An Unusual Debt Solution: Informal Restructuring and the ‘Workout’

There are many ways to deal with creditors that don’t involve getting tangled up in bankers, courts, or trade creditory. If terms like ‘administration’ and ‘insolvency’ leave you terrified, you might be better suited to something like informal restructuring. We have spoken about this before here and here, but as this is a common question we receive, it’s time to do a deeper dive. What Is Informal Restructuring? Businesses can restructure themselves at any time. In fact, the most successful businesses constantly adapt and change to ensure optimal streamlining of processes. Any kind of internally managed change in the structure of a business is called informal restructuring. But in situations where businesses are facing financial distress, restructuring is often overlooked in favor of more immediate (and less beneficial) options, like administration. What Can Restructuring Do for My Cash Problems? Because restructuring is often considered expensive and time-consuming, it may seem counter-intuitive as a tool during times of financial stress. But in fact, it can be the least drastic measure used to save a failing company from toppling over. More to the point, it can be undertaken without going to external parties or seeking the complicated formal protections available under insolvency legislations. How Do I Go About It? It’s just like you’re asking how to restructure a small business but in a more flexible manner. First thing to do is to approach your creditors and negotiate some kind of leeway so you can start the process. This can be done yourself, or by hiring a specialist to handle the creditors for you. This is typically referred to as a ‘workout’ and creditors are often quite understanding if approached in the right way. Once the creditors have agreed to give you the space you need to undergo a restructure, you can begin the process. Considerations for the Workout There is no set procedure for a workout, instead you need to consider your personal circumstances and those relating to the business and design the restructure to address weaknesses and exploit opportunities. In all cases however, you should consider the following: What will the existing debts be exchanged for following the small business restructuring (usually referred to as the debt instrument) What is the equity-debt exchange ratio – often determined by way of a valuation What proportion of the equity dividend will go to creditors How will the residual debt be taxed Final Word The workout is a

July 13, 2023

Uncategorized

There are many ways to deal with creditors that don’t involve getting tangled up in bankers, courts, or trade creditory.

If terms like ‘administration’ and ‘insolvency’ leave you terrified, you might be better suited to something like informal restructuring. We have spoken about this before here and here, but as this is a common question we receive, it’s time to do a deeper dive.

What Is Informal Restructuring?

Businesses can restructure themselves at any time. In fact, the most successful businesses constantly adapt and change to ensure optimal streamlining of processes. Any kind of internally managed change in the structure of a business is called informal restructuring. But in situations where businesses are facing financial distress, restructuring is often overlooked in favor of more immediate (and less beneficial) options, like administration.

What Can Restructuring Do for My Cash Problems?

Because restructuring is often considered expensive and time-consuming, it may seem counter-intuitive as a tool during times of financial stress.

But in fact, it can be the least drastic measure used to save a failing company from toppling over. More to the point, it can be undertaken without going to external parties or seeking the complicated formal protections available under insolvency legislations.

How Do I Go About It?

It’s just like you’re asking how to restructure a small business but in a more flexible manner.

First thing to do is to approach your creditors and negotiate some kind of leeway so you can start the process. This can be done yourself, or by hiring a specialist to handle the creditors for you.

This is typically referred to as a ‘workout’ and creditors are often quite understanding if approached in the right way. Once the creditors have agreed to give you the space you need to undergo a restructure, you can begin the process.

Considerations for the Workout

There is no set procedure for a workout, instead you need to consider your personal circumstances and those relating to the business and design the restructure to address weaknesses and exploit opportunities. In all cases however, you should consider the following:

What will the existing debts be exchanged for following the small business restructuring (usually referred to as the debt instrument)
What is the equity-debt exchange ratio – often determined by way of a valuation
What proportion of the equity dividend will go to creditors
How will the residual debt be taxed

Final Word

The workout is a unique solution for businesses facing crisis, but it is neat and flexible and keeps the matter away from the courts and banks. Handling such things internally is often more beneficial for the business and the reputation of those involved. But such a process can require some finessing, especially as creditors are not always known for their kindness.

Author

Andrew Quinn

With 17+ of experience, Andrew Quinn is a transformative force in the insolvency industry, challenging conventional approaches to business turnaround.