Some startups fail, it’s a fact of life. Here’s just some of those we said goodbye to in 2015.
Businesses will fail, especially in troubled economic times. For example, close to 2,000 businesses were liquidated in South Africa in 2015 alone.
But there are ways of turning the situation around when you see your startup hitting the rocks, according to Gerrie van Biljon, executive director at South African risk finance firm Business Partners.
Van Biljon says business owners need to take active preventative measures during tough times to encourage sustainable growth and avoid company liquidation, which is the winding up of a business either voluntarily or by an order of the court, with all company assets sold or “liquidated” in order to pay off the business’ creditors.
“This process should, however, be considered a last resort, especially for smaller businesses that have suddenly hit unexpected hard times,” he says.
“Businesses, particularly small and medium enterprises (SMEs), are encouraged to do whatever they can to restructure and restore distressed, yet viable companies, in order to avoid liquidation where possible.”
Here are van Biljon’s three tips to rescue a struggling startup from liquidation.
Increase liquidity internally
Though this may seem somewhat obvious, van Biljon says without adequate cash flow efforts to rejuvenate a business will ultimately prove futile.
“Business owners therefore need to ensure that they have access to the minimum amount of capital needed to stay afloat,” he says. “If tighter management of the balance sheet isn’t an option, this may require additional funding from existing investors, or a pitch for new investor funding.”
In this scenario, an entrepreneur must prove that the problems being experienced are circumstantial and can be resolved. If they can, funding is often available if sourced correctly.
“Alternatively, business owners may have to liquidate some non-core part of the business in order to keep operations moving,” van Biljon says.
Revise management roles
“One of the hardest parts of any business turnaround is restructuring and, when necessary, replacement of management and staff,” van Biljon says.
“While this often involves brutally honest and difficult decisions, having the wrong people remain in executive positions can severely hinder a company’s chances of survival.”
At the very least, then, an entrepreneur needs to ensure willingness and commitment among management to make the changes necessary to streamline operations and cut any excess resources to ensure the most cost-efficient production practices are employed going forward.
Apply for business rescue
Most companies have some form of business rescue legislation, for example in South Africa, where the 2008 Companies Act incorporates a corporate rescue system that offers companies the opportunity to access interim liquidity and reach a compromise with creditors while a business rescue package is being developed.
“This means that any business experiencing financial distress can file a notice to start business rescue proceedings with the Companies and Intellectual Property Commission (CIPC). In essence, this process will involve the appointment of a business rescue practitioner who will provide opportunities to restructure and strategise, creating an environment in which the business can continue trading,” says van Biljon.
“It is important to remember, however, that while business rescue does offer an alternative to liquidation for financially distressed companies, the process is largely dependent on the viability of the business going forward and the availability of a source of funding, which means business owners should ideally ensure buy-in from their investors, banks and creditors beforehand.”
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