Best time in living memory for business turnarounds

Every cloud has a silver lining – even the economic downturn caused by COVID-19. A surge in the number of businesses on the verge of failing presents a unique opportunity for entrepreneurs ready to step in and turn things around.

It’s been nearly six months since Australia closed its international borders and went into the first phase of lockdown due to the COVID-19 pandemic. Since then, close to one million Australians have lost their jobs and countless businesses have seen their turn-over dwindle to near zero.

You might expect under such circumstances there would be a landslide in businesses becoming insolvent, unable to pay their bills as they fall due. But in fact, figures from the Australian Securities and Investment Commission (ASIC) show that insolvencies in the June quarter were at their lowest levels for nearly 20 years. Just 1203 companies entered external administration in the quarter – down from nearly 2,100 six months earlier.

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One major reason was the Federal Government’s granting of special ‘safe harbour’ protections to company directors via the Corporations Act, allowing them to keep trading even though they have insufficient cash coming through to pay their bills. Designed to keep the economy moving, these provisions have kept afloat an estimated 5,000 businesses that would have otherwise failed. (To be eligible, the unpaid debts held by a company must have been accrued after March 25, 2020.)

But the situation is set to change dramatically. Extended beyond their original cut-off by three months, the COVID-19 safe harbour protections come to an end on December 31, with businesses then expected to pay their bills or declare insolvency. Experts predict an enormous wave of insolvencies in early 2021 as tens of thousands of businesses struggle to stay open.

Buying A Business

14 Sep 2020

We can expect to see the bulk of business failures in the sectors worst affected by border closures, social distancing and the various COVID lockdowns. Consulting firm McKinsey recently identified the worst hit sectors as accommodation and food services; education and training; healthcare services; professional services; construction; arts and recreation; and retail.

The situation is a tragedy for those business owners who have invested time and money into companies, only to have unforeseen circumstances shatter their dreams. But it also represents a golden opportunity for entrepreneurs looking to get into business management without outlaying capital of their own.

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The concept of ‘leveraged business turnarounds’ involve entrepreneurs identifying businesses that are faltering or underperforming, but that have potential. The entrepreneur negotiates with an owner to acquire control of a business – potentially on a no-cash-down basis – and uses his or her acumen and business skills to put the company back on track. The final stage is to sell the business and repeat the process. The beauty of the approach is that it doesn’t initially require an enormous cash outlay – a traditional barrier to entrepreneurship.

The large number of businesses in a distressed state gives would-be entrepreneurs an incredible choice right now. They can take their pick of enterprises from struggling restaurants, language schools and gyms through to tourism-experience providers, construction companies and physiotherapists.

There are also a range of government assistance packages and protections to help entrepreneurs turn businesses around. An entrepreneur who takes over a business in NSW, for example, may be able to access cash flow assistance, export assistance, loan guarantees and small business grants. That’s in addition to the support provided by the Federal Government in the form of JobKeeper, instant asset write-offs, and so on.

The other good news is that while the COVID-period changes to the Corporations Act come to an end on December 31, the regular ‘safe harbour’ protections for businesses are expected to remain. These effectively protect company directors from being prosecuted for insolvent trading while they are attempting to restructure or turnaround the business. So, provided an entrepreneur has a clear plan of action and their intention is to do their best for the company, they can potentially trade their way out of trouble.

The economic forecast is for a gradual recovery for Australia over the coming years, with the early delivery of a coronavirus vaccine and the opening of our international borders likely to significantly speed up the bounce back. If you’re interested in pivoting your career and making the most of the upturn, it may be time to investigate business turnarounds.

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