How a Small Business Restructure can save your business

Many small business owners facing mounting debts think their only option is liquidation, when in fact a small business restructure might mean they can turnaround the business and continue trading. 

Small Business Restructuring is a process whereby the directors and management of a company can stay in control whilst being supervised by a restructuring practitioner. As part of the process, the restructuring practitioner assists the business to create a plan with their creditors to compromise historical debts, so as to better the chances of the business to survive in the future. A number of other measures may also be taken by the directors of the business to adjust how the business operates to make it more viable.

Below, we’ll have a look at what Small Business Restructuring involves, how it came about, who is eligible, and how Business Rescue Solutions can act as your restructure practitioner to navigate you through the financial minefield.

 

What is a Small Business Restructure?

 

If you have an eligible small business in financial distress, a Small Business Restructure (SBR) offers an option for you to renegotiate your historical business debts with creditors, when those debts are restricting your ability to effectively trade. 

As part of the SBR, a compromise is made between the creditors and your company, which involves you agreeing to pay back your debt to the creditor, in part or in full, over a defined period. If you and the creditor agree that you only need to pay your debt in part, the remaining debt is written off.

Separate to the SBR, your company may decide upon a number of other adjustments to your business to improve how it operates. Alterations include changes to your organisational structure, the sale of assets, and other cost reductions.

 

Business Rescue Solutions

 

The Benefits of a Small Business Restructure

 

If your company is in financial distress, a Small Business Restructure through Business Rescue Solutions offers you the following:

  • An honest assessment of your current predicament, whether or not your business is able to be rescued, and whether it has a viable future.
  • Reduction of debt, via compromises with creditors, tax relief, and other restructure measures.
  • A map for future business success, rather than focusing on past problems.
  • A fast turnaround for a resolution (with Business Rescue Solutions, you can expect an SBR resolution within 36 business days). This means that in just over one month you have a clear vision of where your business stands, and a path for moving forward.
  • Clarity of payment for Business Rescue Solutions’ services at the outset – no hidden surprises. (The SBR is done at a fixed price which must be agreed to before it commences.)
  • Directors remain in control of the day-to-day operations of the company during the SBR
  • A temporary moratorium on unsecured creditors enforcing the repayment of their debts (including personal guarantees) during the restructuring phase (eligibility criteria apply). 
  • Our Small Business Restructure Practitioners (SBRPs) are registered with ASIC as ‘registered liquidators’.
  • The SBR process is supported by the government(see Sept 2020 Treasury press release).

 

Small Business Restructuring – How it works

 

To commence with a Small Business Restructure through Business Rescue Solutions, we have a 30 second test that helps clarify how your business is currently positioned, and how we can best help. (You can also call us directly to discuss.) 

As experienced SBR Practitioners, we know the complexity involved with the SBR process, and don’t expect our clients to understand all the ins and outs. As we proceed through the SBR, communication lines stay open and we answer any questions you have about how the process will work.

Here is a basic idea of the SBR flow:

  • We check to confirm that your business meets the eligibility criteria for small business restructuring.
  • Whilst the SBR is underway, the directors of the company continue to have control of ordinary business operations.
  • We guide you to create a plan to pay historical debts to your creditors. This must be presented to creditors within 20 business days of the SBR commencing.
  • We act as your company’s agent, negotiating a plan with your creditors to pay historical debts.
  • The creditors decide (within 15 business days) whether or not to accept the plan.
  • If creditors accept the plan, the company must make payment of the agreed sum in either instalments, or in a lump sum (as per the plan).
  • After the payment is complete, the company is no longer liable to pay the balance of the debt, and it is considered “cleared”.

 

How did Small Business Restructuring Come About?

 

Small Business Restructuring (SBR) commenced in January 2021,  when it became apparent many small businesses were suffering due to a range of challenges including travel bans, restricted trading, halts in supply chains, labour shortages, and more, due to the COVID-19 pandemic. Small businesses in the hospitality, tourism and arts industries were particularly negatively impacted, however the pandemic affected many industries in unexpected ways.

In an effort to help small businesses survive the economic impacts of COVID-19, the Federal Government introduced reforms to Australia’s Insolvency Framework. The measures aimed to reposition Australia’s insolvency system to minimise the impacts of handling an insolvency, reduce the time small businesses spend on the insolvency process, and assist more small businesses to survive the COVID-19 recovery period. 

Whilst this scheme was initiated as a lifeline for businesses impacted by COVID-19, small business restructuring can apply to any eligible small business facing financial distress.

 

Small Business Restructure

 

Is my Business Eligible for Small Business Restructuring?

 

If you are considering small business restructuring, your company must fit the following eligibility on the day on which the restructuring practitioner is appointed:

  • be insolvent or likely to become insolvent
  • total liabilities of the company must not exceed $1 million
  • no person who is a director of the company, or who has been a director of the company within the 12 months before the appointment of the restructuring practitioner, has been a director of another company that has been under restructuring or subject to the simplified liquidation process within the period of the preceding seven years, unless they are exempt under the regulations
  • the company must not have undergone restructuring or been the subject of a simplified liquidation process within the preceding seven years.

We then check that, at the time the restructuring plan is proposed to creditors, that your company will have substantially complied with requirements relating to employee entitlement and tax filing obligations. A restructuring plan can’t be proposed until a small business has:

  • paid the entitlements of employees that are due and payable (with the exclusion of employee entitlements not currently due to be paid) 
  • lodged returns, notices, statements, applications or other documents as required by taxation laws (within the meaning of the Income Tax Assessment Act 1997). [Tax debts do not need to be paid – only the required returns lodged.]

 

For full details on eligibility, see the ASIC website.

 

Signs your Small Business Needs Restructuring

 

Here are some signs that would indicate that Small Business Restructuring (SBR) might be  appropriate for your business:

Commonly the most prominent warning sign is a large unpaid tax debt. Other signs can include ongoing losses, cash flow problems, overdue tax lodgements and difficulty gaining access to new credit.

  • Declining Revenue: A sharp drop in sales or losses in revenue can jeopardise your operations, competitive position, and ability to meet financial obligations, suggesting an urgent need for business restructuring.
  • Escalating Expenses: If your expenses outpace earnings, it threatens your solvency and ability to pay suppliers and creditors, indicating the need for cost control and financial restructuring.
  • Excessive debt: High debt levels can divert time and resources away from your company’s growth and development. Unpaid tax debts and overdue tax lodgements are common warning signs that an SBR may be needed.
  • Issues with cash flow: If your business struggles to maintain a steady cash flow, it can disrupt daily operations, harm supplier relationships, compromise your competitiveness, and risk insolvency.

 

In Summary…

 

A Small Business Restructure provides companies in financial distress with some breathing space to develop a plan that will provide for the continuation of their business and a better return for their creditors (compared to a hypothetical liquidation scenario). 

In an SBR, a Restructure Practitioner assists the company to negotiate a plan with creditors to pay their historical debts. The benefits of an SBR are, in brief:

  • Directors stay in control of day-to-day runnings of the business during the SBR
  • Companies receive a fresh start to resolve historical debts
  • There’s a temporary moratorium on unsecured creditors enforcing debt repayment (including personal guarantees) during the restructuring phase
  • The restructuring process takes a relatively short time
  • There is certainty of costs (SBR is a fixed-price engagement)
  • The government has a positive attitude to the SBR process. In a press release on 7 September 2023 the ATO described the SBR laws as follows:

“The SBR process is designed to allow financially distressed, but commercially viable businesses, the opportunity to restructure their debts whilst continuing to trade. … To date, the ATO has supported most restructuring plans, voting in favour of 91% of them. Each plan is assessed on its merits and our voting history shows our commitment to supporting businesses through restructuring.”

Addressing collectable tax debt – Tax Institute’s Tax Summit 2023 | Australian Taxation Office (ato.gov.au)

 

Business Rescue Solutions – Small Business Restructuring success stories

Read about how small business restructuring through Business Rescue Solutions has helped the following businesses:

An SBR for this Construction business resulted in an 80% debt reduction

For this Hospitality business, an 81% debt reduction was achieved through the SBR.

Contact your local branch of Business Rescue Solutions for more information about SBR.