Rescuing the business
The key to rescuing a business is making changes to the way it operates; usually additional finance or debt forgiveness does not solve the underlying problems that caused the difficulties in the first place. To preserve the business, a restructuring programme will need to be undertaken. This could involve:
Making redundancies to reduce costs;
Changes in working patterns;
Changes to the pension schemes;
Reorganisation of production;
Moving premises;
Reducing direct and indirect costs;
Changing the product mix to more profitable goods/services;
Closing unprofitable moving to smaller or cheaper premises, reorganisation of production, etc.
At an early stage, consideration could be given to using a specialist 'Interim Manager' or consultant who has expertise of turning businesses around and specialises in rescue.
Finance
Rescuing a business usually requires additional finance or some restructuring of the existing position. This could include:
Shareholders - approaching the existing owners for further finance. This could assist in protecting their existing investment and ensure that they keep control of the business.
Creditors - depending upon the seriousness of the situation it may be possible to stretch credit lines and terms with suppliers and other stakeholders. This may however be a risky strategy - see section Risk to directors.
Restructure finance - it may be possible to agree an equity swap with certain creditors or a deferment or extension of repayment terms on loans or finance agreements. This could free up short term working capital if it is no longer necessary to make regular repayments.
Refinance - if the existing provider is expensive it may be possible to reduce the costs by changing provider. It is unlikely that this would free up sufficient cash in itself but could form part of an overall finance strategy.
Take out additional finance - it may be possible to obtain additional finance from existing lenders or new lenders. Examples could include requesting an increase in the advance rate on an invoice discounting facility, undertaking a sale and leaseback on property or equipment or taking out new secured or unsecured loans.
Informal Arrangements - it may be possible to agree with key creditors a repayment programme that frees up sufficient resources to undertake the restructuring required. An example of this could be a time to pay from HM Revenue and Customs.
DTI loans - under certain circumstances the Redundancy Payment Service of the DTI will pay statutory redundancy costs. Such payments would be made direct to the redundant employees and would be treated as a loan to the struggling business. Such finance is usually only available if:
It preserves the business and jobs;
No other funding is available to the business;
The money would be repaid in full (over an appropriate period).
Management buy out or buy in - if the existing shareholders are not able or willing to invest further money into the business then it may provide existing management or an external management team an opportunity to buy the business. Depending upon the financial circumstances the amount paid for the business could be relatively small (with perhaps a deferred performance based element). The management team would then bring invest in the business through cash injection and/or provision of their services on a cash dependent basis (i.e. only paid after everyone else).
Company Voluntary Arrangements ("CVA") - a CVA is a formal, legally binding agreement with the Company's creditors. It usually involves freezing the existing creditor balances and making monthly payments in order to pay back a certain percentage of the debt (typically 25% to 75%). A CVA is a formal insolvency procedure.
Administration - this is a formal insolvency procedure that provides a business with breathing space from its creditors. This could be used to help restructure the business or more often sell it without the majority of its liabilities.
Receivership - this is a process that is started by a charge holder, usually a bank, should they be concerned about the business. It would typically involve selling the business or closure and selling of the assets. It can therefore be used to rescue the business and preserve employment.
The last 3 of these are considered in more detail in the section covering insolvency options.;
