Corporate Recovery and Restructuring
Operating a business is already murky ground when economies and markets are functioning normally but throw in a global pandemic and the challenges can amplify immeasurably. In a previous post we discussed one of the worst-case scenarios (liquidation) that an organisation may have to face due to the negative impact of the pandemic and made it very clear that this should be an absolute last resort, so in this post we will discuss two of the options that you can consider before deciding to throw in the towel – recovery (specifically turnaround) and restructuring.
While people tend to lump these two options together there are in fact key differences. Both have the same final goal of helping companies come out of a bad financial situation, but which method is required depends on the underlying problems that need to be solved and different approaches are used to address them.
Turnaround is a recovery method that helps a company that has not be performing well for an extended time get back on its feet. You have likely heard about businesses hiring a new CEO or other executives to come in and turn a company around and what that typically means is they are coming in to fix mostly operational issues in order to restore profitability. In some cases, however, instead of hiring a new full-time employees a consultant can be brought on board to guide executives and directors back onto the right path. The first step when implementing a company turnaround is to identify what the problems are and their source(s), these problems then need to be prioritised with the most urgent problems that need immediate attention being tackled first, and once that is completed an appropriate strategy needs to be formulated to effectively solve the problems. One of the key differences between a turnaround and restructuring that sometimes goes ignored is the need for an inclusive team approach. Most strategies will only work if everyone in the organisation from the top to the base of the hierarchy appreciate and buy into the required changes, because everyone will have a role to play in taking the strategy from paper to reality. Depending on what your needs are, restructuring can take just a few months or years to implement.
Restructuring on the other hand focuses more on the financial aspects of the business looking particularly at a company’s capital structure. The aim of this is to figure out how an organisation’s debt and equity structure can be moved around to ease financial stress and put the business in a financially sustainable position. The first step in the restructuring process is to identify and assess the problem(s) and their source(s) by reviewing the financing structure, balance sheet, cash generation capabilities and valuation of the business, among other financial factors; from there the consultant or in house expert devises a strategy to essentially reorganise the financing structure by negotiating with creditors for alternative repayment terms, sourcing more equity or any other viable solution. This option is typically less desirable than a turnaround as it could affect relationships with creditors and shareholders, but it is certainly a better alternative to liquidation.
The pandemic has left many businesses around the world and across industries in precarious positions and decisions have to be made every day to ensure that all stakeholders are well looked after. As we are always sure to express, the choice you make for your organisation has to suit your specific needs and regardless of the solution you require the first step is always to acknowledge that a problem that needs solving exists and with the help and guidance of advisors, whose ultimate goal is to see you thrive, you can start your journey to new success.