[This is an English translation of an article originally published in Czech.]
“Problems are a normal part of life and, therefore, of business,” says Daniel Hříbal, a partner at the consulting firm Tarpan Partners. According to him, it is important to assess your financial health regularly and not underestimate warning signs. Thanks to new European legislation, companies will now receive tools both for conducting such assessments and for addressing potential difficulties at an early stage.
Assessing financial health
A new early warning system will allow companies to assess their financial health. The Czech Republic is introducing it as part of the requirements of the European directive on preventive restructuring. The application for assessing companies’ financial health is freely available on the Ministry of Justice website. It allows entrepreneurs to verify their financial position and identify problems or even the threat of insolvency.
Michal Kuděj, founding partner of Tarpan Partners, also participated in developing the early warning system and the application. “In the Czech Republic, we chose a precise system based on financial statement data as well as information that is not publicly available,” says the experienced expert in corporate finance and restructuring processes, who also works at the Faculty of Business Administration of the Prague University of Economics and Business and serves on the academic board of the faculty’s Harry Pollak Centre for Restructuring and Insolvency.
The application allows companies to assess their financial position very easily. “It is completely anonymous and confidential. When entrepreneurs are finalising their annual financial statements, for example, they can use this system at the same time and obtain the assessment results within just a few minutes. The results can also be archived, providing evidence that they have exercised due managerial care,” Michal Kuděj says, describing the new tool.
The system is intended primarily for small and medium-sized enterprises, as is the entire directive on preventive restructuring.
“Large corporations often use other specialised tools, including independent ratings, which tend to be highly demanding in terms of personnel and costly financially. The application therefore provides small and medium-sized enterprises with an accessible tool for monitoring their financial position easily,” says Daniel Hříbal, who specialises in corporate restructuring and revitalisation, turnaround management, credit risk prevention and resolving legally complex corporate situations.
What happens if the assessment reveals that a company is not financially healthy? Another new instrument exists for such cases. In addition to early warning signals, the Czech Republic is introducing preventive restructuring for entrepreneurs experiencing temporary financial difficulties. The European directive is being implemented through legislation that has already passed the Senate and is awaiting the President’s signature.
“Entrepreneurs will receive a framework for responding to the situation in good time and agreeing on restructuring with their creditors. They will gain both an instrument and the assurance that the recovery processes are being implemented in accordance with the law, leaving little room for them to be challenged,” explains Michal Kuděj, who also participated in preparing the legislation.
Begin the company’s recovery in good time
He emphasises that the system depends on the entrepreneur’s ability to reach an agreement with their business partners. “If they succeed, they have a strong chance of avoiding insolvency and insolvency proceedings, which are inherently adversarial,” he says, summarising the principle of preventive restructuring.
“The legislation is based on the principle that the entrepreneur begins addressing the difficulties early and can negotiate the next steps. If their business partners are unwilling to support them, however, this avenue closes,” adds the expert, who has worked in insolvency and distress advisory for fifteen years.
On the other hand, if the entrepreneur succeeds in reaching an agreement, the legislation provides a clear framework for the subsequent steps.
The process begins with preparing a restructuring project. “In it, the entrepreneur must explain how the company entered financial distress, what primarily caused it and, above all, how they intend to resolve it and what support they expect from creditors. This may involve postponing maturity dates, reducing the amount of liabilities and similar measures. Last but not least, it is necessary to define what both the creditors and the company will gain in the future, and where and how the company will generate sufficient income to continue operating and satisfy its creditors,” Michal Kuděj explains.
Tarpan Partners is part of Tarpan Group, which provides companies with comprehensive services in corporate advisory, investments and financing, M&A, venture capital and corporate governance. It provides advice and legal support and also assists with implementing the proposed measures.
Both experts are convinced that the new prevention system makes sense. “Banks, suppliers and customers will certainly be able to reach an understanding with an entrepreneur who acts fairly and transparently. It is generally in everyone’s interest for the business to continue operating, whether they are its business partner or client,” Michal Kuděj explains.
Delays can prove costly
“In my previous work, I saw this from the creditor’s perspective – that of a bank,” says Daniel Hříbal, who spent two decades working in credit risk management at banking institutions. “Very often, the client lacked initiative. Entrepreneurs must understand their situation and act proactively. They must not underestimate it or succumb to ‘wishful thinking’ that something will change on its own. They need to know precisely what they will offer their creditors and how they intend to put the company back on its feet,” he adds.
The former banker and current Tarpan Partners partner does not conceal the fact that preventive restructuring usually requires a “personal sacrifice” from the entrepreneur. “To achieve a successful recovery, or more precisely to restructure the company, they usually need to contribute additional capital. Not everyone will be willing to do that,” he acknowledges.
What if the entrepreneur lacks the funds or energy? “One possible solution may be to find someone else who will take over the company and be capable of saving it. That is also an option, but even in this case the entrepreneur must agree with their business partners on a plan leading towards that outcome,” Daniel Hříbal adds.
Even in such a case, however, delaying the solution does not pay. “If they hesitate, they will usually sell the company for a significantly lower amount or enter formal insolvency proceedings, from which they will often ultimately emerge empty-handed,” Daniel Hříbal warns.
Protection against predators
Insolvency proceedings are precisely what entrepreneurs often fear most. “Unlike preventive restructuring, this is a judicial process. It is lengthy and inflexible and has firmly prescribed rules that often conflict with the commercial realities of a company, which frequently require flexibility and rapid decisions. The company also has more restricted access to credit financing, so if the process continues for years, it may destroy the business,” Daniel Hříbal warns.
An early solution, such as preventive restructuring, can also protect companies against “predators” hunting weakened prey. “These are groups that target companies experiencing financial difficulties or already subject to insolvency proceedings. Using practices that are often on the edge of legality, they then take control of the insolvency proceedings. In practice, this means a hostile takeover and often the unnecessary collapse of a company that, under normal circumstances, could survive – even in insolvency,” Michal Kuděj explains.
How to avoid a wave of insolvencies
Over the past three years, the Czech economy has faced COVID, the consequences of the war in Ukraine, inflation, the energy crisis and other pressures. Nevertheless, companies are performing relatively well, and experts in corporate crisis situations do not expect to have significantly more work than before. “I have been reading about impending waves of insolvencies since March 2020, when the COVID pandemic began. None has arrived so far,” Michal Kuděj says.
But if companies do encounter financial distress and the threat of insolvency, he believes they should certainly seek advice: “If the application produces a warning signal, we can sit down and conduct a more detailed analysis. If the diagnosis is confirmed, we can propose a solution and guide the entrepreneur through the entire preventive restructuring process.”
“Entrepreneurs are at a disadvantage because they lack experience – they are usually going through this for the first time, which can lead to mistakes. We can offer them experience and knowledge that they cannot possess. We can also offer neutrality, which helps in negotiations with banks and other creditors,” Daniel Hříbal adds.
Tarpan Group has numerous successful references in resolving corporate crises and saving businesses. It participated, for example, in the reorganisation of a foundry in Blansko, now Ernst Leopold. “Insolvency was declared at the end of January, and the reorganisation was successfully completed by the end of November that same year. The company was transferred to a new investor, who revived it and continues to develop it,” Michal Kuděj explains.
One example of a company whose plans were unexpectedly disrupted by COVID was the clothing company Blažek Praha. Tarpan Partners experts participated in the economic aspects of resolving its serious difficulties. “We identified the economic options for restoring the company to health, which subsequently led to its successful reorganisation, and the company continues to operate today,” Daniel Hříbal recalls.
6.9.2023