Unfortunately, not every business in New Zealand survives, but insolvency and liquidation are not challenges you have to face alone. Nearly all the world’s most successful businesspeople have endured the difficult but instructive experience of a failed enterprise and emerged from it better equipped to build a business that thrives.
While it’s true that a failed business can be a profoundly productive learning experience, there’s no denying that it is also painful and challenging. Below, we explore the process of business insolvency and liquidation, and how you can live to fight another day.
What happens to a business when it fails?
When a business is no longer generating enough revenue to meet its financial obligations, it is considered insolvent. Insolvency can occur in either of two ways: balance-sheet or cash-flow.
What is balance-sheet insolvency?
Balance-sheet insolvency occurs when a business or business owner no longer possesses enough assets to pay their outstanding debts. In other words, their liabilities on the balance sheet exceed their assets.
What is cash-flow insolvency?
Cash-flow insolvency occurs when a business or business owner possesses enough value to pay outstanding debts but cannot access that value. This could occur because the assets take time to convert into cash, such as property or a fleet of business vehicles. Cash-flow insolvency may be resolved through negotiations, as payment deadline extensions are granted—usually in exchange for a penalty of some kind—until assets can be liquidated.
A business will have failed if it cannot resolve its debts through either negotiations or payment. From this point, the process of liquidation begins. Liquidation is the process by which a business is closed, and its assets sold off and distributed. This process includes any or all of the following steps:
- The business ceases all operations, closing its doors and laying off staff
- Company assets are identified, logged, and sold to meet the business’s remaining financial obligations
- Negotiation and, in some cases, litigation with creditors to finalise outstanding debts, with progress reported regularly
- Distributions (payments) are made to creditors, resolving the insolvent business’s final obligations
What must the business owner do during liquidation?
Liquidation can be a profoundly difficult period for the business owner, who must shepherd their business through its dying stages even while grappling with the loss of income and the pain of having come up short. Businesses can be forced into liquidation by the Courts, creditors, or shareholders. Most commonly the business owner can choose to enter formal insolvency voluntarily, perhaps because financial forecasting projects unavoidable insolvency. Even when liquidating voluntarily, an effective and efficient liquidation process will be crucial to put your failed business behind you as painlessly as possible and position yourself well for your next venture.
When liquidation begins, much of the authority to make decisions will be turned over to the liquidator—a business recovery or insolvency advisor who will oversee the distribution of the business’s assets. The liquidator will take a leading role in identifying the company’s unknown and unsecured assets and coordinating amongst key shareholders and creditors.
Many business owners are surprised by the extent to which they are side-lined during liquidation proceedings, as the liquidator steps into the spotlight. However, business owners still have important responsibilities during this tumultuous time:
- As soon as possible, speak with an experienced Licensed Insolvency Practitioner, who can offer valuable guidance to meet the many demands of liquidation.
- Help calculate your total business debt so that your advisor can effectively develop a plan to meet your obligations as effectively as possible.
- Turn over key business account information, records, and other necessary information requested by the liquidator.
- Cooperate fully with your liquidator and do your best to fulfil requests to ensure a fair and equitable solution.
- Personal guarantees often become an issue and are not dealt with by the liquidator. Negotiated deals are generally the best outcome to avoid personal bankruptcy.
Surviving business failure
Self-care is vital when enduring liquidation. Your day-to-day life will suddenly look and feel very different without the enormous task of caring for your own business. Dismantling it can feel like amputating a limb. Most business owners are small business owners—97% of New Zealand businesses employ fewer than 20 people—which often means that life savings are tied to their success or that business owners pour tens of hours of overtime every week into keeping them afloat. Suddenly having so much more time and so much less money can be jarring, so take some time to adjust, prepare, and learn.
Just because you’ve lost your business, however, doesn’t mean you need to lose your network. Continue to communicate and coordinate with fellow entrepreneurs. They can provide the support and insight necessary to help you through this challenging time. Many of your fellow business owners will also have endured liquidation before and can offer advice to get back on your feet.
Importantly, a failed business does not make you a failed business owner. Ultimately, you must choose whether liquidation is a sign to give up or a valuable lesson to be learned along the path to success. To meet immediate financial needs, you may need to take part-time or even full-time work while you get to work on a new business plan, but don’t lose track of your vision if entrepreneurship is your dream.
Salvaging a future from business insolvency
Compromise is crucial when navigating insolvency, which is why it pays to have as experienced Accredited Insolvency Practitioner with the knowledge and experience to effectively draft, propose, and manage creditor compromises. At BDO, we understand the challenges of insolvency and liquidation and work hard to deliver outcomes that ease the financial burden on business owners and directors. Contact the Business Restructuring Specialists at BDO today for expert help and advice.