Is Restructuring Better Than Liquidation for Struggling Businesses?

As a company begins to fall on hard times, the stakes are high on all decisions. Even a solid company can face severe cash flow issues, growing debts and decreasing revenues, which may endanger the business. At this point, it is usually a difficult decision for the business owner whether to try to salvage the business through restructuring or shut it down by liquidation?

The selection depends on the business scenario, in terms of cash and overall health and legal requirements. Having insolvency and restructuring legal counsel early on board can be beneficial for the business owner to understand their options for restructuring their business before the issues become irreparable.

Understanding Business Restructuring

Business restructuring is a merger of a company’s finances, operations and/or management to boost their financial condition. The aim is NOT to close down the business, but to make it profitable once again and able to carry on.

Restructuring may involve:

Incorporating debt repayment procedures with creditors

Refinancing existing loans

Selling non-essential assets

Reducing operating costs

Improving business processes

Management and/or ownership restructuring

Successful restructuring provides a breathing room for businesses and also saves the jobs, customer relations and brand value.

What Is Liquidation?

The formal winding up of a business is called liquidation. Creditors are paid based on legal order of priority and Company assets are sold to make payment of creditors. Usually, when this process is done the company stops existing.

Liquidation can be due to:

The enterprise does not have sufficient funds to settle the bills.

Debtors file for bankruptcy there are steps that creditors can take to go to court.

When managers decide the company is not viable any longer.

Ongoing trading would result in further losses to finances

While in some instances the liquidation of the company may be inevitable, it is of course the last resort when recovery measures have been considered.

Recognizing that Restructuring is the Better Option.

Restructuring may be more desirable when the company can re-organize to deal with the short term credit problems when the company itself still has good operations.

Some indicators include:

The company continues to sustain revenues.

Restructuring can solve financial problems without having to go out of business, if products or services are in demand.

Cash Flow Problems Are Temporary

Financial pressures due to unforeseen market conditions, slow or late customer payments, or temporary recessions can turn into conditions that are better in the long run.

Why creditors are willing to negotiate.

A number of creditors would rather get the money back by way of repayment than a smaller pay-off in the event of a liquidation.

Management’s Philosophy: We are Committed to Change

Many times restructuring involves making operational improvements and strategic decisions that can lead to success. When business owners take steps to solve the root issues, they are more likely to make a recovery.

Liquidation may be necessary when:

Even with the best efforts at a business, a time comes when it is no longer feasible to continue running the business.

When the liquidation would be suitable:

The company has debts well in excess of what it is worth.

It is not realistic for the business to become profitable.

There is no longer any cash flow.

Requirements of law are not being fulfilled.

The Directors “are personally liable by continuing to trade”.

In these instances, it could be the most effective way of minimizing additional losses while conforming to laws.

Financial Considerations

There is a need for a realistic evaluation of financial performance in choosing between restructuring and liquidation.

Important questions include:

Is there a way for the business to be profitable again?

Can debts be smoothed by making changes in repayment schedules?

Are key customers’ orders on the books?

Are there any extra funding sources?

Are there any expenditures which can be eliminated?

Oftentimes, professional financial analysis shows opportunities that a business owner would not see when he or she is going through a stressful situation.

Legal Responsibilities of Directors

When a company is facing financial distress, the company’s directors have some legal obligations to fulfill. When a director realizes that the business cannot be continued because the directors have to pay their debts, it would be wise for them to cease trading, as this could make them personally liable in some jurisdictions.

This is why it is suggested to get re-construction and insolvency attorneys beforehand. Directors need guidance from professionals, to know what they are legally entitled to, and to guard their interests of creditors,employees and shareholders.

One of the things that businesses generally need to understand is that the sooner that they call to ask for “restructuring and insolvency lawyer advice,” the more that there will be that can be recovered for them.

Advantages of Restructuring

Restructuring could have a number of advantages:

Business operations continue.

Staff housing is not its own.

No disruptions to customer relationships.

There’s hope that the brand reputation will be repaired.

The value for shareholders can be maintained.

Creditors are more likely to be better paid in the long-term.

It is a fact that many of the businesses face a period of financial difficulties for them yet they do not compromise with their basic business model.

Advantages of Liquidation

While many see liquidation as a negative process, it is also important to the benefit of the parties when it is evident there is no hope of recovery.

These include:

Stopping financial losses on an on-going basis

Giving them certainty to creditors

Making an orderly exit

Meeting legal obligations

Facilitating directors to proceed without putting more money at risk

In some cases when a business goes under they may have created new opportunities to pursue better businesses in a future situation.

Factors That Influence the Decision

Each business will be different and professional assessment is key.

Common factors include:

 Overall debt levels

 Asset values

 Industry conditions

 Future market demand

 Cash flow projections

 Employee obligations

 Creditor support

 Legal risks

A single solution typically won’t do.

The Importance of Acting Early

Perhaps the most common pitfall for floundering businesses is delaying action until things are too late to obtain professional assistance.

The issue of finances tends to quickly escalate to become more frustrating. The sooner an intervention happens, the more likely there will be restructuring options. The delay might lose any opportunities for recovery and instead, the only option might be for the company to liquidate.

Financial performance should frequently be overseen, and cash flow statements flushed out and any indicators that bills are due late, creditors are pushing back or sales are dropping are addressed quickly by business owners.

Conclusion

In some circumstances, it may be considered preferable to undertake a restructuring as opposed to bringing the company to a halt. In the case where the company can yet make it, restructuring can preserve operations, jobs and help to remove the financial aspects for the long-term improvements of the company. However, if a company’s debts have become too difficult to manage and recovery is no longer a possibility, it may be the most appropriate and responsible solution to a company’s demise.

Taking advice from professional restructuring and insolvency attorneys from an early stage of incurring financial problems will enable business owners to feel confident in their ability to review all options. However, with early professional guidance, the difference between the recovery of a business or its closure can be the difference and legal obligations can be handled properly.