Change is always out there and to do nothing because everything seems ok is to invite failure to knock on your door.

Sometimes things just ‘go wrong’ despite your best intentions. Every owner and manager of every business has the challenge of identifying where in the cycle are their products, their customers, their suppliers, their business and themselves.

Sometimes even the most prepared businessperson will get this wrong. In our fast changing global economy, factors that can impact the viability of your business can sometimes appear to change overnight. Think of the recent spike in oil prices, a currency change or the growth of the Asian economy (what happens if it slows down?).

Those business owners that stay on top of the process of change and even anticipate change will, however, have a higher probability of avoiding failure.

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UNDERSTANDING BUSINESS FAILURE

Business failure does not have to be catastrophic and it does not have to completely destroy all around it. But it will involve either an explicit or implied understanding that the old business strategy has failed, either in part or in full. Some examples of both implied and explicit business failure are:

  • Scenario #1 – Out with the old and in with the new

    The shareholders sell out to someone who feels they can make the business work better than its previous owners and managers.

    Shareholders are making a decision that it will take more resources / skills / appetite than they and/or their management team have to obtain the return they are seeking.

  • Scenario #2 – Cut off the gangrenous limb

    Part or all of the business is shut down or sold off to either improve the remaining profitability or to reduce the risk of the gangrene spreading or impacting upon the remaining core (including the shareholders and directors).

    Management is making the decision that they do not have the resources / skills / appetite to fix the problems facing the underperforming business unit. Often these business units will not have a strategic value to the core business and so letting them go or selling them off will not have a sustainable and detrimental impact on the core business.

  • Scenario #3 – Shut up shop

    The whole business is closed down or sold off.

    In this case, shareholders and management have had to admit that they do not have the resources / skills / appetite to allow any part of the business survive.

Scenarios #1 and #2 can often be a good thing for those stakeholders that remain – the employees, the customers and the suppliers. With new capital and/or new management, the business can re-invent itself or take itself into previously uncharted waters, growing and providing opportunities for these stakeholders.

Where business failure is heading towards Scenario #3, however, the cost of failure can be very high for the business and its stakeholders (employees, suppliers, customers, shareholders and directors) if avoidance action is not taken before hitting the brick wall of liquidation.

There is no doubt that a liquidation will give every stakeholder involved in the business the worst result. Liquidation is an end game. Assets are sold and divvied up amongst creditors. There is no continuity of either the company or the business.

Sometimes, due to circumstances this is, unfortunately, the only possible outcome – but it does not have to be this way. Sometimes an advisor will see the warning signs and suggest an alternative to liquidation. This is called the process of voluntary administration. In giving their advice, these advisors have gone down the right path but they have yet to reach the Holy Grail – Plan B.

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AVOIDING SCENARIO #3 BY IMPLEMENTING PLAN B AND REACHING THE HOLY GRAIL

Putting a company into voluntary administration is Step 1 in the process towards the Holy Grail. This is a process governed by the Corporations Act and is designed to allow a company or its business the opportunity to survive.

However, too many times, the plan stalls at Step 1. Why? To answer this we must thank a wise man who once devised the 6 P’s – Prior Proper Planning Prevents Poor Performance (the one I learnt had a 7th P to enforce the concept of ‘Poor’ but this is a clean website for families so I shall leave the 7th P out!).

Lack of planning in the voluntary administration process inevitably results in two negative outcomes: first, the costs of the process are very high and second, the prospect of a successful outcome is less likely (often due to the higher costs and the delays in the administrator getting to grip with all the complex business issues).

There has to be a better way and there is – we call it Plan B. Plan B is the art of corporate reconstruction.

Keeping the law on your side, you can work through a restructuring plan that can assist your business in its transformation. You can retain your business and develop a plan to continue the fight for survival and ultimate success. Bill Bryson would be proud of you!

Plan B works really well if:

  1. The cash value of your assets (what you can sell them for) is less than your liabilities (which is often the reason why you are faced with looking at Plan B in the first place);
  2. A realistic assessment of your business going forward shows positive cashflow can be generated in the near future;
  3. Short term finance from either trading or other sources are available to overcome any hiccups during the reconstruction period; and
  4. You plan for it before commencing the voluntary administration process (the more time the better).

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PLANNING IS THE KEY TO THE SUCCESS OF PLAN B

The planning process has to encompass the following:

  • Getting the right team in place

    Team members need to be able to provide objective and sound input into the process, preferably with some experience in these or similar situations.

    The team members can also be useful in taking some of the pressure off the business owner. The day to day business issues are often more than enough for the business owner to deal without having to be intricately involved in the conception and structuring of the restructuring plan.

  • A plan of action

    The action plan must cover all strategic aspects of the business including its sales and marketing strategy, its supply chain strategy, its human resource strategy, its value add strategy and of course its financing strategy.

  • The right management team

    The management team who will be taking the business through the restructuring process must have the ability and capacity to do the tasks required or they must be augmented or even replaced with skilled operatives who can.

    Failure is not an option so carrying suspect souls into battle is not a good idea.

  • The right communication with key stakeholders

    Key stakeholders whose support you will need are your employees and management, customers, suppliers and financiers.

    It is critical to keep the communication lines open with all the key stakeholders. All communication needs to be honest and have integrity – if you burn a stakeholder with a white lie or an outright lie, you will lose their trust. Trust is one thing you cannot have enough of during a restructuring plan – as all the stakeholders are going to have to trust you to deliver upon the projected outcomes.

Most stakeholders will not be happy when first confronted by Plan B. However, our experience is that when faced with the alternative financial result of a forced sale liquidation, most stakeholders will work with Plan B – as long as it is soundly based and has prospects for success.

Implementation of Plan B is the final step. This takes time, patience, courage, consistency, diligence, adaptability to embrace change and communication and involvement of the key stakeholders. Bill Bryson should add an extra chapter to his tome on this very issue!

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THE KEY STEPS TO A SUCCESSFUL PLAN B

  • Look for potential problems – don’t be afraid to seek them out – early identification could lead to survival.
  • Do an assessment of the problem – be realistic in your ‘what if’ analysis – both in terms of the cost and the timeframe.
  • If you see a risk for you and the other stakeholders in your business, ask your advisors for their input. Allowing risks to convert into problems is not a good idea.
  • If necessary, call in an expert – they are a cheaper alternative at this stage of the process than the cost of failure where the costs of the experts and the costs of failure can become very high.
  • If the business cannot survive without putting its directors and other stakeholders at risk, start preparing a provisional Plan B.
  • If you have to initiate Plan B, prepare for the road ahead – survival is always the desired outcome.

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