As covered in previous posts, the new Safe Harbour provisions were enacted to encourage directors to seek professional assistance in the early stages of a company’s financial distress (or foreshadowed distress), so as to seek a better outcome. The words usually brought up when mentioning positive outcomes for a financially distressed company are “restructuring” and “turnaround”. But what do these terms mean, what does a restructure encompass, what do we have to go through to “turnaround” a company?
The terms are somewhat interchangeable, but have unique aspects at a practical level.
A “restructure” is usually classed as the reorganizing of the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organised for its present and future needs.
Whereas a “turnaround” is more commonly used when referring to a company taking successful operational steps to correct a period of deteriorating financial performance. Although not coming under the Safe Harbour ambit, financially healthy companies also may need to restructure at certain times within their lifecycle due to events such as evolution of the industry in which the company operates, succession, and finance related matters.
There is not a one size fits all restructure/turnaround model.
A restructuring and turnaround expert reviews the company’s situation and its key stakeholders and works with the company’s directors, shareholders, and existing accountants and lawyers to work out a solution best tailored to that particular company, or group of companies.
Below we cover off the more common approaches to deliver outcomes via restructuring and turnaround:
- Mergers & Acquisitions - Combination and integration of the administration, operations, technology and/or products of two or more firms.
- Legal - Changing the legal structure of a firm such as ownership structure. For example, a business unit may become its own legal entity, with the parent company retaining ownership, thus allowing for a successful sale of a single operational unit, if required, whilst maintaining the balance of the business.
- Financial - A change to a firm's capital such as a debt restructuring designed to allow a firm in financial distress to continue to operate.
- Cost Restructuring - Cutting administrative and operational costs in response to a downturn or anticipated downturn in revenue or margins.
- Divestment - Selling or closing that portion of a business if it is unprofitable.
- Spin-off - A type of divestment that results in the creation of an independent company through the sale or distribution of new shares of an existing business or division of a parent company.
Turnarounds involve stabilising the operations of a company and then reviewing and implementing measures to improve profitability, such as:
- Decreasing expenditures or “cost cutting”;
- Reducing the workforce;
- Introduction of dynamic management;
- Streamlining management and/or business units;
- Realisation of idle or superfluous assets;
- Closure or sell off of entire units; and
- Changing how the company markets or sells its products or services.
Directors often believe that engaging specialists to assist in restructuring or turnaround advice is an admission to the market (and possibly the world at large) that their company has issues, which can be quite daunting. The fear is often that as the company reports declining financial results, they will face a possible reduction of share value.
However, a restructuring and turnaround expert should be engaged as early as possible, certainly with the benefits of the Safe Harbour protections for directors, with a view to a positive outcome in the medium-to-long term.
For comparison, American models have indicated that a company undertaking turnaround or restructuring steps, will notice that their shares often trade at a sharp discount initially. Such companies often go on to capture the attention of investors, particularly when there is a strong possibility that turnaround efforts are likely to deliver improved financial performance in the near future. Recent case studies have also found that in some cases, the mere announcement that a company plans to engage in turnaround efforts often results in an increased stock price.
If the restructuring and/or turnaround strategies are successful, the process can result in multiple benefits for all stakeholders.
To learn more, or to discuss your specific situation, contact the restructuring and turnaround experts at BRI Ferrier today.