Many Australian founders and directors are confronting a reality they simply couldn’t conceive of in early January: shuttering businesses that until recently seemed to be in rude health.
For many, the stress can be overwhelming as they consider the personal and financial consequences of decisions around staff and business continuity.
However, according to Chris Olver, who along with Duncan Osborne co-founded business advisory Faro Corporate Advisory in 2017, it is critical that directors in particular not react emotionally. There are many alternative options to winding up a business, he said.
“I think the first thing directors need to do is step back from everything for a second and just say, ‘Okay, this is not me personally, this is the business’.
“And while you may have a lot of pride in the company and a lot of ego wrapped up in it, you need to just take the emotion out of that. Look at the numbers, look at the figures. What does my balance sheet look like? What’s my immediate return in terms of money coming into the business over one month, three months, six months, nine months? What assets do you have, what access do you have to capital, can you restructure and save on headcount?”
Faro was founded on the principle that there is not enough quality advice for directors facing these kinds of issues, beyond formal insolvency solutions.
Insolvency firms make money by putting companies into liquidation or organising restructures. While that is sometimes appropriate, those aren’t the only options, according to Olver.
“It shouldn’t be the first port of call. We should exhaust all of the other options first before looking at a formal insolvency.”
He told Which-50 there are many different options that can be considered to potentially arrest company problems.
“Liquidating a business ought to be the last resort. You shouldn’t be thinking, ‘Oh no, we owe money to the Tax Office, therefore let’s sell all of our assets, let’s shut this business down and fire all the staff’. No one wins out of that situation.”
Instead, he said, it is best to step back and dispassionately whiteboard all of the solutions available to the business to regain control of the situation. Often these approaches will provide a much better return to the creditors as well as protecting directors personally.
Indeed an important part of the work that Faro does involves helping directors and company owners renegotiate arrangements with creditors.
If it does come to liquidation, Olver says many directors confuse insolvency with bankruptcy. The former is a process defined by the Corporations Act, the latter can actually be considered a form of protection in some instances.
Calm before the storm
Interestingly, while the expectation might be of a surge in demand for services like those offered by Faro, Olver says that moment is likely still some way off.
“The ATO, for instance, had already slowed some debt collection activities quite some time before the coronavirus. The bushfires were the catalyst, where they took the foot off the throttle a bit in winding up businesses or applying for statutory demands. And now, obviously, there are a lot more companies in the same boat.
“The government has also enacted legislation that extends the time companies have to respond to a demand from the ATO from 21 days to 6 months, meaning you have six months to respond to a debt issue.”
Olver outlined the policies the government has put in place to assist businesses through the current economic climate. He said these include;
- PAYG tax rebates,
- JobKeeper payments,
- Extending the time allowed to respond to Statutory demands from 21 days to 6 months,
- Access to interest-free loans (QLD),
- Government guaranteed loans
- and relaxation of the Insolvent trading provisions/directors’ personal liability for business failure.
- Commercial lease protection
“Whilst these measures can go a long way to assisting a business, Faro caution directors against burying their heads in the sand and using these assistance measures as a crutch, saying they might still inevitably finding the business in an insolvent position in six months.
“We would advise engaging with a corporate doctor like Faro to take on all of the duties of informally negotiating with creditors, conducting financial analysis on all areas of your business to understand how to do things like reducing overheads or increase cash reserves.”
However, he cautioned that because of the length of time and uncertainty in the market today, a lot of companies still risk falling into liquidation in the next six months. “So it is probably best to look at resolving your issues early.”