Business Viability Review – essential for small & family businesses

Business Viability Review

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Drawing on decades of experience in advising small business owners on crisis management, restructuring & turnaround strategies, financial distress and insolvency, the ABRT Board considers a comprehensive ‘Business Viability Review’ is an essential pre-requisite tool for struggling business owners.

The ABRT’s Executive Certification is being purposely built to equip professional advisers with the requisite skills to complete a thorough Business Viability Review in a timely manner. This professional service should cost no more than between $3k and $5k.

The ASBFEO’s Dispute Support process would be a powerful system, not only for overseeing the quality and standards of the advice given but also in handling creditor disputes that might arise from a Business Viability Review. It may be that an informal creditor workout can be achieved (preventing unnecessary costs).

“VA Lite” “Fat Free VA” “McVA”

The Government intends to introduce legislation for a ‘Debt Restructuring Regime’ to be ready by January 2021 (the COVID ‘safe harbour’ ends Dec 2020). There are two main features to the insolvency regime changes:

  1. a restructuring regime for small businesses that owe less than $1 million; and
  2. a simple liquidation procedure that may either follow the restructuring or operate as a stand alone regime.

The ABRT shares the concerns of Jason Harris – the introduction of the new ‘debtor in possession’ branded regime is sending struggling or “sick” businesses straight to the registered liquidator “specialist”. A registered liquidator’s artillery includes a range of formal corporate restructuring and insolvency regimes that carry stigma and damage goodwill. Effectively the ‘GP’ role, being the accountant or a restructuring & turnaround specialist, has been missed out. No Business Viability Review has been undertaken. The ‘sick’ business might have been otherwise ‘turned around’ but it is now stuck in a formal restructuring regime.

It also misses out the opportunity to examine the directors personal exposure. It is reckless to provide advice to a director about company options without first helping the director assess their personal position. Given that the company directors personal and family affairs are inextricably linked to the affairs of small business, the ABRT considers it crucial that any business viability review adequately examines and explains the director’s personal position and the possible ramifications of a decision to continue trading.

Search ASIC Business Names – every possible name or combination of “Small Business Restructuring Practitioner” and “SBRP” was immediately snapped up…

The ABRT is also concerned that the “Debtor in Possession” branded restructuring tool might entice vulnerable directors to utilise a formal insolvency regime when it is simply not required. Just like the IVAs in the UK, this process might be ‘mi-sold’ by registered liquidators.

The media rarely (if ever) differentiates between insolvency processes once a registered liquidator’s appointment is advertised/publicly listed. “Voluntary administration is reported in the press as the end of a company, with corporate undertakers sent in to sell the business” (Harris, Jason, 2014, The effect of voluntary administration on business restructuring’). The formal nature of a ‘Debt Restructuring Plan’ administered by a registered liquidator and creating a moratorium is likely to be met with similar distaste (by media, employees and suppliers placing the debtor on ‘cash on delivery’).

The ABRT considers a comprehensive Business Viability Review will provide small business owners with the roadmap to manage their business affairs in an orderly fashion. The Business Viability Review should include consideration of the following matters and the value of $3k to $5k is deemed to be appropriate for providing this professional service in a timely fashion.

Business Viability Review

 

Example of considerations required in a Business Viability Review – prior to considering formal restructuring and insolvency regimes (note the liquidator isn’t even considered until stage 4)

Given this review should be independent and objective (to the greatest extent possible), there is absolutely no reason why a registered liquidator couldn’t undertake the role and still accept the formal appointment afterwards (#dirri).

The Professional Adviser’s education and experience should be commensurate to their ability to provide the client with advice on the following headings in a timely manner and for a professional fee of between $3k and $5k.

Business Viability Review – Headings

1. Nature of the business – industry considerations (ability to operate in COVID era)

2. Liquidity and Ratio Analysis

2.1 Quick ratio

2.2 Liquidity gap

2.3 Gross and Net Profit Margin

3. Recapitalisation Strategies

3.1 Shareholder equity/loans

3.2 Bank term debt

3.3 Unutilised asset divestment

3.4 Forbearance and payment plans

3.5 Debt servicing analysis on an EBITDA and Net Cash basis

4. Restructure Strategies (& educate re Illegal Phoenix Activity legislation effective February 2020)

4.1 Safe Harbour protection measures (s588GAAA and s588GA)

4.2 Market value issues & application of Safe Harbour as Creditor Defeating Dispositions defence

4.3 ‘Declaration of Intention’ made for ‘Debt Restructuring Plan’ & ‘Debt Restructuring Plan’ ????

4.4 VA/DOCA

4.5 Business Sale & Exit (Distressed Sale)

5. Financial Analyses

5.1 Profit and Loss analysis

5.2 Cash Flow analysis

5.3 Balance Sheet analysis

6. Insolvency Ramifications for the director

6.1 Insolvent trading (safe harbour?)

6.2 Director’s duties – acting with due care & diligence, Business Judgement Rule & Exoneration

6.3 Loan accounts & Division 7A matters

6.4 Personal guarantees

6.4.1 Trade creditors

6.4.2 Banks and financiers

6.4.3 Landlords

6.5 ATO Director Penalty Notices

6.5.1 Lockdown

6.5.2 Non-lockdown

7. Operational Considerations

7.1 Stakeholder buy in

7.2 Porter’s Five Forces

7.3 Employees

7.4 Pricing

7.5 Technology efficiency & IT adaptation/transformation

————————————–

Immediate informal options arising from the Business Viability Review

Once then director/owner is adequately informed as to their personal exposure and the creditors’ positions, three options can be considered at the company level:

A. MVL (solvent but not viable), CVL or Court Liquidation (insolvent and business model not viable)

B. Continue trading utilising Safe Harbour protection from insolvent trading personal liability, if eligible (s588GAAA to 31 December or ‘better outcome’ under s588GA)

C. Continue trading and investigate the prospects of an ‘Informal Creditor Workout’ or distressed sales transaction (noting the aim with the latter is to preserve value and jobs wherever possible).

Ability to trade the business

 

Practical Checklist for Directors – Ability to Trade the Business

Informal Creditor Workout – prior to consulting a registered liquidator

• independent asset valuation on alternate basis (auction/going concern) by auctioneer
• business valuation by qualified accountant
• director/owners, family or third parties sought to inject funds
• directors loan accounts confirmed
• books and records secured
• insurances & security maintained
• Debtor book and WIP analysis (likelihood of better recoveries under various scenarios)
• judgement creditors ascertained
• tax, super, employee entitlements obligations brought up-to-date
• payment plan entered into with ATO
• establish employee severance (potential liability to FEG in event of liquidation)
• contact made with financiers
• essential suppliers and key employees identified
• contact made with banks and lenders
• trade licence requirements established
• document attempts made to market the business / approach competitors
• a statutory declaration made by the director/owner of company assets/liabilities

• educated directors and document of preferences, uncommercial transactions and director related transactions
• provide educational material and guide director/owner on safe harbour (s588GA), business judgement rule (care and diligence) and illegal phoenix activity/creditor defeating transactions
• a statutory declaration made by the director/owner of company assets/liabilities
• statutory declarations made by director/owners of personal financial positions

Having undertaken the above work with the director, the professional adviser is equipped to provide the director/owner with comparative estimated outcome statements to aid with creditor negotiations. This could provide the outcome to creditors under a range of scenarios (incorporating forecasting):

A. Safe harbour (s588GA) operational restructuring & turnaround
B. Safe harbour (s588GA) sale to third party
C. Safe harbour (s588GA) restructure transaction
D. ‘Declaration of Intention’ made for ‘Debt Restructuring Plan’
E. Approach registered liquidator (or small business restructuring practitioner) for ‘Debt Restructuring Plan’
F. Approach registered liquidator for ‘Debt Restructuring Plan’
G. Approach registered liquidator for voluntary administration/DOCA
H. Approach trustee for personal bankruptcy of the director/owner

Should an ‘Informal Creditor Workout’ not be successful, the director/owner is appropriately educated with the knowledge, information, and records to approach a registered liquidator to undertake a formal regime for the cheapest possible fee.

Pre-insolvency adviser

Pre-Insolvency Advisers (for SMEs)

Author: ABRT Professional Member | Ben Sewell RTA (originally published 3 September 2020 at Sewell & Kettle) – Debunking the Myth When should you engage a pre-insolvency

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