Todd Gammel

Business owners facing financial difficulties are warned to use the current crisis of uncertainty as cover for restructuring and not to wait out the storm from fuel and costs increases as recovery often takes far longer and delays can reduce the options available, Todd Gammel, partner at HLB Mann Judd Sydney, says.

Gammel says a turnaround typically takes between 12 and 18 months, even when action is taken as soon as problems start but now is as good a time as any as there is more understanding in the market and patience from external aspects like transport costs/supply issues that can be utilised to buy time and explore options.

“Financial problems are usually the result of pressure or issues building over time. Cash flow tightens, trading conditions change, lenders become more cautious and suddenly management is spending all their time just keeping the lights on.”

Once a business reaches that point, day-to-day demands such as payroll and suppliers take over, leaving little room to step back and reassess the broader strategy.

“The risk is that businesses become reactive as we can see with fuel prices/transport cost changes. Businesses are forced to focus on survival and the longer that goes on, the harder it becomes to turn things around.”

Gammel says simply waiting for conditions to improve around the current crisis could be a waste of the crisis that can provide a straightforward cover for operating changes.

“Early action gives you choices even in a crisis. If you act while there is still flexibility in the business, you can restructure properly, access funding or bring in new partners. If you leave it too late, those pathways start to close. Acting now may enable recovery activities to be in place and the business moving positively before anyone becomes aware due to the distraction of the larger issues in play”

Gammel says this is often seen in legacy business structures, which are frequently set up years earlier for tax or family reasons.

“We see businesses that are effectively boxed in by their own structure limiting external funding or investment,” Gammel says.

“For family-owned businesses, the challenge can be made worse through the generations. In some situations, funding from family assets is being used just to keep the business going, without a defined end point or strategy. Over time, that can eat away at family wealth rather than preserve it. Family jewels can be sacrificed to feed the family business.

“Changing this approach can unlock new funding or investment opportunities, but it needs to be done carefully. If the tax side isn’t managed properly, you can create new problems while trying to solve the old ones.”

Gammel says an independent perspective can be critical in those moments, particularly when decisions become complex or emotionally charged.

“You need someone who can step back, assess the situation objectively and ask questions of what the desired outcome is. That means looking at all the options, including ones that may not have been considered internally, and focusing on outcomes that are sustainable over the long term,” Gammel says.

“That can include restructuring ownership, or, in some cases, stepping away from parts of the business altogether.

“Bigger isn’t always better. A simpler, more focused business can ultimately deliver more value for the owner and a potential investor than a large, complex one that’s constantly under strain.

“We’ve seen businesses reduce their scale significantly, sometimes by more than half, by exiting contracts or divisions that were not delivering real value. What’s left is often a more profitable, more manageable business with stronger margins and a clearer strategy towards sale or investment.”

Funding also plays a central role in stabilising distressed businesses, particularly where assets exist but cash flow is constrained.

“There are situations where businesses are asset rich but cash poor,” Gammel says.

“In those cases, structured funding can bridge the gap and give the business time to execute a recovery plan but that may become more difficult as a crisis develops as confidence in the business and /or the overall market declines, so acting early can avoid these issues.”

Gammel says the businesses that recover most successfully are those that approach these situations with clarity and urgency, supported by the right advice from the outset.

“A business in going through difficulty can be a turning point to greatness. If you address issues early using a larger crisis as coverage for change and take a structured strategic approach, you can reset the business and put it on a more sustainable footing for the future before anyone notices.”

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Jonathan Philpot

Investors should revise their expectation of comparative returns from their risky and secure investments, as the impact of consecutive rate rises normalises levels of return, according to HLB Mann Judd wealth management partner, Jonathan Philpot.

Mr Philpot says the gap in returns between different investment types is now around five per cent, having been closer to ten per cent over the past decade.

“Now that much of the interest rate movements have occurred, investors should be reassessing their expected returns across share markets and fixed interest.

“For the ten years up to 2022, every additional ten per cent of their portfolio allocated to risky assets delivered an additional one per cent per annum return. For example, the 60/40 balanced portfolio delivered a return of nine per cent, the 70/30 balanced portfolio around ten per cent, and the 80/20 portfolio 11 per cent.

“However, these returns will not be replicated for the next ten years. For equities, you should expect a return of 7-8 per cent and fixed interest a 3-4 per cent return. We’re entering a very different environment for investment returns,” he said.

Mr Philpot said it is the smoothness – or lower volatility – of the market that is important, particularly for retirees. For the ten years up to 2021, investors enjoyed positive returns, with 2022 coming as a surprise for retiree investors.

“The risk premium is justified as share markets will often move downward within a one-year period of about ten per cent, so particularly for retirees, the stability of returns over their lifetime is an important factor.

“For those investors who have increased their risk allocation over the last 10 years, it may be worth starting to consider slowly reducing their exposure to the share market, particularly as markets move into overvalued territory over these next few years.

“Some other asset classes, such as infrastructure investments, high yield debt and hedge funds, could be considered as alternative investments for share markets, however it is important to understand the underlying risks in all of the different type of asset classes,” he said.

Another beneficiary of the higher interest rate environment is the short-term investor – those with an investment horizon of less than three years – who may be saving for a home deposit or large capital purchase.

“These investors can now invest in a term deposit or higher interest-earning accounts and receive a return on their savings,” he said.

According to HLB Mann Judd restructuring and risk advisory partner, Todd Gammel, 13 consecutive years of record-low interest rates followed by ten straight increases is also having a substantial impact on businesses, with the SME market in particular being affected.

“The current economic climate is making it difficult for some businesses to access capital and debt to fund operations. While supply chain issues have eased, relative to 12-18 months ago, it continues to have a knock-on effect for some.

“The uncertainty around rates and the steep manner in which they have risen means business owners need to manage funding risk more closely.

“The Silicon Valley Bank collapse has highlighted the need for management to understand and hedge risk in a changing environment with greater scrutiny. Taking a small loss on a poor investment or strategy is a learning experience, losing the business because of an unwillingness to close the position or accept the loss earlier places concern around adherence with personal obligations,” he said.

Mr Gammel said rising interest rates are also resulting in an increase in distressed businesses, while prospective acquirers have missed the opportunity to use cheap capital.

“Rising rates have, to a degree, put a handbrake on some businesses looking for greater scale through acquisition but given there are some sectors still struggling, particularly construction and some retail sectors, the opportunity to acquire hasn’t altogether passed.

“Not only does an acquisition add scale, increase hard to find workforce, they can improve the margin and market position of both businesses by operating as a single entity,” he said.

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Todd Gammel

Businesses looking for growth and opportunity are well-positioned to capitalise on persistent supply chain and cash flow issues by acquiring struggling competitors, according to HLB Mann Judd Sydney restructuring and risk advisory partner, Todd Gammel.

Mr Gammel said current market conditions, including rising inflation and interest rates, are resulting in an increase in distressed businesses, creating opportunity for those looking to grow or expand their offerings through acquisition.

“Industries where there’s an inability to pass on changes in costs, such as construction and also retail and service-based sectors, will likely see an increase in distress.

“However, this presents a unique opportunity for businesses in the sector to expand and grow operations, by acquiring another business at a value lower than it would cost to build from the ground up, with the potentially added value of additional skilled workers” he said.

Distressed businesses are classified as those that are struggling to generate sufficient revenue or income to meet or pay its financial obligations. Some distressed businesses may be in a formal process like administration, receivership liquidation, or not in a formal regime but under other pressures including supply challenges or if the business owner has passed away and there’s no succession planning in place.

Mr Gammel said businesses looking to acquire a distressed competitor can gain immediate scale, and improve the margin and market position of both businesses by operating as a single entity.

“Businesses operating in highly competitive markets have likely been undercutting each  other for a number of years, which is now causing financial stress. In the current market, labour shortages remain a key issue, but purchasing a distressed business can afford the acquirer with a level of skills and resources they would have otherwise been unable to easily source,” he said.

With the Reserve Bank of Australia having lifted interest rates for a historic fourth consecutive month – the official cash rate now sitting at 1.85 per cent – Mr Gammel said prospective buyers of distressed businesses may have missed the opportunity to use cheap money.

However, the combined impact of inflationary and cost of living pressures, rising interest rates and supply chain issues are creating growth prospects for well run businesses that can manage the issues they face.

“It’s a rare scenario. All these factors add up and impact the ability of a business to trade or   trade profitably. At the same time, many small business owners in particular, have reached a point where they need an exit strategy. It can then become a case of a purchaser effectively buying a pool of employees and business to expand and resolve any labour issues in their existing business.

“There are many reasons why you can get good value from buying a distressed business. It’s just about how a purchaser approaches the process,  understanding of vendor motivations and what issues could arise – a thorough due diligence process is crucial to ensure the investment of the acquisition is maximised” he said.

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Registered liquidators act in a fiduciary capacity, and often have total management control of the affairs, money and other property of a body corporate. An application for registration as a registered liquidator is made to ASIC, before a committee interviews the applicant and makes a determination based on qualifications, experience and skills.

Mr Levesque-Hocking joins restructuring and risk advisory partners Todd Gammel and Barry Taylor as the registered liquidators at the firm.

Mr Gammel said Mr Levesque-Hocking’s skills and experience in the restructuring and risk advisory market have proven invaluable to the firm during the COVID-19 pandemic, with the registration validating his expertise.

“Matthew has over 15 years’ experience assisting clients and stakeholders in distressed situations across a wide variety of industries including property, mining, manufacturing, hospitality, technology start-ups, professional services and retail.

“The registration is a culmination of his hard work and ability to provide clients with pragmatic restructuring and turnaround advice, particularly amid such uncertain times,” he said.

Mr Levesque-Hocking has been heavily involved in advising clients on the importance of taking stock of their current position, reviewing all aspects of their business, including governance and management frameworks, financial reporting, and adjusting their strategies to better suit economic conditions.

“This current lockdown could have larger economic implications than the 2020 lockdown without the safety net of JobKeeper. The construction sector in particular has been impacted significantly, and there being a real risk of a longer extension should case numbers fail to improve.

“Given statutory protections appear limited, Matthew’s registration will be critical in providing assistance to businesses around and strategies to appropriately navigate the current financial year,” said Mr Gammel.

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Todd Gammel

Any steps taken by businesses now to review key functions such as funding models and service delivery could be instrumental in determining their viability on resumption of normal trading, according to restructuring and risk advisory partner at HLB Mann Judd Sydney, Todd Gammel.

Mr Gammel said business owners should be utilising the current “hibernation mode” resulting from the COVID-19 pandemic to reassess funding options, and consider how they are going to operate and cover expenses when trading restrictions are lifted. A wholesale business, for example, will have stock to sell and, while they could pay wages, there’s a timing issue between selling the stock and receiving the cash.

“First and foremost, cash is king – it should be the number one priority, especially for smaller to medium-sized businesses. This means getting as much as you can and using it the right way, to minimise the impact stemming from COVID-19,” he said.

For those business seeking external financing or support, formalising a recovery-led business plan is an important way for business owners to demonstrate funding and strategy options, according to Mr Gammel. A single document can be used to explain the business’ position to the ATO, banks and other lenders, landlords, key suppliers and investors, ensuring consistency of approach.

“The ATO is willing to accommodate reasonable proposals from businesses at this point in time – it doesn’t want to be responsible for destruction of any businesses, particularly for those that have a good history but also those with an updated business plan. On the other hand, those businesses with a chequered history who can’t formally demonstrate how they’re going to fund their way out of this or defer debt will be of far greater concern. Even for responsible businesses, the next six months after restrictions are gradually lifted (and some stay in place) may be challenging,” he said.

Once businesses clearly understand their financial position, Mr Gammel recommends they consider an independent business review which would include the review of a recovery-led business plan. For any businesses showing signs of distress or cash flow pressure, this may be in the form of an independent Safe Harbour review, which provides the structure required for a plan. The review is undertaken by an independent third-party, typically an insolvency expert who assesses forecasts (including reasonableness of revenue and costs), considers possible options and alternatives, and value of the business.

Mr Gammel also said going concern requirements for companies subject to audit this year are likely to be more extensive, with businesses needing to review forecasts diligently for the COVID-19 impact on the balance of FY19 and into FY20. ASIC would be expected to provide guidance on how businesses should report the impact of COVID-19, including what the business has done to assess and understand the impact, as well as measures to mitigate the impact on revenue forecasts this year and next.

“All listed entities have disclosure requirements, which are intended to help manage the expectations of investors, and require them to report any material risks. If businesses are prepared to report coronavirus hasn’t been material, then they will be required to justify it.

“What we are seeing is a restructure of large sections of the economy and a significant downturn with many sectors in the economy (such as travel and education) having to adjust to a new normal that may last well into 2021. Emotionally, this will affect people for a couple of years. Business owners and managers won’t wake up six weeks and it’s all done – it’ll take a while for all the impacts and changes to wash through the economy, but it appears unavoidable,” he said.

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