Business rescue a lifeline for many businesses - CNBC Africa

Business rescue a lifeline for many businesses

Southern Africa

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Business rescue is a form of company restructuring during a financially stressing period. PHOTO: Getty Images

According to the Deloitte Restructuring Survey, South Africa’s current stagnated economy could result in a high number of restructuring activities in companies as a means of preventing financial collapse.

“This is the first time we’ve done this [survey] in South Africa. There’s no other barometer of restructuring activity locally, so Deloitte decided to go ahead and actually conduct a survey. We interviewed over 35 restructuring professionals across the legal disciplines, commercial banks, development finance institutions and other key parties like the Companies and Intellectual Property Comission,” Wanya du Preez, senior manager for restructuring services at Deloitte, told CNBC Africa.

Du Preez added that businesses in manufacturing, retail, mining and construction are most likely to suffer financial distress as the economy continues to stagnate.

Business rescue, which is a form of company restructuring during a financially stressing period, is a relatively new concept in in South Africa which only came about in May 2011.

“I believe now, as it’s got more interest, particularly public companies going into rescue, people are looking for a source of information, some kind of template to check on what’s actually happening. We thought this is a great opportunity to showcase that,” Du Preez added.

(READ MORE: Dialogue needed to enhance S.Africa's business community)

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The red flags of financial distress in a business include deteriorating cash flow, the struggle to pay creditors, struggling profitability, and in some cases the loss of a major client. Each of the reasons, according to Du Preez, will lead the business to a unique downward path.

“From the report, the four main sectors are manufacturing, followed by retail, construction and mining [that are currently suffering]. It actually makes a lot of sense if you look at the kinds of companies that are currently in the news around financial troubles, [and] most predicted that on the back of a stagnant economy,” said Du Preez.

The retail sector is of particular interest, as a number of retailers have reported positive figures between last year and the beginning of the year. Du Preez however explained that the positive performance does not necessarily reflect the same trend from a consumer perspective.

“If you look at the impact on consumers, with rising interest rates, effects of electricity costs, fuel, the wallet of the consumer really is shrinking, and so those businesses are really going to struggle in the next year to come,” she explained.

South African companies that went through business rescue include 1time airline, which in the end failed to resuscitate its trade and resulted in liquidation.

On the other hand, restaurant chain Moyo made a successful comeback after utilising the business rescue option, and was subsequently bought out by Fournews Developments.

“Each company is unique and the reasons why they get into distress are unique, but the principles remain across the board about how you prevent getting to financial distress in the first place, and then what options you face once you’ve made that decision,” said Du Preez.

“Business rescue is one option to help save a business, but the most popular is informal restructuring, getting another business to buy the struggling company or getting external funding through a distressed fund."

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