Many companies find themselves in an existential crisis through no fault of their own, despite good management and sound strategic positioning. The entrepreneur thus runs the risk of more than just losing control. Once the insolvency administrator takes the reins, there is a risk of permanently losing one’s business operations with no prospect of recovery. The smart combination of a well-prepared court-supervised restructuring process and a structured search for investors demonstrates that there is another way. The Insolvency Code (InsO) offers the possibility of financial restructuring in the shortest possible time. A prerequisite for rapid debt relief is that, when a crisis looms, an insolvency petition (§ 18 InsO) is filed at an early stage. The following path illustrates how a successful fresh start can be achieved.
The Crisis Has Arrived
If a company is suffering from a declining demand for its products and services, the deteriorating earnings situation leads to a liquidity crisis that brings the company close to insolvency. If this is compounded by a poor balance sheet structure, stakeholders are no longer willing to bear the risks. A breakdown occurs.
The provisions of the Insolvency Code are clear. Depending on the progression of the crisis, there is either an obligation or a right to file for insolvency. When making this decision, the entrepreneur relies on external expertise in insolvency matters. The decision must be well-informed and made promptly. If the objective is to ensure the company’s viability, self-administered insolvency is the ideal solution. With the help of external consultants, management additionally assumes the responsibilities of the proceedings; an insolvency administrator is not appointed. The time between filing the insolvency petition and the opening of proceedings is used to adjust the company’s realignment.
Restructuring
If the core of the company is sound, the process of seeking a partner is initiated immediately and in parallel. In a crisis situation, bringing an external investor into the company requires a special effort to let go of control over the business and be open to new partners. It is often an emotional process until the decision to bring in an investor is made or a consensus is reached among all parties involved in the restructuring process, especially when this decision must be made under significant time pressure. On the part of the external M&A advisory firm, this requires not only specialized knowledge but also experience, flexibility, a very good understanding, and tact in order to gain the acceptance of all parties involved.
Through collaboration between insolvency advisors and M&A advisors, the entrepreneur is relieved of some of the burden, while at the same time the company’s continued existence and the preservation of its assets are secured. This combination gives rise to a plan for continuing the core business. Ideally, the entrepreneur’s future position following the conclusion of the insolvency proceedings takes center stage in this process.
If the shared interest in continuing the company and distributing the shares in a way that motivates the stakeholders is realized, the insolvency plan is submitted as the final step. In terms of content, the insolvency plan offers considerable flexibility. It allows the company to be restructured on an individual basis, deviating from the general provisions of the Insolvency Code (Section 217 InsO). Not least, this enables the company’s shares to be redistributed. The insolvency plan is submitted by the entrepreneur and drafted by the insolvency advisory firm. Its advantages are thus obvious.
Conclusion
The objectives of the insolvency proceedings and the significant time demands they entail promote collaboration between self-administered insolvency and specialized M&A advisory services. The balancing act between a dual-track process and the critical goal of preserving the company for the entrepreneur represents a major opportunity in this combination.
