Business restructuring options

How can you restructure a distressed business?

When limited companies experience financial distress, some directors choose to close their businesses to avoid a prolonged period of upheaval and worry. If the company is insolvent and has little chance of making a recovery, liquidating the company voluntarily via a Creditors’ Voluntary Liquidation (CVL) is usually the best approach.

However, it’s also the case that many struggling companies can be saved. Business restructuring offers a lifeline to viable companies, with various routes available to improve their financial and operational efficiency so they can continue to trade.  

What is business restructuring?

Business restructuring is the process of making financial, operational or legal changes to a company so it becomes more efficient and profitable. Perfectly healthy companies can restructure, but more commonly, financially distressed businesses use it as an alternative to liquidation so they can continue trading in an altered form. 

There’s no size fits all approach to restructuring, with refinancing, streamlining and cost-cutting all potential options. The company’s directors will work with a team of business recovery experts to determine an appropriate strategy. 

Why restructure a business?

There’s a misconception that when a business becomes insolvent (it cannot pay its debts when they’re due), it automatically signifies the end of the road for the company. But it’s often the case that companies that take on too much debt or fall on hard times have a viable underlying business model and could go on to be profitable with a few changes and the right help. 

By restructuring the company, you reduce its costs, create efficiencies and change the way debt repayments are made. That can breathe new life into the company, save jobs and improve the return for your creditors. 

What are my business restructuring options?

Working with a company turnaround expert, the first step of the process is to assess the business’s current financial and operational position to determine why it is failing. You can then consider the business’s short and medium-term outlook and your objectives to determine the most appropriate business restructuring process to use. You may choose to use one or a combination of the following options. 

Debt refinancing

It’s often the case that expensive debt prevents the business from operating effectively. If you’re in this position, you may be able to reduce the cost of your debt by spreading the repayments over a longer period or pay off old debt with new debt you secure at a lower rate of interest. 

Some companies cannot access cash when they need it, which creates shortfalls in their cash flow. Directors often turn to traditional sources of business finance like bank loans and overdrafts, but other options could be a better fit for your business. 

One example is invoice finance, which allows you to release the value tied up in unpaid customer invoices to give you an instant cash flow injection. Asset-based finance is another option for businesses that are asset-rich but cash-poor.     

Streamlining

Another cause of financial problems for growing businesses is taking on too much too soon and spreading the company’s resources too thin. That can drain cash flow and create inefficiencies. 

Streamlining focuses on scaling down or removing the unprofitable parts of the business. That frees up funds to keep the rest of the company trading and aims to make it viable over the longer term.  

HMRC Time to Pay Arrangement

If your company has tax debts it cannot repay, you may not need to enter a formal insolvency procedure. HMRC Time to Pay Arrangements allow you to restructure your tax arrears by spreading the repayments over a typical period of between three and six months, although some arrangements can last up to 12 months. 

You can either negotiate with HMRC yourself or ask a company turnaround expert to do so on your behalf, which will increase your chances of making an arrangement. You will need to propose a monthly repayment that the company can realistically afford and allows you to clear the debt in an acceptable timeframe. 

Company Voluntary Arrangement (CVA)

A Company Voluntary Arrangement (CVA) is a formal insolvency procedure that allows a company to restructure its unmanageable debts. As part of the process, you must appoint a licensed Insolvency Practitioner to create proposals and negotiate with your creditors on the company’s behalf. 

The CVA will become legally binding if 75% of your creditors (by the value of their debt) agree to the proposals. You’ll then be able to make monthly repayments towards the debt over three to five years while continuing to trade. As part of the CVA, you may also be able to write off a proportion of your debt.  

Administration

The primary purpose of Administration is to rescue the company as a going concern. You effectively hand over control of the business to a licensed Insolvency Practitioner, who will explore the various ways to implement a rescue plan. 

They will aim to put a plan in place to save the viable parts of the distressed business before handing it back to the directors so they can continue trading. If that’s not possible, they will explore whether they can sell the business’s assets to a new owner. If they cannot achieve either of those two aims, they’ll work to generate better returns for the creditors than if the company was liquidated without entering Administration.  

Pre-Pack Administration

In a Pre-Pack Administration, the sale of all or part of a company’s business or assets is negotiated with a buyer before an Insolvency Practitioner is appointed. The buyer could be an unconnected party or, as is often the case, the directors of the existing company who want to operate under a new company. 

Once the sale has been arranged, you can appoint an administrator and the sale contract will be executed immediately. The old company will then be liquidated and the money raised from the sale of its assets will be used to repay its creditors as far as possible.

Need advice?

If your company is struggling financially, contacting us at your earliest opportunity will give you the best possible chance of restructuring your business successfully. At Begbies Traynor, our teams of company turnaround experts and licensed Insolvency Practitioners are ready to assess your situation and guide you through your options. Get in touch for a free, same-day consultation or to arrange a meeting at one of our 100+ UK offices.