Receivership Trading a Business Out of Trouble

Editor’s note:This is a guest post by Sachin

Liquidation and receivership are very different things. A receivership is the takeover of an ongoing business by an appointed receiver, but a business in receivership is still considered viable. Receivers are typically appointed by banks, but may also be appointed by creditors or even the business’ own management.

Why to use a receiver?

Businesses in receivership have different characteristics to those in liquidation:• These businesses are still technically solvent.• There’s reason to believe they can trade their way out of difficulties.• The business creditors are of the opinion the business can be saved.Appointing a receiver can be an excellent solution for businesses in trouble. Receivers are experts. They’re often better qualified to run businesses than their original owners. It’s not uncommon for receivers to have an excellent appreciation of the issues facing a business in trouble, and to have some solutions of their own. In these cases, a receiver may be able to save the business, and if possible, that’s the best outcome for all parties. The alternative, liquidation, incurs the immediate risk of losses, and that’s definitely not the preferred option.

There are advantages in receivership for the business, too. In receivership, a bank will be more prepared to advance extra credit to its own receiver than it would to a business with “iffy” financial credentials.

The advantages of receivers for creditors

The receivers are also excellent options for banks and creditors in terms of dealing with financial issues. Being experts in their fields, receivers can often discover and sort out the financial issues that business management couldn’t deal with.The fact is that some business managers aren’t expert financial managers. They may lack the knowledge or experience to manage particular business situations, particularly lines of credit and overheads. The receiver, on the other hand, has both the support of a bank and the industry experience to manage even extremely complex problems.

Advantages of voluntary receivership

A voluntary receivership involves an agreement between the business and a creditor, usually its bank, to appoint the receiver as manager. The business management remains active in the business, working with the receiver, and gets the benefit of the receiver’s experience and knowledge.This is a real business education, and it has the added advantage of “training” business management.

For example:

A business is clearly not going to be able to pay its bank money owed on time and has a record of missed payments. However, the business is trading well. The manager and the bank agree to a receivership arrangement.The receiver, who has over a decade of experience in the industry, restructures the business, cuts overheads, locks in better supply and freight costs, and improves profit by 300% within three months. The business is firmly in the black within 12 months. The values of this receivership are obvious. It will also be noted how much work had to be done to turn the business into a best practice model.

Many receivers also go to work on business productivity. They drastically improve administration costs, cut expenditure across a range of operations, and similar measures.

Australian banks have doubled their appointment of receiverships since 2008. That’s a good indication of how effective receivership can be.

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