Removing the barriers to get solutions to business solvency challenges.
Undoubtedly, acknowledging your business is in financial distress and seeking advice about the situation can be a daunting and emotional experience; particularly for those in the SME space who live and breathe their business. Often discussions about the business finances are only part of the story, and in these meetings we can find ourselves taking on a quasi-counselling role, no doubt like many advisors have done when assisting those in a vulnerable situation.
Many subscribers to our e-newsletter are likely to have never taken part in a formal meeting with us and one of their distressed clients and as such, may be unaware as to what actually happens at these meetings. This article provides an overview of what a director—and their advisor—can expect from an initial meeting with Worrells.
As a starting point, at Worrells we pride ourselves on approaching these meetings with respect and not making it any harder for the business owner than it needs to be. We also understand the insolvency laws can be confusing so our motto of "plain talk" is more than just a tagline.
What is the intended outcome?
The first thing to know is that we approach these meetings with the primary aim to help inform people about how insolvency law works in practice and what it means for their specific situation. For us it is about giving people options to their circumstances that feel accessible and logical. Our aim is to ensure that everyone leaves the meeting with the information necessary to make an informed decision as to the future of the business and that they have an awareness of areas of risk.
What information do we typically ask for before a meeting?
Commonly our guidance is sought not directly by a business owner but rather by their advisor—be it an accountant, solicitor or another professional in this space. To best prepare for these meetings so that the time available is leveraged, we typically ask for some background information on the client's position, and if available and current, a copy of some basic financial information such as a balance sheet and profit and loss statement. Inherently, the more complex the business operations, the more financial information we would ask to consider from the outset. Any information shared with us is naturally treated in confidence.
We also ask for a brief overview of company details and corporate structure, which can just be talked through at the meeting. This is in part to allow us to ensure there is no conflict within our firm internally in providing guidance and also to allow us to do some preliminary searches on the ASIC and the PPSR registers. This assists in being able to formulate a big picture of the stakeholders involved and assists in guiding discussion at the meeting.
What is discussed at a meeting?
More often than not, meetings start with a little bit about Worrells and then with the business owners explaining their 'story'. There is a lot of fact-finding and information gathering done at this time. There is also a focus on what the business owners are seeking to achieve—for example, are they desperate to salvage the business at all costs, or have they lost interest or become far too overwhelmed and are looking for an exit strategy. These issues will help guide the discussion.
Diving into the finances
We often look to build a realistic financial snapshot through a broad-brush reconstruction of the balance sheet during the meeting. Experience tells us this assessment can often depict a picture materially different to what may be listed in the financial records.
We also look at the cash-flow position, and financial forecasts that may exist, as well as the historical trading results. Whether a business has a history of trading losses, compared with a business with issues stemming from a milestone event (e.g. COVID-19) will be important when considering available options which are also realistic.
What options are considered?
The options available to a business are as unique as the business itself—there is not a one-size-fits all proposition. Typically, we work through:
- Potential informal options that may curtail the solvency issues; whether that's via a refinancing, sale of business, negotiating with creditors or otherwise restructuring debt (potentially in conjunction with leveraging safe harbour protection); and then also
- Formal insolvency options – such as Voluntary Administration, Deeds of Company Arrangement or Liquidation.
As an alternative, we also explore what the future would look like if the business owners simply did nothing and "put their heads in the sand".
Decisions on the next steps can take days, weeks or in some cases many months for business owners to deliberate. Knowing this we also cover off on areas of risk such as director duties, insolvent trading and director's personal exposure for liabilities such as tax debts. This is to ensure the directors can (where possible) mitigate these risk areas.
When should a client seek guidance from an insolvency practitioner?
The textbook answer: "the sooner the better". The options available will narrow as the financial position deteriorates.
More commonly than not, a catalyst to speak to Worrells seems to stem from a critical event that has occurred in a business—whether that is a statutory demand being issued against the company or a systemic shortage of cash flow that forces a business owner's hand. Where possible, we encourage contact as soon as business forecasts show significant headwinds that may be difficult to overcome. The longer it is left the more likely the options to salvage a business will be limited.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.