Business environments around the world have been dealing with a series of challenges that have fundamentally reset the way that companies do business.
Adjusting to this new normal has been easier for some companies than others. Further, global markets have been able to achieve something South Africa has not; they have implemented key changes that have helped companies cope with the disruption that they face.
This is evidenced by the fact that South Africa is facing a growing number of liquidations while the rest of the world are growing their economies. With no signs of this disruption going away, is business rescue still relevant in the current environment and what options are available to financially distressed companies?
Increased risk
Last month Deloitte published their annual review (the Deloitte Restructuring Survey) of the turnaround industry. In terms of their analysis, a wide range of business sectors are likely to be at risk of some form of distress this year. Additionally, respondents expressed an opinion that the South African economy was only likely to recover in three years’ time.
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This view was driven by the analysis of the top five risks faced by South Africa. The highest risk is the current political uncertainty surrounding the general election and the likely coalitions that will govern the country. Following this is lower consumer confidence, the loss of talent, and an unstable currency.
Whether you agree with his analysis is another matter. These reflect the simple view of industry participants in the survey.
Specific interventions
Against this analysis, Directors and Chief Turnaround Officers are well advised to take some time to reflect on the current state of their business and how it is likely to perform over the next few years. Particularly if the interest rate cycle continues to be adverse, driven by sticky inflation.
The strategic review taken by the C Suite should include a detailed and well thought through cash flow outlook for three to five years. This should include a funding plan to provide sufficient working capital, replacement capital and planned expansions. A comprehensive cash management system is an effective tool to stave off financial distress.
If this strategic planning shows gaps in the cash flow, Directors need to consider the options available to the company to improve its outlook. If the analysis shows the company may not be able to repay its debts as they fall due in the next six months, the company is technically financially distressed.
Root cause analysis
Directors should further reflect on the causes of this distress and take corrective actions. These options include a comprehensive revenue review (products, services and markets), significant cost reductions, and potential mergers or acquisitions if the issue relates to the scale of market penetration. The improved earnings and restructured cost base will support the solvency of the business.
Include in the analysis whether the distress is related to the whole market or if the Company is under performing the market. Its all of us or just us?
The Directors should also consider their risk coverage through insurance or outsourcing. In uncertain environments risk coverage is a critical consideration.
Cover legal risks
Directors should also cover their legal risks and estimate the impact of an adverse outcome on the companies’ cash flow.
In the South African Post Office (SAPO) business rescue plan, the business rescue practitioners (BRPs) indicated that their review found an additional 62 claims against the Company. This may be an extreme case but indicates the need for a comprehensive risk framework that needs to be implemented in any company, whether they are distressed or not.
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If the options that are investigated indicate that there is an outcome that will result in a return to solvency, or an outcome better than a liquidation, they should be pursued. Business rescue will always be better than liquidation in these situations because jobs are preserved, and the company can contribute to the economy. Directors need to consider the routes to fixing a distressed business and discuss this with Turnaround advisors.
Other options
Companies should consider informal workouts if the distress turns out to be temporary and the company can achieve a resolution through normal trading actions. This can be done under the Directors supervision.
If the other indicators of distress are more acute, distressed companies may need the support of Business Rescue Practitioners (BRPs) in the role of a restructuring director or a formal business rescue.
It is important to remember that the directors must issue a sworn statement of affairs in which they state their opinion that the business is capable of rescue. If they have considered all of the above, they should be in a strong position to have a positive opinion of the likelihood of success. It is also an excellent way to ward of claims of delinquency should the business fail.
Answering the question
While supportive of the business rescue profession, Deloitte has questioned whether business rescue has a place in the current South African business environment.
While the 2024 Deloitte Restructuring Survey may seem critical of business rescue, it is not. The Survey draws attention to the fact that many companies are (dangerously) unaware of their financial distress until it becomes critical and debilitating. They are correct in calling for companies to notice the early signs of their financial distress and to consult with BRPs to come up with an effective action plan.
Is business rescue still relevant? Yes, provided that interventions are implemented early enough for the key interventions that business rescue aims to achieve can take effect.
