Small Business Restructuring plans are spiking as financially distressed small business owners increasingly turn to the SBR process to resolve their issues. And the ability to retain control of the business is a key driver.

In the July-September 2023 quarter, Jirsch Sutherland experienced more than a 200% increase in SBR matters compared to the same period in 2022, and we expect them to continue rising.

We’ve handled a significant number of SBRs since the process was introduced in January 2021, but volume has accelerated in the past few months. At first, SBRs were an unknown quantity but more directors of eligible small businesses, not to mention their advisers, are now inquiring about how the process works. And with the ATO getting more aggressive with their debt collection activities, that has prompted many into action.

The most appealing feature of the SBR process is the ability for directors to remain in the driver’s seat throughout the process. However, its success is in the planning and communication with the creditor group.

A successful SBR must demonstrate why the business finds itself in a precarious financial position, as well as how those events or circumstances have been addressed and overcome, while also convincing creditors and other stakeholders that it’s in their interest to support the restructure. It means this process requires careful consideration to ensure it has the best chance of a successful outcome for all parties.

The latest Credit Risk Insights report by Alares reinforces the trend. It shows SBR appointments rose dramatically during August and September. Alares director and report author, Patrick Schweizer says the spike might also explain the recent drop in ATO Court activity “as more small business owners seek help via the SBR process”.

“There has been a clear increase in the take up of the SBR process in the past two months, and there could be a few factors at play here. Firstly, many small businesses have now gone through the process in the past two years, so there’s generally a much better understanding of the process and the benefits among key stakeholders – i.e., small businesses, creditors, and restructuring practitioners. Secondly, another recent wave of Directors Penalty Notices (DPNs) from the ATO may be encouraging more small business owners down the SBR path,” Schweizer says.

“A common message we hear from the ATO is that it would prefer not to wind up companies or bankrupt individuals, preferring less ‘terminal’ solutions to dealing with outstanding tax debts – and for many, one option is the SBR.”

While the SBR matters Jirsch Sutherland is handling spans various industries, the three main sectors have been construction, retail and hospitality. The take up of SBRs in the construction sector may be a result of the lesser licensing impacts in certain states, while retail and hospitality are a result of rising costs and the decrease in consumer discretionary spending due to the cost-of-living crisis.

It’s crucial for directors to partner with an appropriately experienced SBR practitioner. Every scenario is unique and must be treated as such; there’s no cookie-cutter solution in corporate insolvency. Working with an experienced practitioner can be the difference between a successful outcome and being caught in a deeper hole.

Andrew Spring is small business restructuring practitioner at Jirsch Sutherland.