3 Key Questions for Financially Distressed Businesses

3 Key Questions for Financially Distressed Businesses
  • Financially distressed SMEs should take advantage of the 6-month provisions in place during the Covid-19 crisis to avoid insolvencies.
  • Pinpoint underlying issues, understand key stakeholders’ motivation and assess whether you have support from other parties.
  • Always consult a qualified insolvency and turnaround specialist early to avoid a bigger disaster from happening.

While most people are sick of hearing the word “unprecedented”, it really is the most apt term to describe the situation we are currently going through. For many businesses, the COVID-19 crisis has instigated a period of total uncertainty, which is likely to continue for months, if not years to come.

We have yet to understand the full impact on our businesses, markets, and economies from a long-term perspective. Therefore, it is critical for business owners to be fully aware of their positions, and where they see the business in the next 6, 12, 18 or even 36 months to chart a road map for it.

On first blush, the initial analysis of the a business’s future can go one of two ways, either the business owner has an overly optimistic view of the end game, which may be unrealistic, or given the potential negative outcome that could ensue during this period, the business owner may refuse to fully embrace the analysis, continuing instead just to “go through the motions” each day.

To this end, business owners should be mindful of the following:

  • You can’t find a solution until you can properly identify the problem; and
  • The sooner you seek help for a problem, the more options there are for a potential solution.

This is not a process for business owners to go through on their own.  Most businesses should have an accountant who can advise the business and assist with the analysis and formulation for a plan forward. 

Having a third party, such as an accountant to assist with this process not only brings a “fresh set of eyes” to the situation, and a viewpoint that is potentially a step removed from the everyday issues, but it also allows certain technical aspects to be addressed to get the best outcome.

However, if the analysis shows that with all things being equal, the business will not be able to enjoy a sustainable future, it is imperative that businesses and their advisors turn to specialist help, in the form of a qualified insolvency or turnaround practitioner (“QITP”) as soon as possible to assist with the best path forward.

There are many options available for financially distressed businesses, provided the problem is identified and help sought early enough.

Safe Harbour provisions

The government has established several relief provisions in relation to insolvency, covering a six-month period, to help businesses during this time.  It would be a mistake, however, for business owners to consider that these provisions are a “Get out of jail free” card, or worse, an exemption from all of their directors’ duties during this time. 

Holistically speaking, this six-month period is a point in time wherein businesses have a chance to put themselves in a prime position for survival. The Safe Harbour provisions were put in place in Australia to provide a defence to company directors from potential future insolvent trading claims, where the directors were working towards a plan which would lead to a “better outcome” to creditors than would otherwise be possible if the company was immediately placed into a formal insolvency (Liquidation or Voluntary Administration), and that this process is supervised by a qualified professional.

There are pre-requisites to be met before the Safe Harbour provisions can be relied upon including the company having its tax lodgements, and employee entitlements up to date.  This is why is it is crucial for businesses to take advantage of the six-month reprieve from insolvent trading to bring these items into order.

The earlier directors can approach qualified advisors for assistance to journey through the safe harbour period, the more options there may be available for the restructure or turnaround plan.  Often, unfortunately, by the time this advice is sought, the number of options is reduced, and those available options are not always the most desirable.

3 key questions in a turnaround plan

To identify the best way forward for the business and its owners, the following questions need to be answered:

1. What is the underlying problem?

Before any solution can be reached, it is important to understand the real problem.  Specifically, it is important to understand whether the business’ current distress was brought about only because of the COVID-19 crisis, or were there pre-existing issues?  Similarly, although no one has a crystal ball, do the business owners expect that once they are able to “re-boot” the business, will they be able to achieve a recovery including what it looks like and in what timeframe?

2. What are the goals and outcomes of key people in the business?

It’s vital to understand the appetite of the company directors or business owners in respect to risk, cash injections from personal funds, timeframes for recovery, and the hard work that may be required in order to do a turnaround.  It may be that prior to the COVID-19 crisis, the business owners were looking to exit, sell, retire etc.  In these situations, the desire to “start from scratch” and “build back up” may not be one that exists.  Conversely, a startup that was working towards a longer-term goal, might not be averse to going back a few steps to achieve their overall long-term goals.

3. What is the position of other stakeholders required to support the ongoing goals and outcomes of the business?

Similarly, it is important to understand what support is available from other stakeholders towards the business. Particularly, what is the relationship with major creditors/suppliers?  Are they prepared to extend terms, enter into payment arrangements or even covert any of their debt into equity?  Unfortunately, without the ongoing support of major stakeholders, a restructure or turnaround becomes quite difficult.

Once these questions have been answered, a map to the future can be drafted and strategy decided upon to give the business the best chance of firstly, survival, and then success.

In the event that the directors have decided either that they do not have the appetite to continue running the business, or it has become evident that they won’t be able to garner the support of the major stakeholders, and if the company is or is about to become insolvent, it is important that the company be put into Liquidation or Voluntary Administration to chart the course through the formal insolvency channels.  Whilst these options lead to the suspension of the directors’ powers, the Liquidators/Administrators can work through these matters to achieve the best outcome possible for the creditors.

It is probably safe to say that, at the moment, given the COVID-19 crisis, a significant number of businesses are in some state of distress and the future of those businesses really depends on the actions that their business owners take now in order to plan for the future.  Accordingly, in order to give your business the best chance of survival, make sure you:

  • Get your tax lodgements and employee entitlements up to date.
  • Seek advice and guidance from your accountant; and
  • Arrange for an appointment with a qualified insolvency and turnaround specialist to discuss available options for your business.

This article is intended to provide general information only in summary format on relevant issues. It does not constitute legal or financial advice and should not be relied on as such.


Alice Ruhe

Partner at SMB Advisory

I have a passion for helping businesses at every stage of their lifecycle whether it be through phases of growth or contraction. As a Chartered Accountant with a Bachelor of Commerce and a Bachelor of Business (Management), I enjoy working with businesses to, build and capitalise on their strengths whilst identifying and working with the constraints that may arise. Through Aquarius Business Advisory, I assist businesses with identifying and clarifying their purpose and goals, and develop strategies to assist with transporting the business from the existing to achieving their potential. Outcomes Assist can be utilised where there is a need for businesses look to restructuring and turnaround services, informal debt negotiations and other informal distressed business consulting services. I have also practised in the Insolvency and Corporate Recovery Industry for over 18 years and am a Registered Trustee in Bankruptcy, Liquidator and a Partner at SMB Advisory, with experience in all forms of corporate and personal insolvency administrations. I am a member of both Chartered Accountants Australia & New Zealand (CAAANZ) and the Australian Restructuring, Insolvency and Turnaround Association (ARITA) I believe that in most instances early diagnosis and accurate prognosis can foster the best results. All too often, good businesses go by the wayside because the early signs of rapid growth or potential distress growth have been ignored, or worse, have not been identified at all. I am a true believer in providing clear and relevant communication to stakeholders and I acknowledge that more often than not things are not always quite as they seem.


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