In brief - External factors can create the need for change
All businesses must adapt to changes in their environment. These changes can be driven by external factors, including new competitors, products or services in the market that adversely impact your business.
Taking action early
To keep your business healthy, a regular review of each product and service line is imperative. If a decrease in activity, sales, revenue or profitability is detected, early action is the best way to address the problem.
Questions to ask yourself about your business
How is your business tracking relative to your business goals?
Do your products and services need to change to suit new business conditions?
Do you need to raise money to achieve changes to your business?
Do you need to wind down unprofitable or non-core aspects of your business to focus on the profitable aspects?
If the answer to any of the above questions is yes, forcing yourself to make changes to your business is vital. The best time to make changes is before you need to conserve your cash.
Don't wait until the situation deteriorates
Here are three rules learned from hard experience.
- The best time to raise money is when you don't need it right away.
- The best time to sell portions of your business or its assets is when you don't need to sell them immediately to raise money.
- The best way to strike a good business deal is to have the ability to walk away from a bad deal.
Getting approval of third parties to implement needed business decisions
Once you have made up your mind that changes need to be implemented, there are a number of third parties that may need to be consulted.
If you need approval from either shareholders or the board of directors, you may need to educate the shareholders or directors about the nature of the problems facing your business and the benefits of the solution you are proposing. You may also need to propose alternative solutions to the problems.
Bear in mind that there are often notice periods required to call a board or shareholder meeting. While a meeting may be called at short notice, you may need to get unanimous consent for such short notice.
You should also consider whether there are commercial agreements that need to be renegotiated in the event that you want to change the products or services offered by your business.
Are your business assets encumbered by a security or other guarantee?
If you have agreed to pledge business assets as security for a loan or if your business is subject to a security interest by creditors or investors, you will need to negotiate a release or replacement of the security interest.
Is there a danger of litigation or insolvency?
If your business is in danger of litigation or insolvency, you must seek legal advice prior to the sale or transfer of any asset of the business, as your ability to deal with business assets may be limited.
Remember that decisions about the company's future should be made with the interests of creditors in mind, not the stakeholders.
Once a company enters into external administration, whether it be liquidation, administration or receivership, the external administrator has statutory powers to investigate the circumstances leading to the company's insolvency, including scrutinising business decisions made by directors in the periods leading up to insolvency.
Transactions which can be reversed by an external administrator
The external administrator will seek to claw back assets for the benefit of the company's creditors, including from the directors themselves in some circumstances, comprising:
- Antecedent transactions - recovery of property of the company which was disposed of after the commencement of the liquidation
- Unfair preferences - recovery of funds paid to creditors of the business in the six months before the company went into external administration
- Uncommercial transactions - recovery of transactions in the two years before the company goes into external administration where a reasonable person in the company’s circumstances would not have entered into the transaction having regard to the benefit or detriment to the company and the respective benefits to other parties
- Unfair loans - recovery of loans if interest was extortionate when the loan was made
- Insolvent trading - recovery of funds from directors in their personal capacity for debts incurred by the company during a period of insolvent trading, or when a reasonable person would have suspected that the company was insolvent
Preserving the healthy parts of your business
With adequate notice and planning, it is possible to set up a business to operate through various subsidiaries to quarantine risk and to deal strategically with business obligations which are no longer profitable. In other words, you can preserve the healthy parts of your business and purge the unhealthy parts.
If there are portions of your business that are successful, then early restructuring advice can help.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2020.