If your business is experiencing financial difficulties, rest assured that financial recovery solutions are available. But sometimes selling is the best option.
If your business has been ravaged by financial difficulties, selling it may be the best way to avoid bankruptcy. What are the steps? How do you protect your employees, customers, suppliers and the organization’s value? Here’s an overview of the financial turnaround process and how to connect with potential buyers.
Current situation in the wake of the pandemic
A lot of small and mid-size businesses have faced hardship since the beginning of 2020. In fact, 71% of SMBs have gone into debt as a result of the COVID-19 pandemic. On average, they owe $170,000 and three-quarters of these businesses will need more than 1 year to pay down their debt. In Quebec, insolvencies jumped 17% between the second quarters of 2020 and 2021. Now that government subsidies are winding down, the trend is only expected to get worse.
Insolvency trustees and financial recovery advisors know that entrepreneurs tend to be optimistic and solutions-oriented. They’ll try everything before seeking help from specialists. Whether a business has lost an important client, been hit with significantly higher material costs or simply lost control over their finances, most owners will try to set things straight on their own. After all, bold initiative is what got their business off the ground in the first place.
Provide temporary flexibility
Sooner or later, creditors will start demanding repayment. When this happens, many entrepreneurs look for short-term solutions that can actually reduce their chances of getting their finances back on track over the long term. They might take out a high-interest loan or personally guarantee their business’ debts, etc. This is often the stage when they’ll reach out to a financial turnaround specialist. And yet, involving a specialist earlier on would give you more time and options to turn your finances around. What will a specialist do to help?
1. Identify difficulties
Your financial recovery specialist will start by helping you determine what’s causing the problem. This is key in order to come up with the right strategy for your organization.
2. Propose an action plan
Once the issues have been determined, the recovery specialist will propose an action plan that reflects your business’ specific circumstances.
3. Place the business under the protection of the Bankruptcy and Insolvency Act
At this stage, it’s a good idea to seek protection for your business under the Bankruptcy and Insolvency Act. Doing so can prevent a shutdown and eventual bankruptcy, if:
• your company’s debt load is so high that it’s unable to borrow more;
• your company is no longer able to find investors to provide liquidity;
• pressure from your business’ existing creditors is jeopardizing your operations.
Bankruptcy protection is used to temporarily prevent creditors from seeking recourse against your organization’s assets. It also freezes the company’s liabilities. This eases some of the pressure from creditors and gives the company time to prepare a proposal to creditors and restructure the business.
4. Find investors
If you’re able to inject cash back into the business, the funds can be used to finance a settlement with creditors or future operations. Rather than using the funds to cover past losses, you’ll be investing in the future.
If this isn’t possible, the insolvency trustee can help you find a shareholder interested in gaining a stake in the company. The investor’s funds will be used to rekindle the business and settle with your creditors.
However, finding an investor isn’t always possible, especially if the company is in dire straights and market conditions are particularly unfavourable. When this is the case, the best way to save the business is to sell it. This can be hard for business owners to accept. But the advantage is that you can save jobs, preserve relationships with your customers and suppliers, and enable the business to remain operational.
Selling a struggling business
If you have no choice but to sell your business, your insolvency trustee can help you keep it up and running. After all, the objective of the law is to protect the business.
Acting quickly can help you avoid losing suppliers and customers, which could reduce your business’ value or even jeopardize its survival. To make the process successful, you’ll need support from your key employees and you may want to offer them a bonus for staying on.
1. Prepare a presentation document
Your trustee will prepare a document to present the company and provide a transparent description of its financial situation.
2. Approach competitors and suppliers
Next, your trustee will approach competitors who may be interested in broadening their customer base or expanding their operations. Other potential buyers could be suppliers and customers interested in vertically integrating their operations.
3. Ensure you get the right price
At this stage, the trustee will make sure that no decision is made that could worsen the company’s financial situation. The goal is to obtain the best possible price for the business, given the circumstances. The sale will have to be approved by the court.
The advantages of an acquisition for the buyer
Even though the Bankruptcy and Insolvency Act provides various tools to proceed with an acquisition, most of the time the buyer of an insolvent business only acquires its assets. Then it’s up to the buyer to figure out how to make these assets profitable.
Acquisitions can be very useful for companies looking to expand. They get the assets, but not the debts, since any amounts owing remain attributable to the insolvent legal entity.
If your business is experiencing financial difficulties, our recovery specialists can help keep the business operational and assist you through the remaining steps.