Avoid Liquidation and Legal Business Rescue with Proactive Capital Restructuring
For Small and Medium Sized Enterprises that need to optimize their funding (i.e. limit financial risk and maximize investment returns) by restructuring their capital – either by reorganizing existing capital or raising new investment.
Ukwanda Growth Partners offers services to enable financially distressed businesses to proactively restructure their capital before the need for liquidation and legal business rescue.
Almost every business has in some way been impacted by the current Covid-19 pandemic, some more than others. Pretty much all business owners and managers have had to think about how they can adjust their businesses to minimize the negative impact of the pandemic or take advantage of arising opportunities.
Perhaps THE MOST CRITICAL area of business adjustment is in the Capital Structure i.e. how a business is funded and how it invests its capital.
In this article you will learn:
- Why capital is such a big deal and the arising need for capital restructuring;
- Reasons to avoid liquidation and business rescue;
- The Importance of Reviewing Business Capital as a Strategic Imperative;
- Six Key Risk Factors in Capital Restructuring – Why Some Businesses Struggle;
- How business can leverage Ukwanda’s expertise in restructuring capital; and
- Ukwanda’s Credentials.
Why Capital is Such a Big Deal
There is a very good reason why business funding was one of the first economic interventions to be announced by President Ramaphosa after the declaration of Covid-19 state of national disaster in March 2020.
There were many other business funding interventions to follow.
THE REASON IS
Business funding determines business survival.
No Funding = No Business.
Many businesses are largely funded from operating cashflows and when such cashflows were disrupted by economic lockdown, funding disappeared. For businesses that also have external debt, they are not able to service loans.
The Need for Capital Restructuring
In situations where there is financial distress, some form of Capital Restructuring is inevitable to ensure long term business survival. Adjusting capital to reflect what might be the new business normal is vital. It might be necessary to surviving other economic aftershocks. Even the best of analysts find it difficult to predict how long it will take for the economic environments to return to pre Covid-19 state, if ever.
Many businesses need to adjust in order to, among other things
- secure their financial future in the midst of economic turmoil and uncertainty,
- reorganize their operations so they are able to withstand financial crises in future and
- take advantage of opportunities that avail themselves in the midst the crisis.
Some businesses will probably survive the Covid-19 crisis without restructuring their capital. They may suffer losses or lower financial returns while facing higher financial risk, but they will survive.
For some businesses the unfortunate inability to adjust to the current situation would mean the end, closing down, and putting employees on the streets. For the founders this could mean losing everything they have worked so hard for, even losing personal and family assets and not being able to provide for their families.
Reasons To Avoid Liquidation and Business Rescue
The case to avoid liquidation (if possible) is an obvious one. When the business is liquidated it basically means the end. Employees lose their jobs and the profit potential of that business disappears. That said, not all businesses can and should be saved. It may be better to salvage some value through liquidation if continuing to trade will continue to erode business value and there are no prospects for profitable operations in future.
Avoiding Business Rescue
By Business Rescue we refer to the Legal Business Recue Process as provided for in Chapter 6 of the Companies Act 71 of 2008. This is the same process that South African Airways and the Edcon Group have recently embarked on.
Business Rescue in this form is usually the last attempt at saving a financially distressed business that is not able to pay its debt. If this process fails liquidation is inevitable. There are instances where the Business Rescue Process is unavoidable and even preferable; however we do believe that proactively taking steps to avoid getting to the business rescue process is the best option.
Here are three reasons businesses should seek to avoid the Business Rescue Process.
1. Chances of Success are Low
Chances of success in the Business Rescue process are fairly low. Globally, the average success rate is reported to be less than 6% while in South Africa it is in the region of 10-15%. In South Africa however, the business rescue legislation is still very new having become effective less than 10 years ago (May 2011).
One of the biggest factors in determining the success of a business rescue process is early intervention. The early detection and correct diagnosis of issues to be resolved are critical to the options available to dealing with financial distress.
2. Creditors Take Priority
In many instances the legal business rescue process is more about protecting the position of the creditors than it is about rescuing business operations. The greater power to decide whether business rescue proceedings go ahead or not rests with the creditors. This is because creditors have the power to file for the company’s liquidation if the company is not able to pay its debt. The business rescue plan is only likely to be approved and implemented if the position of the creditors looks to be improved by the plan as compared to a liquidation scenario.
3. Loss of Executive Control
In a Business Rescue Process, a business rescue practitioner is appointed to lead the rescue proceedings. The Business rescue Practitioner has has full management control of the company in place of its board and pre-existing management. In this way the company board and executive management lose some control of the business.
It is in the interest of business owners and executive managers to take control of the business turnaround process and relevant transactions early before it becomes necessary to rely on the courts and the formal business rescue process.
The Importance of Reviewing Business Capital as a Strategic Imperative
Here are 6 reasons it is important for businesses to from time to time review their capital structure. The Covid-19 environment has made it is even more critical for some businesses.
1. Inappropriate Capital Structure is the cause of business failure.
At Ukwanda Growth Partners we live by the motto “Business Finance is the Number One thing in Business”. Why? – Because businesses fail for one reason and one reason only – they run out of funding. Covid-19 has demonstrated this concept in a very clear way. Many businesses that were thriving because of strong monthly cashflows suddenly faced the risk of failure if that form of business funding disappeared and there was unavailable form of cash injection. It is in the interest of business to periodically review capital structure and stress test it for business risk.
2. The Forever changing economic environment and Business Situation
What works for a business today may not work tomorrow. Even under normal business conditions things change, both within the business and in its operating environment. This calls for business to revise how they fund their operations to suit their changing needs as well as the changing operating environment.
3. If you don’t take the control of a distressed financial situation, your creditors and courts will.
Many businesses are facing financial distress as a result of the Covid-19 economic shutdowns. If they are funded through some form of debt this may mean they are not able to adequately service their debt obligations. While some creditors are supportive to businesses their priority is still to protect their investments as much as possible. They may need to quickly take control of situations they deem risky including insisting on a formal business rescue proceedings or even liquidation.
When this happens executive managers lose some or control of their business. It therefore helps to be proactive in reviewing the capital situation before creditors and the courts come in, providing more options.
4. You can significantly improve return on your equity by carefully structuring your capital.
With the use of external financing firms can earn better financial returns than they would have with only owner equity. This is because external capital allows companies to earn more by for an example:
- pursuing business opportunities that require significant upfront investment.
- funding operations with long cash conversion cycles.
- saving on tax expense through tax deductible finance charges.
- leveraging equity capital by funding unlimited earnings with fixed cost funding instruments.
With carefully designed capital structures business owners can improve their investment returns.
5. Capital structure determines the level of financial risk in your business.
The use of external funding brings numerous benefits to a business but it also brings some level of financial risk. External funding, especially debt brings with it a greater risk of bankruptcy for the business because the obligation to make fixed debt repayments remains even when earnings drop. The Covid-19 pandemic has exacerbated this risk for many businesses.
Business earnings vary over time because of company specific factors as well as macro economic conditions. Reviewing the capital structure from time to time helps businesses keep track of the bankruptcy risk they face.
6. There are possibly numerous ways of funding your business that you may have not considered.
Business funding is generally used to acquire business assets from which to generate earnings. There are numerous ways of funding the acquisition of these assets beyond the traditional funding methods. Reviewing the capital structure can uncover some unconventional beneficial ways of funding your business that you may not have considered.
Six Key Risk Factors in Capital Restructuring – Why Some Businesses Struggle
1. Too Little Too Late
Just like in human physical health, the early detection and diagnosis of a disease goes a long way in ensuring that the disease is treated successfully. In the same way early detection of the need for capital restructuring and early intervention are critical. The longer you wait the more you have to do to get it right.
Benefits of early intervention include
- improving the chances of a good outcome because of early intervention before things get worse,
- giving the business more time to analyse and understand the issues to be resolved,
- giving the business more options in dealing with the issues and
- helping the business to plan ahead and make appropriate decisions.
2. It May Require Significant Time From Senior Managers
Capital restructuring, especially under financial distress is a major undertaking of strategic importance to organisations. It requires top managers to evaluate all aspects of a business in such detail that it would require significant executive management attention and time.
In distressed and crisis situations managing the day to day running of a business consumes more than 100% of management’s time such that there is hardly any room for additional the work required in capital restructuring.
3. Insufficient Skills and Expertise
Capital restructuring needs to be informed by intelligent business and financial analyses, especially for businesses in financial distress. Because such kind of work is seldom undertaken by businesses there is no need for many small and medium sized enterprises to maintain ‘corporate finance’ type capacity to perform such daunting tasks. Book keeping and basic financial management capabilities are often sufficient for day to day operations.
Capital restructuring requires sufficient depth of experience to conduct extensive due diligence reviews on the company operations, financial condition and future outlook. Such due diligence requires ability to make judgements in diverse areas such as marketing, organisational structures, product considerations, industry dynamics, accounting and legal.
4. Insufficient Capacity
The company may not have enough staff to undertake the required reviews and analyses and getting some of the staff members to engage in the required work may distract them from their normal business duties.
Moreover, in distressed situations, time and speed are of the essence. The company needs to produce revised business plans and financial projections within a very short period of time. At the same time there is a business to run which often involves a lot of fire fighting.
5. Requirement for Independence
In capital restructuring to deal with financial distress, capital providers often insist on an independent review of the company’s affairs to inform the restructuring proceedings. Such an independent review provides some level of comfort to creditors if they believe it is objective and not influenced by existing management biases. They are likely to place greater confidence in independent advice than management reports. Independent advice is even more important where there is more than one lender.
An independent review also provides executive managers with a fresh perspective from someone who is not too involved in the affairs of the business. Constant fire-fighting may compromise management’s ability to take a broader perspective.
6. Unstable Financial and Business Environment
A business in distress can face a very unstable environment with key stakeholders such as customers, creditors, employees and suppliers, if they are aware of distress. This is because when stakeholders smell trouble with a business, their priority becomes that of protecting their own interests. When these groups of people start pulling in different directions they create a very unstable environment for capital restructuring.
7. Availability of Short Term Liquidity
A business undergoing capital restructuring needs short term liquidity to continue with trading operations while concluding the restructuring. Often when a business is in distress this much needed funding is hard to come by.
How Businesses can Leverage Ukwanda’s Expertise in Restructuring Capital
Ukwanda Growth Partners provides expertise in capital structure reorganization and capital raising. We have assisted many of our clients to pursue their business and investment goals.
What allows us to add more value is our good understanding of the South African business finance landscape. We extensively studied the South African Funding landscape for the publication of our ground breaking South African Business Funding Directory. We studied and profiled more than 125 business funding organisations and almost 330 funding products in one of our directories.
We undertake to assist small and medium sized businesses to:
- Conduct independent professional reviews of their financial position and business viability;
- Decide if capital restructuring is necessary and how it can help the business;
- Create real options for restructuring and optimising capital;
- Raise funding; and
- Evaluate what investments the business should be prioritising.
In capital restructuring, time is of the essence so we endeavour to implement the necessary capital restructuring interventions as quickly as possible by fully dedicating our resources to fewer projects where we can add most value.
We are able to add significant value to businesses we work with mainly because of the following:
The Right Capability and Expertise
We offer the right expertise and experience to properly assess all relevant information, circumstances and risks, to allow business owners and executive managers to make informed decisions at the earliest possible time. We have enabled senior executives in many organisations to manage complex and important decisions in financial restructuring, growth and investments.
Engaging Ukwanda allows you to utilise less of your staff in the exercise and leave them to focus on their core activities. You are able to leverage the expertise of Ukwanda professionals who have vast experience across many industries and advisory assignments.
Right Analysis and Advice
Over the years we have developed robust analysis frameworks to conduct sufficient and reliable analyses from which to make judgements and take decisions. Having been in the business finance industry for more than 20 years our professionals are able to assess the position and options available to bot h lenders and the business. In addition we have expertise in undertaking business valuations and can advise in negotiations with financiers.
In forming professional opinions we exercise utmost objectivity and impartiality. We are independent of any funding institution and approach every assignment objectively and with an open mind. Our main goal is to achieve what is best for the business. We only accept assignments that are clearly free of any form of potential conflict of interest.
Understanding the Legal Framework
Our understanding the South African legal framework within which business rescues, liquidations and turnarounds are implemented enables us to advise on the appropriate restructuring process.
Cost Effective and Timely Professional Service
We seek to offer a cost effective and timely service. We understand that businesses in financial distress do not have limited financial means and we therefore offer solutions that are as cost effective as possible.
Capital Raising Capability
We have expertise in the capital raising process and can advise and facilitate capital raising. We offer capital raising as one of our services where we assist in
- Preparing information memoranda and funding proposals;
- Identifying and approaching the appropriate funding partner;
- Engaging the potential funders in their investigation of the business and the deal;
- Negotiation of the right terms of financing and closing the deal; and
- Post transaction funder / investor management.
The need and nature of Ukwanda’s intervention depends on the particular circumstances of the business and the transactions to be concluded.
Businesses that are most likely to benefit from Ukwanda’s intervention include businesses that:
- Need to stabilise their funding given the changes in the current economic environment.
- Are restructuring their operations and need to consequently devise appropriate funding structures.
- Are concluding complex capital restructuring transactions such as loan workouts, debt to equity swaps, mergers, consolidations and dispositions.
- Are pursuing new opportunities that require capital investment.
Such transactions need to address complex issues across the full range of commercial, operational, financial, and legal disciplines.
If this is your business we would be happy to engage in a no-obligation telephone assessment to determine the business can benefit from our services.
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Tel. : 083 556 0542 / 012 003 3294