Negative sentiment becoming more positive.
The Australian Institute of Company Directors (AICD) has released its final director sentiment survey for 2020 and unsurprisingly, the majority of business owners and directors are not looking on the sunny side of life. It’ll come as a shock to no one that 2020 has been a tough year for business owners. Directors have faced unprecedented challenges; and while COVID has presented some unique opportunities, sudden changes in consumer demand and behaviour, the regulatory environment and operating conditions created significant stress and anxiety, even for the most experienced operators.
However, what may come as a surprise, is that director sentiment is not as negative as it was. The AICD surveys over 1700 directors biannually to calculate their Director Sentiment Index (DSI). It reports that since March 2020, the Index actually climbed 22.4 points to minus 37.2[1]. This is even with the ongoing economic uncertainty stemming from COVID 19. Since this survey, positive sentiment has continued to grow, particularly as the global economy becomes more confident of a vaccine being rolled out shortly.
The findings showed that while current economic woes were still top of mind for many directors (41%), respondents also felt that the government needed to invest resources in re-establishing Australia’s relationship with Asia, climate change policy, and energy policy.
Interestingly, 80% of directors stated that they expect a rise in the level of mergers and acquisitions over the coming year. Our view is that the general transaction market (which includes mergers and acquisitions and restructuring) will increase significantly in 2021.
For a business in financial distress, it is now more important than ever, for a business owner, its financiers, and its management to consider the options around their operating model. While there have been significant government support packages available it is still important for the directors and their companies to continue to monitor their revenue and expenses. We will experience some permanent and temporary changes in industries and officers need to identify those changes now. With temporary changes, business owners can implement short-term solutions to work through those challenges. With the permanent changes, businesses need to potentially make a fundamental way in how to do business.
Decision making should be swift and prompt as slow decision-making could cause a permanent and unnecessary adverse impact on their business. Seeking out your accountant and their adviser connections promptly is paramount.
If the business requires more drastic restructuring, there are several formal processes available to those looking at restructuring their business including a Deed of Company Arrangement or voluntary administration and the new debt restructuring plan option[2]. Directors should also consider whether to enter into safe harbour protection and engage advisers on assessing restructuring initiatives such as seeking further injection of capital through either debt or equity or refinancing. However, often the financial burden of the restructure for a business is too great and the need to formally restructure through a voluntary administration is necessary to overcome cost and contract hurdles that are not possible through an informal restructure.
Restructuring, either through a formal or informal process, brings not only financial health to the business but also piece of mind for a business owner. So, should this flood of mergers and acquisitions materialise, we could see an improvement in director sentiment in 2021, potentially even into positive territory!
For more information for you or your clients on the restructuring options that may be available in your unique circumstances, please contact your local Worrells partner.
Related article:
Dec 2019: Director sentiment survey uncovers pessimistic outlook
[1] https://aicd.companydirectors.com.au/media/media-releases/director-sentiment-bounce-back
[2] Available to eligible small businesses as of 1 January 2021.
