If your business is facing financial challenges, prompt and effective action is critical. Decisions you make at breaking point can have huge implications not just for the future of your business, but also for its creditors, employees and stakeholders. Understanding the options you have at the earliest available opportunity is essential if you are to work towards the best outcome for everyone.
In these situations, it is likely that you will have to decide whether a process of business restructuring or company liquidation is the best course of action. Both are viable and suitable responses to business distress yet will result in hugely different outcomes: recovery in the case of restructuring and closure in the case of liquidation. The right option is hugely circumstantial and we have created this guide to help you weigh up business restructuring vs. company liquidation in your time of need.
Business Restructuring
Business restructuring is a process designed to help financially struggling businesses regain stability and, over the long term, maintain profitability. It can take a variety of different forms, including changes to the organisational structure, operational plan, and management of debt. All of these types of restructuring efforts are centred around the need to make the business model more sustainable and resilient even when faced with external financial pressures.
Pros Of Business Restructuring
There are a number of reasons why struggling businesses may wish to consider business restructuring, including:
- Business continuity – By far the most significant benefit of business restructuring is that it allows for the continuation of business activity. The company can continue to trade and work towards financial recovery at the same time as making internal tweaks and renegotiating financial relationships.
- Debt renegotiation – If the business restructuring process involves financial restructuring, it is possible to reduce the financial strain on the business. Creditors may agree to new payment terms, giving the business welcome breathing room from pressing debts.
- Potential for growth – Once restructured, the business may become more efficient and profitable.
Cons Of Business Restructuring
It’s important to note that business restructuring is not always suitable or viable. Some of the downsides of business restructuring include:
- No guarantee of success – The restructuring process can take up a significant amount of time with no guarantee of success at the end. If financial issues are too severe or the wrong improvements are identified in the restructuring process, the business can still fail.
- Requires stakeholder cooperation – For business restructuring to work, creditors, employees and other stakeholders must be willing to both support and implement the changes. Getting this buy-in can be challenging, particularly if the business has damaged these relationships while getting into financial trouble in the first place.
- Damaged employee relationships – Organisational restructuring may result in changing job roles or redundancies, leading to morale issues and possible skill shortages among remaining employees.
Company Liquidation
Unlike business restructuring where recovery is the goal, the aim of company liquidation is to close the business in the most efficient way possible. However, company liquidation can be a suitable (and often the only) alternative for any business unable to meet its financial obligations.
Company liquidation can take different forms but those in financial difficulty and insolvent will go through either the Creditors Voluntary Liquidation (CVL) process or compulsory liquidation. Both involve company assets being sold and distributed to creditors before the company is formally closed but the former is always preferable as the process is initiated by directors as opposed to a Winding Up Petition.
Pros Of Company Liquidation
While no business owner likes to imagine having to close their business due to insolvency, company liquidation does offer a range of benefits to those in this predicament:
- Debt relief – Once the company is liquidated, its outstanding debts are written off and directors have a clear financial reset. Providing no wrongdoing took place (the appointed insolvency practitioner will investigate this), directors can move forward without the burden of mounting liabilities.
- Reprieve from creditor pressure – Company liquidation puts an immediate stop to creditor demands, legal actions, and enforcement measures. Once the liquidation process begins, creditors can no longer chase the company for payments.
- Closure with clarity – Liquidation offers a structured and legally compliant way to shut down a struggling business. This ensures that all assets are fairly distributed, legal obligations are met, and directors can exit without lingering disputes.
Cons of Company Liquidation
Despite providing a clear exit strategy for an insolvent business, company liquidation also comes with significant drawbacks. Some of the key downsides of company liquidation include:
- Business closure – Company liquidation marks the very end of the business. This can be a difficult decision for directors who have invested time and effort into the company, as well as for employees, customers and suppliers who rely on it in some way.
- Asset loss – During the liquidation process, company assets are sold to repay creditors, often at a lower value than expected. This typically means that directors and shareholders may receive little to no return on their investment and that some creditors may not recover the full amounts owed.
- Impact on reputation – The closure of a business through liquidation can have long-term consequences for the directors involved. Directors can technically be directors again but past actions may make it harder to maintain trust moving forwards. Directors may also struggle to secure credit if they are found to have been personally liable for the company’s downfall.
Make The Right Choice With Ballard Business Recovery
Deciding between business restructuring and company liquidation is a significant and complex choice – particularly as it is one which must be made when a business is in a real time of need. The best course of action ultimately depends on the reasons for financial distress, as well as the long-term viability of the business moving forward.
If your business is struggling and you are not sure what to do next, Ballard Business Recovery can help. Whether your business needs a structured rescue plan or a well-managed closure, we provide expert and transparent advice tailored to the needs of your business. Contact us today to discuss your circumstances with one of our business rescue experts.
