Lessons learnt from insolvencies – steps to business survival: HLB Mann Judd Sydney

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Actions as simple as establishing a clear plan, taking decisive action and keeping key stakeholders informed can be the key to saving a business that is otherwise destined for insolvency, says Todd Gammel, business recovery and insolvency partner at HLB Mann Judd Sydney.

Mr Gammel was administrator of high-end fashion business Lisa Ho, and book wholesaler/pop up retailer Allbook4less during 2013. He says despite the disparate nature of the businesses there are some common themes to the business insolvencies of 2013. Above all, he says, it is important to be proactive early with poor performing businesses.

“We have seen a number of otherwise reasonable businesses fail in 2013 because of a number of factors. However, many of these businesses may have been able to be saved, in some form, if issues had been identified earlier and action taken,” Mr Gammel says.

“Action that can be taken ranges from the closure of an unprofitable store to exiting unprofitable contracts or deciding to no longer hold assets that cannot be serviced from current income.

“In the current environment most stakeholders – from employees, suppliers to financiers – understand that there are difficult decisions to be made.  Sometimes failing to make hard decisions can have greater consequences.”

Mr Gammel says there are a number of practical steps that can be taken to avoid insolvency or enforced restructure, before it is too late.

“Financiers may be willing to consider proposals and assess their position when given the opportunity, particularly if the proposal incorporates a true restructure of the business that is based on conservative assumptions and results in significant debt reduction or improvement of position,” he says.

There are a number of options to consider.

1. Constantly managing working capital

“Constant management of working capital, in real time, can ensure early identification of any issues. When working capital shortfalls are identified in advance, it is easier to take measures to address it,” Mr Gammel says.

2. Developing a restructure plan and providing a financial forecast

“Development of a restructure plan, along with the provision of a financial forecast for relevant stakeholders, such as financiers, shareholders and management, ensures all of participants are fully informed. The plan should be conservative and achievable to ensure there are minimal “surprises” through the process,” Mr Gammel says.

3. An expert solvency review

“It’s worthwhile considering the appointment of expert to conduct a solvency review as part of the restructure process, including a review of the restructure plan and to ensure thorough consideration of all the options available.

“Depending on the business and its circumstances, the options considered may include an asset sale, provision of further security, a formal insolvency appointment or a merger with another company,” Mr Gammel says.

“While financiers are usually willing to consider other options, it is important that the timing of the plan, and the level of detail provided, is considered. If insufficient detail regarding a plan, or an inadequate time frame is suggested, most financiers are likely to move to protect their position and recover the amount owing.”

The position of the ATO is another consideration, Mr Gammel says.

“The best approach is to manage the ATO in the same way that you manage financiers, in order to reach agreement on an achievable payment plan if that is what is required.”

While the economic outlook for 2014 is difficult to predict, many businesses need to be prepared for a difficult trading environment during 2014.

“If a business is facing operating difficulties at the beginning of the year, chances are this situation will continue in 2014. For business owners in this position, the best course of action is to acknowledge the difficult trading environment, and seek help.

“Prompt action, at an early stage, can be the key to business survival. Businesses that take a proactive approach are more likely to be saved, than those that do not,” Mr Gammel concludes.

HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and part of the HLB Mann Judd Australasian Association.

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For more information please contact:

Todd Gammel – Phone: 02 9020 4014

5 February 2014