Rob Smith is a restructuring partner at McGrathNicol and an expert in restructuring, turnaround and insolvency. He shares his insights on the high demand for turnaround expertise and why timing is everything.
Back from the brink
Insolvency rates in Australia are currently at record highs. There have been more insolvencies this year to date than there were during the 2008 Global Financial Crisis. Economic conditions have become tougher, consumer discretionary spending remains under pressure and corporate balance sheets are still carrying legacy COVID liabilities, leading to a very busy restructuring and insolvency market.
A perfect storm
There is a reckoning occurring in the aftermath of the COVID-19 pandemic. During the pandemic, Australian businesses were heavily protected by generous government support and an easing of insolvent trading regulations. As a result, insolvencies reached historical lows in 2020 and 2021.
Importantly, the ATO also provided relief from proactive debt collection during that period, which has led to ongoing large amounts owed to the ATO. The amount of debt collectively owed to the ATO by businesses tripled since the start of the pandemic. Many businesses have since found themselves with significant ATO debts and limited capacity to make those repayments.
Another trend we have observed is a reduction in liquidity available to the startup sector. There has been substantial and welcome growth in venture and early life capital being made available to startups over the last ten years. This has led to significant global success stories in Australian technology, health and medical startups who have been able to access funding more easily in a maturing startup industry.
With the rise of startup capital, we have seen increased business emphasis on growing scale and revenue as quickly as possible, with businesses encouraged to spend money quickly to rapidly grow. The aim has been to generate rapid growth, raise further capital and then use scale as a bridge to increased business valuations and financial sustainability. However, with the liquidity tide flowing out in recent years, startups have become financially vulnerable. In this environment, it has been essential for many businesses to quickly pivot to cash preservation, cost cutting and to deprioritise growth in the short term.
In today’s challenging trading conditions, we have seen that a lack of focus on profit and cash is risky. Too often, businesses invest heavily in revenue, fixed overheads and capital, and pivot to cash flow preservation too late.
Other economic conditions have contributed materially to the increase in insolvencies, including input cost inflation, labour availability and lethargic commercial and residential property values.
SOS from business
A consequence of the increase in financial distress has been a need for more turnaround professionals. We have seen an increasing number of talented professionals coming to work in the restructuring and insolvency industry, often from disciplines such as audit and business consulting.
Restructuring and insolvency is often an extremely challenging and emotional time for everyone involved. It requires a high calibre professional to navigate it with business owners, employees, creditors and other stakeholders. Insolvency often comes with significant personal implications impacting on family relationships and all those who have been relying on the business. It often comes with job losses, a loss of equity value and a loss to creditors and suppliers. It can be a very difficult environment, but if managed well, there may be better outcomes for stakeholders than alternatives.
Long-term relationship building
One of the benefits of my close association with Quinn Allan is the fantastic network of CFOs it possesses. It has enabled me to work within that network and to meet lots of high performing professionals – and I hope I have returned the favour by connecting them with my network.
I have always found that Quinn Allan invests in its business relationships. This includes corporate relationships, partner opportunities with firms like ours and with its key clients. It is a long-term, mutually fulfilling approach. Often with recruiters, the relationship can feel very transactional: they place someone in a role and then quickly move on. That is not how business is done with Quinn Allan. They invest in relationships for the long-term and look at ways to bring value to those relationships
Light at the end of the tunnel
Australia’s insolvency and bankruptcy regime is designed to fulsomely ,transparently and objectively deal with an insolvent situation, which allows for an investigation into any wrongdoing or poor behaviour that’s transpired prior to that insolvency. It offers a process of rehabilitation for a company or a bankrupt person to have another go in business. It’s not supposed to be an overly punitive regime. It offers the chance for rehabilitation in the future.
A key problem we see is that turnaround consultants and key stakeholders are often engaged too late. What could have been a business turnaround ends up being an insolvency. The reality is that the more runway a business has to deal with financial stress and engage in turnaround initiatives, the more options it has for a better outcome.
Every business is different, but if you find yourself in a situation of financial stress, then you want to be proactively dealing with all the elements as early as possible. Unfortunately, I’ve seen many businesses start to engage with key stakeholders or consultants only weeks from running out of cash. Ideally, turnaround experts are engaged more than three to six months before a key liquidity crisis. The availability of time allows far more tools to respond.
However, it is fairly common for business owners to try to handle everything themselves. This is understandable, but can be a mistake. ‘A problem shared is a problem halved’ is true in a situation of financial stress.
