Restructuring Your Business - Think Ahead of the Curve
Gary Abrahamson for The Lawyers Weekly
November 20, 2009
Due to the weak global economy over the past year, business owners and managers may be exploring ways to strengthen the financial health of their operations. While the thought of an operational and financial restructuring process may be a contentious and emotional issue for many, it is often a necessary step to facilitate a return to profitability and enhance liquidity.
One of the challenges business owners repeatedly encounter is one of timing. Many owners and managers tend to ignore early warning signs that may create a situation where the options available and control of the restructuring process are impacted. For this reason, lawyers must ensure that the business clients they serve have a sound understanding of the restructuring options available and when they are appropriate.
Barring catastrophic unforeseen circumstances, the earlier one can recognize, acknowledge and act upon the need to restructure, the greater the flexibility and available options. Generally speaking, it is advisable to consider restructuring when key drivers have shifted within the business environment and reduced profitability or resulted in operating losses. This can be a compelling warning sign that the operating model of a business may be outdated or needs adjusting.
For some, however, the realization only happens once the cumulative effects of negative operating performance impacts liquidity and perhaps results in covenant breaches in key financing agreements. At this point, third parties - in most cases lenders - drive management to have another look at what is occurring in their business. The active involvement of lenders, compared to a management-led process, often causes additional strain on the organization and perhaps added costs.
The causes for reduced operating performance can often be obvious, and include factors such as increased competition, the recessionary impact on sales or the loss of a key customer. But the causes may be more subtle and the result of changes to the operating model over time. For example, reduced employee productivity, equipment efficiency, deteriorating customer profitability or product margins may not have been measured or addressed on a timely basis.
While early recognition is one challenge, the correct interpretation of what is occurring is equally important. All too often, business owners will start with an assessment or restructuring of the balance sheet and ignore the root causes, which often stem from operational performance.
When performing any assessment, it is important to determine if the setback is something from which the business can rebound over time with a few adjustments to its operating model, or if it will require more formalized, drastic action. This will determine the appropriate restructuring strategy to adopt, as well as the key stakeholders to involve and the timing of the restructuring.
Restructuring options fall under two broad categories: formal and informal. In an informal restructuring process, a company can attempt to renegotiate relevant contracts and agreements to allow it to continue operations without obtaining formal protection from creditors under insolvency legislation. This process is best suited in circumstances where there are few relevant stakeholders, the operational issues identified can be rectified with no, or limited, legacy costs to the business or where on balance it is determined the risk of attempting a formal process is too invasive.
In most circumstances, formal restructurings are executed using one of two federal statutes: the Proposal to Creditor provisions in the Bankruptcy and Insolvency Act (BIA) or the Companies' Creditors Arrangement Act (CCAA). Each provides a specific, formal methodology to help businesses restructure operationally and financially. In addition, each has specific technical requirements to fulfill.
For example, the CCAA only applies to companies with debts greater than $5 million. The CCAA process is court-oriented and tends to be more costly but, in the appropriate circumstances, could provide a longer time period to restructure than the defined timelines of the BIA restructuring process.
There are common elements that apply to both the BIA and CCAA, including creditor "stay" provisions, procedures for continuations and voting requirements with relevant creditors to successfully complete a restructuring.
Amendments to both the BIA and CCAA came into force that codify the availability of interim financing, the assignment of a debtor's rights and obligations under an agreement, the ability to disclaim certain types of agreements, the removal of directors, the ability to declare as critical a supplier in a CCAA proceeding and the ability of a debtor and bargaining agent to revise terms of an existing collective agreement.
While the above statutes and processes are helpful, perhaps the greatest challenge when advising clients experiencing financial difficulties is to assist them to move beyond the emotional aspects of the decision-making process. By working with third parties whose stock in trade is restructuring, business owners can gain a clear and unbiased understanding of their challenges and what will be required to achieve profitability and financial stability over the long term.
Gary Abrahamson is responsible for the restructuring and insolvency practice at Fuller Landau LLP, Chartered Accountants and Business Advisors, in Toronto.