06 Oct Financial resilience: getting a grip on your assets
Financial resilience: getting a grip on your assets
October 6, 2022
In the face of severe economic headwinds, it is important for you and your business to minimise risks. We cannot stress enough how important financial resilience is. How can you make sure that the bankruptcy of your biggest client does not spell the end of your business? And if it does, then what can you do now to be able to restart later? And are you able to use your private assets to do so? Financial resilience also means getting a grip on your assets.
Separate strategic assets and (risky) business activities
If at all possible, you want to keep strategic assets available for the longer term. For example, free assets for retirement. Or important equipment and intellectual property for products or work processes (which could be important in the event of a relaunch). You want to separate these kinds of assets from business activities because, as a general rule, they carry greater risks. After all, every business is at risk of long-term negative operating performance. This could eventually lead to bankruptcy. In addition, there are always industry-specific risks such as the potential for product liability, claims or tax liabilities.
Surround it by a fence and keep the gate closed
But how do you keep strategic assets and more risky activities separate? You do that by putting them in different private limited companies. You then place a fence around them so that risky activities cannot touch the assets. Setting up a corporate structure is nothing new in itself. Yet experience shows that many companies can do better. In any case, it is wise to review the structure every four to five years.
Transactions between the various group companies can create mutual liabilities or claims and debts. So having a gateway is also necessary. That is not a problem as long as you are consistent about closing it. In other words: mutual transactions need to be justified from a business economic perspective. Shared deliveries need to be paid on time. A risky operating company should not have any claims against the private limited company with assets. The holding company financing the operating company should ask for collateral, just as a bank does. And all of these arrangements and procedures need to be properly documented in agreements. Current accounts, rents, management fees – all of this needs to be arranged on a contractual basis.
Start early and maintain a steady course of action
Securing your capital and important assets is not something you can do once severe weather is already looming. In those times, you have limited room to manoeuvre. If bankruptcy ensues, there is a good chance that a trustee will reverse the situation. Risk management and asset structuring should actually be a fixed part of your business operations. You start this process when things are going well and then establish a firm line. For instance, the operating company can distribute surplus capital to the holding company every year to build up savings – economically sound and taking into account any agreements with the bank. If the operating company needs money at a given moment, the holding company can decide at that time whether it wants to lend it on commercial terms. With collateral and periodic interest payments and therefore with as little risk as possible.
This way, you take annual capital out of the spere of risk while still having it available for later investments or a relaunch in case of bankruptcy. This allows you to keep a grip on your capital as well as your strategic assets. Want to know more about this topic? Please get in touch with your dedicated contact person at Joanknecht or one of our recovery advisors as listed below.