Wexted Advisors discusses why distressed retailers must explore all restructure and turnaround options to survive.
With the difficult conditions that have plagued the retail industry over the past twelve months, retailers must consider all restructuring options before it is too late.
COVID-19 has unfortunately resulted in reduced foot traffic, store closures, the accumulation of legacy creditors and significant deteriorations in working capital positions.
Even with the support of JobKeeper amongst other government initiatives, many retail businesses will continue to struggle in 2021.
The misconceptions of formal restructures
Restructuring processes and reaching out for external help can appear scary and is often seen as something to be avoided at all costs, but Raj Goyal from Wexted Advisors explains that, "retailers will not be on their own in dealing with the difficult conditions in the short term future.
"We do not want to see business fail due to a lack of information about their options."
There are always options available, however the longer a company holds off, the more a business and its options will deteriorate.
If companies act early, options include informal arrangements, safe harbour, voluntary administration and now, the new small business restructuring reforms.
With the availability of several options and the right people involved, there is no reason why a financially distressed company cannot survive and thrive in the future.
Goyal explains that, "the same fundamentals apply from SME businesses to very large corporates and it is all about cashflow.
"All companies experience distress from time to time and often at no fault of their own.
"The ones that survive focus on cash, seek appropriate advice from trusted advisors at the right time and act on it."
Tuchuzy, a well-known retailer in Bondi, was successfully able to use the voluntary administration process as a restructuring tool, that allowed legacy creditors to be dealt with, a refocus on high margin product lines, and ultimately resulted in the company continuing to trade profitably.
Goyal explains that the key to Tuchuzy’s restructure was a ‘light touch’ administration to minimise costs and disruption to the business and working closely with the director to ensure the proposal submitted to her creditors would be acceptable than an immediate winding up scenario, which it was.
There is quite of lot of flexibility and breathing space afforded in the voluntary administration process.
The administrator can quickly reset the cost base by exiting unprofitable stores, reducing the workforce, and focusing on only buying and selling only positive margin products.
Even when a liquidation becomes necessary such as in case of Mon Purse, a well-known women’s handbag retailer, Goyal tells us that, "The process can be fairly quick, fair and transparent if run properly."
In this case a public sale process was carried out generating lot of interest and the business was eventually sold to the highest bidder, resulting in the brand continuing to exist and hopefully prospering in the future.
A similar process was also run by Wexted Advisor’s Andrew McCabe with the sale of Stylerunner to the ASX listed, Accent Group following his appointment as receiver.
Stylerunner continues to trade today with the founder “ecstatic” that the brand has been given a second chance at life.
The secret is to overcome the general stigma accompanying restructures and approach restructuring experts early who will ‘unemotionally’ explain each available option and provide an impartial recommendation that aligns best with the individual circumstances.
The new Small Business Restructuring (SBR) reforms
Voluntary administration for many small businesses is not appropriate due to associated financial costs, and the hurdle that accompanies a director relinquishing control.
Goyal tells us that, "for a business with a few creditors and only one location the voluntary administration process can be expensive and unnecessary."
The government luckily has responded to this critique and offered an alternative, which comes at a particularly good time as directors are once again exposed to personal liability for insolvent trading.
The new SBR reforms offer a lower cost and far simplified restructure process, that will be critical for small businesses to continue to trade when government assistance such as JobKeeper drop away in March this year.
Goyal sees these reforms as adding an important new path that will help many retailers.
There has been only a handful of SBRs to date and its effectiveness to save businesses is yet to properly evaluated.
However, it is an option to explore in the right circumstances.
Final word and key questions that retailers should be asking
The government and the insolvency industry are doing everything they can to make sure that those companies affected by COVID-19 do not collapse, but for it to work, directors and business owners need to be proactive and engage early.
Goyal reflects, "the sad reality is that far too often businesses approach us at a point where their financial problems have become insurmountable and at that point a liquidation/shutdown is often the only option left.
"If they had come to us say six months earlier a restructure through VA or the new SBR reforms would have been possible, and they could still be trading today," he said.
With proper preparation and an effective plan that considers all stakeholders, any business should be able to restructure and continue to trade.
If the answer to any of the below questions is yes, you should seek immediate advice from a trusted restructuring advisor.
1. Am I currently losing money?
2. Am I finding it hard to pay bills on time?
3. Have I got old debts that I am finding it hard to pay down?
4. Do I need some breathing space?
5. Do I have my ‘head in the sand’?
Joe Hayes, Raj Goyal and Andrew McCabe are all Partners and Registered Liquidators at Wexted Advisors, a boutique insolvency and corporate restructuring firm. If you have any queries, please visit their website at www.wexted.com or contact their offices directly on (02) 9210 1700.