By Natasha Hayne

The term zombie company is a term used to describe a distressed company. These companies usually have extensive debt, with revenue that just enables them to just meet those fundamental running and fixed costs (rent, wages, interest on debt etc) and remain in operation. During the pandemic, an unprecedented amount of fiscal support was given to Australian businesses. Many commercially non-viable firms were able to persevere, on a steady diet of taxpayers’ capital. In addition, record low interest rates during the pandemic gave companies access to cheap loans, in an attempt to stimulate the economy.

As we exit the pandemic years, the business cycle is now working to eliminate firms which are not commercially viable. The current volatile market conditions, including high interest rates, inflation, and high cost of living, are acting to accelerate this process. High interest rates reduce consumer demand for goods and services, tightening the competition and reducing revenue for many businesses. As the economy continues to slow, these zombie businesses will continue to emerge.

A significant challenge of the current time is differentiating between businesses that are struggling (due to the current climate) and those which are fundamentally ineffective enterprises.  A major criticism of zombie businesses is that they prevent economic growth by hindering productivity, taking capital away from viable enterprises, and contributing to a saturated market.

So, can a zombie business come back to life? In short, yes. It is important to note that not all zombies are the same. If the core fundamentals of a business are viable, but the business has been the victim of harsh economic conditions, or some other, operational issue, there are usually avenues for turnaround. A successful turnaround is also dependent on the willingness of creditors, the flexibility of management, and the access to working capital. Creditors will not support a zombie business revival if the turnaround plan is not commercially viable.

The SBR (Small Business Restructuring) is a new form of restructuring available to businesses with less than $1 million in liabilities. Many businesses which entered a period of stagnation during or after the pandemic may qualify for this restructure. This process allows for directors to stay in control, through a simplified, timely, more affordable process. This restructuring is becoming increasingly popular amongst SMEs (small and medium-sized enterprises) within Australia. Larger businesses may wish to explore a voluntary administration, which assesses the options for turnaround, and determine if a liquidation is the best course of action. Effective and honest communication with accountants, creditors and insolvency practitioners is also crucial during times of difficulty.

Considering a small business restructure or a voluntary administration? Speak to one of our specialists on +61 2 9251 5222. There is always light at the end of the tunnel.

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