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Everything You Need to Know About Financial Restructuring

An image of an outsourced CFO that is helping a small business with their financial restructuring.

Financial restructuring is often associated with a business on the verge of failure. Most restructurings are used to handle debt and help the company sustain itself in difficult times. For instance, the high inflation and high debt costs are stressing the cash flows of small and medium-sized businesses (SMBs). An Equifax survey of Canadian SMBs in September 2023 found that 53% struggle with limited business financing access, and 18% have faced past bankruptcy or insolvency.

Sometimes, financial restructuring can also be a proactive approach by management to eliminate a problem before it escalates. For instance, a company might undertake financial restructuring to streamline its business by selling underutilized assets, removing waste, and unlocking untapped potential. This could help the company revive the business and boost profitability.

If financial restructuring is so effective, why don’t small businesses opt for it often? Because restructuring has consequences that could reduce the company’s ability to get better credit terms in the future. In this article, we will understand financial restructuring, when you should consider it and how to prepare for it.

What Is Financial Restructuring?

A company’s value is determined by its assets and liabilities, which lead a business to success or failure. In financial restructuring, an external administrator analyses the company’s current financial situation and rearranges its assets and liabilities to unlock productivity and profitability while reducing financial harm.

The restructuring could happen at various levels and requires the management to make tough decisions. Sometimes, it involves selling obsolete inventory to reduce storage costs, adopting digital transformation, cutting back on wasteful marketing, or improving the HR and accounts receivable processes to free up the cash stuck in delayed client payments.

This restructuring process might uncover frauds and scams and save costs and resources. However, it will require the business owner to reveal confidential data, which could create problems if not executed properly. Hence, it is suggested that you seek professional help before and at every step of restructuring.

How To Prepare for Financial Restructuring?

Initiating and completing a financial restructuring must be logical, methodical, and strategic, with a clear and pragmatic goal.

Asses your business financials: When preparing for financial restructuring, critically assess your financial situation. Try looking at your business as a third-party buyer. See if any factors appear as red flags and put you off from buying the business.

Operational restructuring: Look at the business operations, workflow, processes and policies. Review the books to identify any gaps. You might be surprised to find inefficiencies or frauds that can be detected if you read between the figures. A professional financial consultant can help you set up efficient internal processes and controls to improve efficiencies.

Debt restructuring: If you are restructuring to manage debt, you have to accept you need help and be open about your situation with the stakeholders. Stakeholders are all parties having a financial interest in your business, including investors, suppliers, employees, debtors, and banks. Clear communication helps stakeholders prepare themselves and open up to negotiate the debt terms. In the end, everyone wants your business to survive and be able to pay off what is owed.

  • You can ask suppliers and lenders for additional time to repay the debt, freeze interest, ask for short-term credit or trade discounts for immediate payments.
  • Offering additional equity can encourage shareholders to seek more financing. Approaching existing creditors before reaching out to new lenders can also remove the “getting to know you” stage necessary with new lenders.
  • You could also consider selling off assets and using the proceeds to repay the debt.
  • In the worst-case scenario, you might ask unsecured debtors to reduce your debt or opt for the legal route of a proposal under the Bankruptcy and Insolvency Act. The proposal should be accepted by both parties and approved by the court.

Remember, never promise something you cannot deliver.

Risks of financial restructuring: While a financial restructuring might revive your business, it could impact your reputation. A restructuring may involve layoffs, hampering the company’s ability to attract and retain talent. Lenders might be hesitant to give you money, and if they do, the cost of financing could be high in the short term. The business will have to start operations fresh and rebuild its credibility.

When Should You Consider Financial Restructuring?

Financial restructuring is a big decision. While it can result in a financially more robust and profitable business, it also comes with significant risks. Small business owners should consider the pros and cons. The company should consider restructuring if its survival depends on it or to prepare for market fluctuations, disruptors, changes in demand trends, or the arrival of new technology. You could also consider financial restructuring to make your business attractive for a merger or acquisition or when preparing for an IPO.

Contact Edelkoort Smethurst CPAs LLP in Burlington to Help You Improve Your Business Finances

Talk to a professional CFO to help you analyze your business and financial situation and guide you on the best strategy to improve your financial health. At Edelkoort Smethurst CPAs LLP, our CFOs can provide services such as analyzing financial statements, identifying pain points and preparing restructuring strategies. To learn more about how Edelkoort Smethurst CPAs LLP can provide you with the best CFO expertise, contact us online or by telephone at 905-517-2297.