When winding down a business is necessary

In the current tough economic environment, management and shareholders need to take action to improve the profitability and liquidity of their business assets. This exercise requires the process of reviewing the organization’s legal structure, its divisions, sites, factories, and products.

Quite often the results of this strategic review are surprising, indicating that a significant portion of the profits and cash flow generated by the performing divisions are offset by those of underperforming and/or non-core segments. Improving the outlook of the wider operation requires a decision to either fix, sell or close those assets.

In many cases, allocating resources and time into fixing the asset through a turnaround program does not make financial sense. Selling may not be a realistic option either (though both alternatives should be considered and sometimes pursued in parallel to the wind-down planning). When fixing or selling is not possible, a solvent wind-down can offer a pragmatic solution to stem the bleeding or, at the very least, provide a valuable baseline to compare recovery returns against other scenarios.
 

A bold but effective approach

The wind-down approach is bold and may create uncertainty for those who have not been through it. However, winding down an asset should be seen as a real option to transform a company. Its ultimate focus is to achieve the greatest value (or the least damage) for key stakeholders, all while allowing management to refocus on their remaining core businesses.

In addition, in contrast to insolvency proceedings, a solvent wind-down can be done discreetly, being particularly useful when public attention is not desired.

Another advantage is that control remains with the owners, and risks as well as opportunities can be weighed up without dependency on an insolvency administrator. This enables a company to control operational aspects such as the management of customer and supplier relationships, therefore minimizing negative implications on the remaining corporate structures.

Executing a successful wind-down

Despite its benefits, executing a wind-down can be extremely complex and time-consuming. Several moving parts and stakeholders are involved, and careful management is required to navigate decisions that may result in dismissing employees, stopping production, selling assets and terminating key contractual arrangements. 

To help with that, a phase of validation, planning, and concept development should take place in advance of implementation. The essential aspects in the preparation and execution of a solvent wind-down include:

• Preparation of a comprehensive wind-down plan.
• Monitoring liquidity and active cash management to minimize funding requirements and maximize dividends (including close management of collection of receivables and management of outstanding payments).
• Planning and implementation of staff reduction measures.
• Preparation of assets sales and management of liabilities and risks.
• Transfer of customer and supplier relationships.
• Relocation of production activities.
• Management of key stakeholder relationships and communication of relevant aspects of the wind-down to internal and external stakeholders.
• Establishment of a project organization and steering committee.
• Other operational aspects, e.g., termination of contractual relationships.
• Consistent communication plans with all stakeholders.
   

Integrating special situations into the wind-down plan

In addition to the above, each situation may have specific issues that require proactive management, as these can have a material financial impact on the outcome of the wind-down. The outcome of litigation, for example, needs to be considered carefully. The uncertainty related to an ongoing, potentially multi-million litigation requires scenario planning and back-up legal support to ensure company and directors are still trading solvent. The below indicates such high-impact areas:

• Litigations (especially as a defendant).
• Tax issues (especially tax audits).
• Transfer of pension obligations.
• Unwinding of intra-company relationships and dependencies.
• Management of dividend distributions.
• Implications for the cost base of the wider group and any consequential “stranded costs”.
   

Conclusion 

Carrying out a solvent wind-down can be complex and demanding on management teams and shareholders. Focus, independence and effective communication are crucial to meet stakeholder expectations and maximize value for shareholders.

The development of a comprehensive wind-down plan is critical. This should not only detail relevant issues, but also reflect the necessary resources and financial implications of the wind-down; and it should be compared early on to alternative options. Implementation should happen in a structured way and with speed, especially if staff are only available for a limited period.

Liquidity must also be monitored closely through working capital wind-down management, to ensure that sufficient funds are available for the closure of the company and that no insolvency is imminent.
 

How A&M can help

Alvarez & Marsal (A&M)’s Financial and Operational Restructuring team can help businesses achieve the benefits of a solvent wind-down on time and within budget, releasing significant benefits for the wider organization.

Sebastian Nimwegen is a Managing Director with A&M’s Financial and Operational Restructuring team in Germany. He has more than 15 years of international restructuring and advisory experience and acts as CFO or CRO in interim mandates.

Ed Manning is a Managing Director with A&M’s Financial and Operational Restructuring team in London. He has 18 years of international and UK-based turnaround and restructuring experience and acts as CRO, COO or CFO in interim mandates in situations of stress or underperformance.