Do you always need a formal process such as Administration, Company Voluntary Arrangement or liquidation?
Corporate restructuring is a term used to describe reorganising a corporate structure, separating or combining different but connected business activities, or rescheduling liabilities to make them more manageable or more in line with the business requirements. But do you always need a formal process to restructure such as Administration, Company Voluntary Arrangement or liquidation?
Why is corporate restructuring sometimes necessary?
Sometimes different areas of a group of connected companies progress at different speeds, changes in demand for different products or services, mergers and acquisitions, or just different management objectives can all be reasons for ‘ corporate restructuring’ or reorganising the way the bits of the business fit together. From time to time even historically successful companies find that loss making or underperforming areas of their business operations begin to have a significant impact on overall trading results and in extreme cases threaten the very existence of the organisation.
In recent times we have particularly seen large retail companies having to deal with changes in the retail market and the growth of internet shopping, leading to uneconomical sites needing to be removed from the portfolio, to protect the overall business. On a smaller scale we have also been asked to assist with the separation of the trading part of companies from the property owning part, as a step towards succession and retirement planning in a family business environment.
When is a formal corporate restructuring process necessary?
In many circumstances, the danger signs identifying the non performing operations are not spotted until very late in the day. Consequently the business faces severe financial pressures, which don’t allow time for the corporate restructuring to take place, without the protection of a formal insolvency using one of the options below :-
Administration is a legal process which allows the business breathing space and protection from creditor pressure. It can be used to allow time to find a buyer or implement corporate restructuring to cut out the cancerous elements.
Company Voluntary Arrangement
Known as a CVA this is a formal agreement with creditors to agree that their debts can be paid over a period of time. The CVA can also be utilised to make radical corporate restructuring changes including making redundancies and cutting costs.
A formal company winding up can be coupled with the sale of the profitable elements of the business, detached from the historical losses, to provide the best return for creditors. On occasions it is simply that one loss making company within a group is wound up to protect the other companies.
Can it be done another way?
Yes is the simple answer. We were recently asked to advise a company which owned a significant social housing property portfolio, and as a result was ‘asset rich but cash poor’. The company also operated a residential care home, which was incurring significant losses, partly relating to the burden of increased regulation, which had depleted the trading cash reserves.
Fortunately, we were asked to advise before the problem reached levels where creditor pressure would have restricted our options. The owners were considering the, apparently, simplest option of borrowing more money against the property portfolio to pay the trade creditors and HMRC arrears incurred through the loss making part of the business.. However, we identified that the priority was to have an action plan to set about stemming the flow of losses and thereby turning the business around. To just cover up the losses by borrowing was not addressing the underlying problem and in effect would have been a short term solution leading to long term pain. Once the numbers were crunched and upon reflection, the business owners recognised that they did not possess the skills and motivation or the immediate resources to confidently set about making the required changes in an environment of restrictions from the industry regulators.
As a result it was agreed that the best outcome would be achieved by selling the care home business to a new operator and we were instructed to assist the company in finding a purchaser. After a short, but focused, marketing period, we were able identify a suitable purchaser and successfully negotiated a sale of the care home to an experienced operator in this sector, with a proven track record with the regulatory authorities. The purchaser was better equipped to invest the time and resources needed to turn that part of the business around. No formal insolvency process was needed for the corporate restructuring and the trade creditors and HMRC arrears were all paid without even being aware that the company had a potential problem.
The happy ending in this example was that the proceeds of sale have helped to replenish the company’s cash reserves and flow of losses has been stemmed. Freed from the burden of running the care home, the management are able to concentrate on managing the property portfolio, which now provides a healthy and steady flow of income and profits for the owners to enjoy.
What should I do if part of my business is not functioning properly?
Ideally, if you set up a new business service and there are potential risks for your core business, consider a group structure to isolate any potential risk.
Maintain good accounting records to track performances in different areas of the business to identify weaknesses and avoid losses in one area being obscured by profits elsewhere.
Seek early advice if poor trading performance in certain aspects of the business is likely to have a significant impact on the company as a whole.