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How to navigate the challenges of a ‘forced exit’ from your business

Every business owner will exit their company at some point in time. It’s inevitable. The reasons to close or exit a business will be different for every owner, but they largely fall into two scenarios: an exit through natural succession in the normal lifecycle of a business or through ‘forced’ circumstances.

During a natural succession, time is on your side and longer-term exit preparations can be made. The opposite is true in a distressed scenario. Your business is likely suffering financial and/or operational issues or a cash crisis is looming and threatening its survival. There is often pressure from many stakeholders including banks, creditors, employees and even family members.

While an exit in forced or distressed circumstances is challenging, there are some specific strategies you can employ to help manage the process, increase the return for the business and its assets, and minimise risk to the business owner.

Act fast and early

Acting early is key to increasing your options and can result in better outcomes. The decline curve best depicts this: as the company’s health declines and the severity of its issues intensifies, so too do the options available.

Acting early and seeking advice at the first signs of decline will greatly improve the prospects of turnaround or exit value.

Develop a short-term plan to stabilise the business

The primary objective is to understand the company’s short term cash position and ensure the business generates sufficient cash to remain within its lending facilities.

A solid first step is preparing a 13-week cash flow forecast. This can be highly beneficial as it’s easy to prepare and update. The forecast mainly includes the ‘unwind’ of the opening balance sheet position, which means there are less forecasting errors. It’s also a great tool to focus management’s attention on cash generation through working capital management.

Undertake a detailed diagnostic of the business’s issues

A comprehensive financial, operational and strategic review of the business is required to identify the key issues and risks facing the business, and the steps needed to mitigate those risks and develop a turnaround or exit plan.

External factors

Strategic reviews are important as they allow you to understand the external factors at play. The market may be aware of the company’s difficulties and as such, competitors, customers, suppliers and employees may be positioning themselves accordingly. The risks and a plan to mitigate their potential impact on the turnaround/exit plan need to be fully explored and understood.

Focusing on the company’s strengths and its sources of competitive advantage is important.

Financial review

It’s critical to develop a realistic assessment of the company’s current financial position and future trading prospects. The forecast assumptions must be robust, based on accurate information, realistic and achievable. A sufficient amount of headroom in the forecast is also needed to give the company ‘breathing space’ to implement its plan.

We commonly encounter the ‘reality gap’, a discrepancy between the company’s actual and reported financial position, ie, assets are overstated and or liabilities are understated. This has implications not only on the current financial position of the company but also on historic reported results (being overstated) and the forecast assumptions (being unachievable).

A thorough review of historic trading performance to understand the key profit drivers and trends is required to underpin and support forecast assumptions. Common issues we encounter with financial information includes:

• too little and non-meaningful information not focused on the key issues, or too much information that’s hard to interpret
• forecasts aren’t robust, and underlying assumptions are not supported and haven’t been challenged - ultimately, they are unachievable.

Improve management/governance capabilities

Strong management capability across all aspects of the business is a must. Stakeholder confidence in management’s ability to deliver may have declined, so fast action is required to identify the leadership team’s shortcomings and get the right support in place.

It’s not uncommon for management to become complacent about the dangers the business faces - some even go into denial. This behaviour often involves overlooking warning signs and failing to act. Autocratic behaviour can set in – diminishing collaboration with advisers, stakeholders and other members of the management team.

Strengthening management reporting and operating procedures can vastly improve collaboration and decision making.

Owners need to be realistic and ask themselves if they still have a passion for the business and are committed to supporting it to make it work. If the answer is no, it’s unrealistic to expect the company’s stakeholders to get on board and provide support as well.

Develop a clear communication strategy

Stakeholder confidence is lost when communication is poor or non-existent and there have been failures to deliver on promises. Typically, stakeholders aren’t receiving the right information and/or the information is unreliable.
Developing a strong communication strategy is key to preventing precipitous creditor action and rebuilding stakeholder confidence.

The turnaround/exit plan

The solution for your business will very much depend on its specific circumstances - the severity of the issues faced, the company’s financial position, the level of stakeholder support and the ultimate viability of the company. These factors will determine if the exit plan will be executed consensually (with the support of stakeholders) or non-consensually (through a managed insolvency process).

A consensual restructuring plan requires stakeholders to be confident the plan is realistic and achievable. For example, there is no point pursuing a turnaround strategy if the balance sheet cannot be recapitalised, and the business can’t generate sufficient cash flow to maintain operations and service its remaining debt in the future.

When considering the sale of the business, it’s important to be realistic about value and ensure the sale process is executed properly to achieve the outcome required. If these factors are not addressed the sale process will likely fail before even begins.

To give your turnaround/exit strategy the best chance of success, your plan needs to:

• be well presented
• demonstrate how the key issues will be addressed and managed
• include clear milestones
• be timebound and
• adequately assess the alternative options.

A “Plan B” may be required as a result of the onset of insolvency. It should be well thought through and ready to implement in the event the preferred strategy cannot be achieved. As hard as it may be, the owners need to be prepared to follow through with “Plan B” and its timely implementation to achieve the best result.

There are a number of insolvency procedures available, the best one is very much determined by the facts of the case. Whilst insolvency typically means the end of the company, it provides certain benefits such as protection from creditors, a route to major and quick operational restructuring, and it can allow the core business to continue free from the burden of historic liabilities.

The objectives in an insolvency scenario remain the same: maximise return from the business and assets for creditors. The insolvency practitioner will adopt similar strategies identified above to execute the exit strategy.

And finally …

Managing a company in distressed circumstances, especially when it’s nearing insolvency, presents specific risks for directors and so it is important you have the right advisers guiding you through the process. There is no one size fits all solution for business owners facing a forced exit and the outcomes achieved often don’t meet stakeholders’ expectations. It’s vital to get the right strategy in place to maximise value and minimise risk. The right advice and support can go a long way to achieving the best result for owners and stakeholders alike.