During the covid-19 outbreak, many companies are suffering from financial disruption. Companies are contingency planning to ensure they survive with a positive outcome. In this restructuring guide, we will provide you with the right principles and steps to help you develop a restructuring plan.
The adverse consequences of the virus could be broad. That includes the reduction of consumer demand and supply chain disruption. Also, consequences include an increase in risk aversion in financial markets (driven by an overall downturn in business). Local subsidiaries of multinational enterprises (MNEs) in affected regions, could be experiencing a substantial reduction in profitability.
Restructuring experts are finding themselves in demand, anticipating that companies will not be able to make good on their promises on time. They may also seek to negotiate new terms with lenders, vendors, employees, and other parties.
Companies that depend heavily on consumer spending are especially troubled. Restructuring advisers expect retailers to run into further trouble as people cut back on shopping.
Energy companies, which loaded up on debt in the past decade, are convulsing because of low oil prices as demand falls because of the pandemic. Hoteliers, cruise lines, restaurants, event sponsors, and mortgage lenders are among those suddenly short on cash. Furthermore, with travel and outdoor activity at a standstill and unemployment soaring.
In anticipation of demand, many law firms are redirecting their lawyers into restructuring and bankruptcy-related assignments from other areas. Corporate failures are inevitable in the current crisis, especially given that there is $6 trillion in U.S. corporate debt that remains outstanding.
Meanwhile, several private equity and hedge fund firms, including Fortress, Apollo, and Avenue Capital, are seeking opportunities to finance companies with riskier debt profiles.
Restructuring advisers expect the real estate sector to hard-hit as homeowners and businesses are unable to make mortgage payments.
Options and current issues
Many businesses suffer a dramatic and immediate drop in turnover caused by the Covid-19 outbreak. Meanwhile, the Government has already rolled out what is assumed as the first wave of financial support measures.
In the first instance, anyone suffering from cashflow or other solvency issues should take professional advice from their accountant as to what support is available.
Even with a financial support package, some businesses may struggle to survive in their current form if, for example, they have liabilities that they cannot meet today or in the future.
The directors can conclude that their company is insolvent, which can be on a balance sheet or cash flow basis. That said, they are under a duty to consider the shareholders and the creditors of the company. The directors will have to act in the interests of both.
In such circumstances, the directors should take professional advice from an insolvency specialist, not just to identify the best options for the company and its creditors but also to protect themselves from future criticism should the company enter Liquidation.
What do you need for a restructuring plan?
You should start planning. A business restructuring plan usually takes time to prioritize financial aspects.
The planning stage requires the formulation of detailed operational and strategic plans. Anticipate that the diagnosis and planning parts of the process will require a minimum of several months and often more than a year.
Three of the most important parts of any business restructuring are the participation of corporate stakeholders, adherence to any legal restrictions, and flexibility during implementation.
Often companies do not allow enough time for planning and implementing the restructure. A restructuring involves details concerning vendors and consumers, stockholders and financial relationships, employees and inventory, quality control and environmental impact, equipment and technology, and management and marketing. All of these areas need careful thought and consideration to determine how company restructuring will affect each one.
Developing a Restructuring Plan and Timeline
The restructuring is likely to impact various sectors of the business. Therefore, you need a plan and a timeline.
Possible organizational structure scenarios that will position the company for future growth:
- A new or existing legal restriction or required financial investments that should get done before the restructuring takes place
- Implementation timelines
- Key hires or the creation of new roles
Restructuring activities should be communicated among the leadership team, as well as with employees.
The company should communicate restructuring plans to employees so that they hear about them from company leaders first, rather than in the media or through the rumor mill.
There are no specifics in the law of what restructuring plan should contain.
Key elements to include in a restructuring plan are:
- A description of the subject matter and scope of the task
- A summary and analysis of the business environment
- An analysis of the causes of the crisis and the stage it has reached
- A model for the restructured company
- A program of measures
- An integrated restructuring plan
- An assessment of the restructuring viability
- The content and steps covered in a restructuring plan depend on the stage and scope of the crisis and the specific stakeholder structure.
Small steps throughout the process
While the documentation and analyses are profoundly necessary during the restructuring process, the center is on the information.
In addition to the analysis process, keep the transparency for your employees, and other people included in restructuring. The results of all analyses and restructuring measures should show the integrated business plan. In addition to the business plan, income statement, balance sheet, and cash flow should also show the complete restructuring plan.
Design the plan so that the measures and objectives meet within a reasonable timeframe.
Moreover, consider designing a plan where actions and procedures can follow the same timeframe. You should look to establish measures as a realistic objective.
The practice has shown that it is not sufficient to set out the restructuring measures that the company management proposed in a restructuring report. For the latter in particular, you will have a significant position with an experienced restructuring advisor. Depending on the stage of the crisis, this applies to measures focused on liquidity. Similarly, that applies to adaptations to organizational structures and processes through to setting a new focus and designing business models to give a competitive advantage.
Corporate restructuring is a natural part of business life, but it doesn’t have to slow business productivity or create havoc on the company’s structure. Many companies are more successful than their rivals because they are able to take advantage of new technology. They are able to provide services and products more efficiently. Try to plan restructuring activities carefully, taking into account key positions, people, and processes.
The more closely a restructuring is focused on the key issues for survival, and the more realistic the measures are when drawing up the plan, the greater the chances of success. Every restructuring needs the liquidity, debt maintained on time, and cost-cutting achieved. Efficiency changes also have to be held in improved cash flow and profitability.