What is business rescue? A practical guide.
In other articles on this website we’ve covered issues around spotting the early signs of insolvency Here we deal with what you can do once you’ve accepted that you have to act to save the business. That doing nothing is simply not an option.
The battle to recover your business from insolvency is likely to be the toughest task of your professional career.
Muster all the help you can get – a good start would be to team up with a business rescue expert, such as a licensed Insolvency Practitioner (IP). Don’t be fooled by the name – the job of the licensed Insolvency Practitioner, in the first instance, is to try to rescue a company, not to close it down.
What is business rescue?
Basically, business rescue offers an alternative to the liquidation or winding-up of a company. It rehabilitates a company that is financially distressed – one that won’t be able to pay its debts as they become due within the ensuing months.
Step one is to engage the services of a licensed IP.
What they do to tackle the problems you face depends on your company’s situation, including – crucially – how much you are in debt.
When it comes to the finances, business rescue includes sourcing new funding, restructuring a company’s affairs (including assets and debts), and entering formal insolvency solutions such as a Company Voluntary Arrangement or administration.
Your licensed IP will help you cut your costs and streamline the business, to make it as efficient as it can possibly need, cutting down on waste and non-essential items.
We will explore all of these options during the course of this article.
When is business rescue an appropriate solution?
As we’ve already mentioned, the first job of the licensed IP – with your involvement – is to give your company a thorough ‘health check’. We know there are problems, but only by finding out the extent of the problems can you move forward.
Only then can you ascertain the appropriate course of action to take.
This ‘health check’ involves comprehensive analysis of your company’s finances, including:
- Cash flow
- Monies owing and owed
- Money in the bank
- The order book
- Market and sector conditions
It’s in analysing the data that your licensed IP will really earn their corn. Their report is one of the key factors in deciding whether the business is sustainable going forward, or whether it’s time to shut up shop.
If you decide, having taken advice, that there is a future for your company, then you need to act at once to implement the rescue measures recommended to you.
Any delay could scupper those plans and lead eventually to even bigger problems in the future.
How can a business be rescued?
There are many and varied ways in which a business can be rescued. Your IP will look at the suitability of each one with you.
Renegotiating debts with creditors
With your trusted advisor you should devise a plan on how you can repay your debts.
Refer to your predicted cash-flow forecast, so you can tailor payments around the times you expect to be paid by your customers.
Most importantly of all, talk to your creditors and explain your situation. When you do this, if they can see you’ve taken the time and trouble to devise a repayment schedule they’ll understand that you’re committed to pay them what you owe them (of course they will have to agree to any schedule you propose, but it’s a good place to start discussions).
In the majority of cases, they’ll want to work with you, as they are far more likely to receive more of the monies owed to them if you continue to trade. If you become insolvent they are likely to receive far less of what’s due to them. Moreover, they could get drawn into a lengthy and time-consuming legal process if your company is liquidated.
If you can convince them your company has a future they will want to support you, so make sure you go into any meeting properly prepared.
Your business rescue expert can help you with this process. Analyse what you’re doing well – and what you are doing badly. Focus on the latter category: the former will look after itself.
Are you giving your customers what they want? Check out what your competitors are offering. Are they doing some things better than you? Are they more innovative that you? Don’t be afraid to ape them – copy what they do well, whether it’s sales & marketing, use of digital, after-sales service, and so on.
Can your company better use technology to make it more efficient, agile and streamlined? Automate where you can, especially time-consuming and repetitive functions – this will save time and money.
Are your staff working effectively and efficiently? What can you do to help them?
A good idea is to have a team meeting, where you can explain that you are restructuring the business and that you would like input from them. Ask them what would help them to do their job better, and where they think the business can be improved.
Finally, are you doing things that you really should not be, but you’ve been doing them a long time and you’ve always done it that way? Perhaps some of your working practices are out of date. Or perhaps there just isn’t the same level of demand for some of your products or services.
Don’t be afraid to tackle these legacy issues, and make wholesale changes if required.
Sourcing new funds
It may be that you’ve exhausted your credit with the bank, so why not look for new sources of credit?
This might involve selling some shares in your company to a private or corporate investor. Emotionally, this might be difficult for you, especially if you see the company as ‘your baby’.
But it might also be beneficial (apart from the cash). A new face might be able to improve your offering with their experience, knowledge and business acumen.
If this does not appeal, then why not set up a partnership arrangement? We’ve covered this in detail in our article on strategic partnerships.
Cutting costs is one of the hardest areas to tackle, especially if it involves making staff redundant. But it is also one of the most crucial areas that you need to address if you are going to survive.
Try to think creatively when you’re cutting costs. For example, if you need to downsize your workforce, talk to staff members about flexible working.
Perhaps some of them would be happy to reduce their working hours, job share or even go part-time. Or work from home, as they have in many cases been doing during the pandemic.
Examine your overheads; you might be wasting money on office supplies that aren’t really necessary. Are you on a competitive tariff for your utilities, such as electricity?
Sweat the small stuff. Go through your outgoings line by line, as even the smallest saving matter. And lots of small savings put together can make a large saving.
Are you operating lots of different software programmes? By upgrading and streamlining your tech you might be able to work more efficiently and cost-effectively.
Consider outsourcing some functions? Could you team up with an external company to handle your marketing, payroll or HR functions?
Are your premises the appropriate size, or could you cut the space you pay rent for every month? Do have space that you could sublet to a micro or start-up company. Perhaps you could offer a start-up HR firm desk space in return for them working for you.
There are many ways you can cuts your costs, and your trusted business advisor will be able to help here too.
Disposal of assets
Perhaps you have some plant, machinery or vehicles that are not being fully utilised and could be sold. It might be more cost-effective to, for example, hire a van when you need one, rather have one sitting in the yard that’s barely being used.
More formal arrangements
Negotiating with your creditors is no easy feat. Especially if you’ve
had a turbulent relationship with them due to late or missed payments. A formal arrangement such as a Company Voluntary Arrangements (CVAs) can make the negotiation process less stressful for you, as it’s dealt with by a licensed insolvency practitioner.
Alternatively, there might be some parts of your business that are more profitable than others. A more formal arrangement to dispose of the parts of your business holding you back could be an option. A Pre-Pack Administrations is an example of this.
To help you focus on your plan, devise some SMART objectives. This will give you clarity and make it easier for you to work towards achieving them.
SMART stands for:
Specific: Make your goals understandable and straight-forward.
Measurable: So you can easily see where you’re at in relation to your goals.
Achievable: Can be accomplished.
Relevant: Fits in with your overall strategy.
Timed: Has a final deadline, with ‘marker’ points along the way.
What role do the owner and directors play?
While you’re planning and executing your business rescue it’s important that you and the other owners or directors continue to discharge your duties and obligations under The Companies Act 2006.
You must do all you can to ensure that debts you have accrued can, and will, be paid as fully as possible. The law is very clear in emphasising that company directors must make every effort to pay creditors the money they are owed.
Importantly, make sure you don’t do anything that could be seen as prejudicial to the interests of your creditors.
Remember, should the business become insolvent, the behaviour of the directors leading up to insolvency will be scrutinised by the administrator. Failing to follow the rules can lead to directors facing a ban from setting up and running a company for up to 15 years, and in extreme cases lead to court action and prosecution.
It’s a difficult balancing act, but be mindful that you have a responsibility to all stakeholders to be aware of the distinction between operating on an insolvent basis and simply facing up to serious cash flow problems.
What role does the licensed Insolvency Practitioner (IP) play?
Your licensed Insolvency Practitioner will play a vital role in steering your business to safety, as outlined in this article. So it’s important you choose one with expertise, experience and a reputation built up through years of solid service delivery.
Particularly important is the role they play in helping you agree how you will repay creditors, and they will monitor any such arrangements going forward.
While for many licensed IPs insolvency is their main focus, more and more are providing restructuring and more informal advice than previously.
According to The Gazette: “Lenders and directors are also recognising the value of seeking professional advice before a company becomes insolvent, which has led to an increase in restructuring work being undertaken by the profession.
“If an IP is approached at an early stage, there is often an opportunity to successfully keep a business going. The profession sees first-hand the personal toll of a business failing and makes every effort to save jobs where possible.”
However, you do need to tread carefully. Dozens of companies offering business rescue services can be found easily with a simple internet search but be warned: there are a great many unqualified, unscrupulous operators out there interested only in making a fast buck. Many are not licensed or regulated, and often have no formal training.
A danger here is that they will tell you what you want to hear, rather than explain the reality of your situation. If you are not circumspect this could lead to a catastrophic outcome further down the line.
One warning sign is an ‘expert’ charging significant fees upfront, before they have spent time with you, analysing the situation.
F.A. Simms is a long-established and reputable firm with expertise in business rescue and insolvency. To find out how we can help rescue your business, or if you’re looking for advice, contact our team of licensed Insolvency Practitioners and business rescue experts on 01455 555444 or email [email protected]