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Corporate Restructuring in a Race Against Time

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felixtschopp_inisghts_visual_02Every company can face a crisis during its existence. The best way to deal with difficult situations is to face them early on and take active action. This also includes the willingness to seek help from experts.

Business crises can have many causes: Default of a major customer, global economic crisis, new political conditions, pandemic. In the vast majority of cases, however, the causes of a crisis lie within the company itself. In medium-sized companies, the success of the company is particularly strongly linked to the person of the managing director or entrepreneur. A sudden illness, death or simply the owner's dwindling ingenuity have already caused many businesses to flounder. To make a profit in the long term, a company must constantly reinvent itself, develop new products and explore new sales channels.

Crucial Role of Controlling

Typically, affected companies recognise far too late which areas of the company are running well and where difficulties are emerging. Many insolvency administrators name a lack of controlling as one of the main causes of corporate crises. In addition, medium-sized companies usually have too little equity capital to cope with a crisis.

The early detection of a crisis and the rescue of an ailing company require detailed controlling and comprehensive commercial knowledge. The strength of many SMEs lies in their comprehensive industry knowledge, while there are often deficits on the commercial side. This is where a professional advisor can help, at the latest, when these signs come to light:

  • Wages and salaries are no longer paid on time
  • There are arrears with the tax office and social insurance
  • The business partners now only deliver against advance payment
  • Banks cut credit lines or refuse direct debits because of insufficient funds in the account.
  • The volume of customer receivables is falling, with poor payment morale at the same time.
  • There are overdue payables due to suppliers

Race Against the Clock

Unfortunately, most companies wait far too long before they actually face an impending crisis and thereby squander the chance of rescue. As long as financing partners, suppliers, employees, customers and other stakeholders have confidence and not all financial reserves have been used up, the company has a certain room for manoeuvre. As the crisis progresses, this becomes more and more limited. So the earlier an entrepreneur acts during a crisis, the greater his chances of being able to continue the business.

Prevent the Company From Going Bankrupt

If the difficulties are recognised at a very early stage, the crisis can still be overcome by means of out-of-court (private) measures. The prerequisite for this is a convincing business plan. Depending on the individual situation, a number of different restructuring approaches are available to the company, such as:

  • Financial measures: Settlement, deferral of payment, factoring, shortening of payment terms, inventory reduction
  • Organisational measures: Restructuring, cooperation with other companies, personnel management
  • Balance sheet measures: Sale of non-operating assets, release of hidden reserves, sale-and-lease-back, conversion of short-term into long-term debt capital.
  • Insolvency proceedings: As a last resort, insolvency proceedings can protect against the access of creditors.

Reorganizing through an Insolvency Application

If the pressure from creditors is already too great, the only option is to file for insolvency. This procedure enables the company to reorganise itself and find a settlement with the creditors. Here, too, the rule is: the sooner, the better. A distinction is made between reorganisation procedures with self-administration and without self-administration. Sometimes the industry expertise of the previous business owner is decisive for the success of a reorganisation. In other cases, the trust between creditors and entrepreneur has been destroyed to such an extent that only an outsider can bring about a settlement. A restructuring consultant helps to find the most promising way for a successful restructuring.

Facilitating a Business Turnaround

At the beginning of every restructuring, there is always a detailed analysis of the causes of the crisis. In the process, the cost and revenue structure, the value creation processes and the financing structure are closely scrutinised and the strengths and weaknesses of the business are worked out. On this basis, a clear action plan must be developed and consistently implemented. An efficient and resource-saving approach is essential. In addition, all stakeholders, i.e. suppliers, banks, employees, public corporations and, if necessary, customers, should be involved from the very beginning. After all, a restructuring or turnaround only has a chance of success if everyone pulls together.

Identifying the Ideal Investors

A company crisis almost always leads to liquidity bottlenecks. Often, the existing financing structure of too little equity and too much short-term financing massively restricts the room for manoeuvre. In these cases, the success of the restructuring depends largely on finding suitable investors who are willing to invest risk capital, assume the bank's liabilities and provide the company with the necessary liquidity.

Seeking External Assistance

Entrepreneurs are often unfamiliar or insufficiently familiar with the legal framework to find the most promising way to restructure. In particular, if the crisis is due to management errors or a lack of controlling, the managing director will find it difficult to discover the true causes of the crisis and possible potential for the turnaround. A professional restructuring consultant with crisis experience is recommended, especially since the managing director also faces personal liability risks if restructuring proceedings are opened. A capable restructuring consultant will find it easier to convince stakeholders or mass administrators of the restructuring. Moreover, his experience allows him to take over management on a transitional basis, if necessary, until confidence in the previous management has been restored. Ideally, he also has a large network that is worth its weight in gold when it comes to finding investors and raising liquidity and venture capital.

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