Is business rescue an exact science?

Over the past five years, South African companies have navigated significant economic disruption, as reflected in the rising number of businesses placed into liquidation or business rescue since the end of 2019.

In the past six months, liquidation trends have shifted notably. While total liquidations declined by 3.7% in the first quarter compared to the previous year, compulsory liquidations surged by 32% in January and February, signalling persistent financial pressures across key sectors. Industries such as finance, insurance, real estate, and business services were particularly affected, underscoring broader economic challenges. However, March saw an 8% decline in total liquidations compared to March 2024, with voluntary liquidations outpacing compulsory cases, reflecting a shift in how businesses manage financial distress.

This shift suggests that as economic headwinds continue to intensify, businesses may increasingly recognise the advantages of formal business rescue over informal workouts. With greater awareness of the legal protections and structured recovery mechanisms offered by business rescue, affected parties may begin leveraging these tools more effectively.

Despite its growing prominence, business rescue remains complex and widely misunderstood. Many stakeholders still grapple with critical questions: Why is a company placed into business rescue? What happens during the process?

Determining factors in business rescue

The Companies Act (71, 2008) mandates that directors conduct regular evaluations of their organization’s solvency and liquidity, ensuring it can meet obligations to creditors, staff, tax authorities, and capital providers. A company is deemed financially distressed if it faces significant solvency or liquidity challenges.

Aligned with the King Code on Corporate Governance, directors must act promptly if signs of distress emerge, taking steps to restore solvency and liquidity. The code outlines key corporate actions for recovery:

• Internal Turnaround Strategies: Revenue enhancements, cost reductions, capital restructuring, and new investments.
• External Actions: Acquisitions, divestitures, or the orderly liquidation of underperforming assets.
• Business Rescue Considerations: If internal and external measures prove insufficient, business rescue provides a structured pathway to recovery or, at minimum, a better outcome than liquidation.
• Voluntary liquidation if the above alternatives are not feasible.

To assess whether a company is a candidate for business rescue, stakeholders use financial frameworks to determine its value, viability, and ability to regain solvency and liquidity.

Broad applications beyond distressed enterprises

The evaluation processes used in business rescue can also be applied to thriving companies, particularly during due diligence assessments, mergers, acquisitions, or strategic reviews.

The first stage in any strategic evaluation is diagnosing the company’s true business model and market positioning.

This framework not only aids distressed organizations but also serves as a proactive tool for guiding businesses through strategic decisions and operational recalibrations. By utilizing the principles of solvency and liquidity analysis, companies can anticipate challenges, refine their strategies, and ensure resilience in a competitive marketplace. Moreover, a disciplined approach to governance and performance evaluation enhances the alignment between business vision and execution, fostering sustainable growth and adaptability in changing environments.

This often reveals discrepancies in leadership perspectives, with directors holding conflicting views on the company’s identity. Such misalignment signals the need for a strategic review to refine decision-making and operational efficiency.

A clear governance structure prevents confusion, misallocated investments, and inconsistent market positioning. In many cases, business units within the same group require distinct strategic approaches to optimize performance.

Core strategic focus areas

Businesses generally align their strategies with at least one of the following ten core areas:

These strategic focus areas are pivotal during enterprise evaluations and transitions. The interplay between internal turnaround strategies and external actions often highlights a company’s core strengths and exposes vulnerabilities that require addressal. Effective diagnostics can help determine whether to consolidate efforts around existing strengths or diversify into uncharted territories.

• Product or Service Offering – The goods or services they deliver.
• Target Customer Base – Specific market segments served.
• Market Category – The industries they operate within.
• Technology Development or Deployment – Proprietary innovations or processes.
• Production and Operational Capabilities – Efficiency, capacity, and in-built competencies.
• Competitive Advantage – Unique selling propositions or marketing strategies.
• Distribution Model – Methods used to deliver products/services to customers.
• Natural Resource Utilization – Reliance on raw materials or resource-based advantages.
• Return on Investment (ROI) – Profitability and shareholder value generation. Generally used in conglomerates and diverse holding companies whose focus in on maximising returns to shareholders.

Once these elements are clearly defined, companies can assess their strategic focus, market positioning, and industry value chain. Understanding these factors ensures a precise, informed approach to addressing financial distress. Poor analysis can lead to ineffective recovery strategies, worsening financial instability.

Economic cycles and business viability

Market dynamics, shaped by economic cycles, technological disruption, and shifting consumer needs, play a crucial role in determining financial distress.

A company operating in a declining sector will always be at greater risk. Survival depends on responsive strategies, agile management, and sound governance. South Africa’s commodity-driven export-based economy, dominated by mining and agriculture, is inherently cyclical, exposing enterprises to frequent periods of distress and volatility.

Similarly, businesses in high-tech industries face accelerated obsolescence due to rapid innovation cycles.

Organizations facing financial distress must not only evaluate internal factors but also consider external influences such as regulatory changes, geopolitical risks, and the broader economic environment. These external pressures often amplify the challenges of maintaining operational stability and can reshape the viability of rescue strategies. For South African companies, navigating these complexities requires a tailored approach that balances short-term recovery tactics with long-term strategic resilience.

One effective tool is a stakeholder-centric model, which emphasizes collaboration between creditors, employees, management, and shareholders to achieve collective buy-in for the rescue plan. This approach fosters transparency and shared accountability, laying the groundwork for sustainable reforms. Moreover, harnessing technology and data analytics can enhance decision-making by providing real-time insights into market trends and operational performance, aligning rescue strategies with dynamic industry shifts.

Companies must either drive industry change or adapt swiftly—as seen in the shift from traditional TV broadcasting to digital streaming platforms.

Final thoughts

While business rescue and turnaround are based on some elements that are not an exact science, it is built on structured methodologies and economic principles that help organizations regain stability.

The greater an empirical fact-based assessment the more likely is a sound turnaround strategy. That should also include a hard look at management and board competence and capability. In a resource constrained business environment talent management and retention is crucial in a rescue.

Successful turnarounds require proactive governance, industry awareness, and strategic decision-making. As South African companies continue navigating volatility, a deeper understanding of business rescue tools and frameworks will be essential for long-term sustainability. These should become a mainstream consideration when evaluating company actions as part of the implementation methodology and financial restructuring. This reflects the International trend in financial restructuring in the US and the UK where court overseen debt restructuring is now commonplace and enables a greater preservation of economic assets then liquidation.

Seasoned executives, diverse industry resources, and a unique turnaround perspective.