Business failure: To rescue or not to rescue?

Unfortunately, there are many businesses today which are undergoing, or are in need of, business rescue. According to Standard Bank, “70% of new businesses will fail. Fifty percent of these will be in the first three years”.

While a number of factors can be attributed to a business’s downfall, the worst thing a business owner can do is stall in asking for help. This can often mean the difference between having a profitable healthy company and one that is six feet under.

There are a variety of warning signs that struggling businesses should take heed of, for example, if you find yourself having to borrow cash in order to keep your business from going under. According to Standard Bank, other warning signs that one should look out for include an overdependence on one particular client, failure to adequately anticipate cash flow, insufficient cash reserves, failure to understand your target market and uncontrolled growth (huge jumps often come before a huge downfall).

The initial reason for business failure, however, can be attributed to a lack of capital.

If, however, your business is not doing as well as you had initially projected and is on the verge of going under, what can you do in order to ensure its survival?
Says Debt Rescue’s CEO Neil Roets: “You need to determine whether your business is worth saving. Before you put in the effort to save your business, you must be sure that it is a healthy one that can make money and just needs a bit of assistance.”

Once you have established that it is indeed worth saving (this can be done by simply taking a look at your company’s finances over the previous months, speaking to your accountant or getting a professional analysis of the business), then applying for business rescue may be just what your company needs.

If there is an opportunity of increasing sales by investing further funds, then a simple injection could be what the company needs, says Mazars Business Rescue director Daniel Terblanche. “Unfortunately, in most cases the investment will be too late to change the immediate circumstances of a company. It would therefore not be a good idea to invest further funds if there is no possibility of the company trading out of its negative financial position.”

In most cases further investment only postpones the inevitable failure of the company and places the owner in further debt, he adds.

Werksmans Attorneys says that “the test for whether or not a company should be placed in business rescue is whether or not the company is financially distressed – it appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months”.

Primarily used to aid the rehabilitation of a company, business rescue is often used to help financially distressed companies (through reorganising and restructuring). Keep in mind though, that business rescue may not be the knight in shining armour that you expect it to be for your company.

Says Eric Levenstein, director at Werksmans Attorneys: “The aim of business rescue is to appoint a business rescue practitioner to consider the reasonable prospect of the company being restructured in a way which allows the company to trade out of its position of financial distress and on a solvent basis into the future.

However, not every business is a candidate for business rescue. A business rescue will only be successful if there is a willingness on the part of shareholders [or some third party] to provide some form of working capital [post-commencement finance] to the company during its business rescue process… either the business is viable in which case it can be rescued or, if not, the business must come to an end through the liquidation process.”

Keep in mind that if your company qualifies for business rescue (and not liquidation) as set out by the requirements in the New Companies Act (No. 71 of 2008), it will operate as before but under the supervision of a business rescue practitioner. Essentially, business rescue creates a moratorium on legal actions against the company in financial distress, explains Terblanche.

Putting the control of your company in someone else’s hands is not something that any business owner wants to do. However, it could mean the difference between resuscitating your business and burying it.

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