Written by Alistair Wardell – Partner, Head of Restructuring South Region, Grant Thornton
With an unprecedented level of uncertainty set to continue for businesses over the next few months, and most likely into 2021, investors and business leaders are facing a number of challenges.
Timing and communication are key to ensuring that business owners and stakeholders are able to have the ‘difficult conversations’ when necessary. Well-timed, informed and ongoing dialogue could make all the difference in a business’ survival and recovery.
In my experience there are three priority steps that businesses in financial trouble should consider:
- ensure leadership understand the scale of the problem
- identify the issues – an external assessment will help to reveal what internal scrutiny may overlook
- explore their choices – a well-executed recovery solution can make all the difference.
Many business owners are often fully occupied with the day-to-day challenges of running their business and now, with COVID-19 impacting so many aspects of everyday life – personal lifestyle, well-being, business operations and finance – it is understandable that attention to cash flow and profitability could become confused and neglected. But it’s vital that business leaders focus on getting these basics right.
While the ongoing pandemic may be an obvious contributor, a detailed financial analysis is required to ascertain exactly why a company may be short of funds or operating with unprofitable results. Impartial conversations, coupled with thorough financial modelling, can help to determine whether there is an immediate problem to address, or if there is a need for a longer-term approach to tackle loss-making aspects of the business.
If they find themselves in distress, there are many initial options for businesses to consider – accessing cash, Asset Based Lending (ABLs), Peer to Peer Lending (P2P), distressed debt investment, pensions, invoice financing, creditor management, time to pay arrangements, team restructures, the use of interim roles, corporate simplification, price increases or cutting overheads. Every businesses circumstance will be unique and require its own solution, which is where the insight and guidance of a professional adviser can often be extremely valuable.
But where these options are not relevant or suitable, and a company is having to restructure – what options are available?
The organisation could look at a Company Voluntary Arrangement (CVA). For companies in this situation, it is imperative to act quickly. If this is the chosen route to ensure an outcome of future financial stability, it is essential for the company’s directors (who will still be in control) to think and act differently. Doing more of the same is not the answer and would likely not be condoned by stakeholders or creditors. The focus of directors and shareholders should be on the need to reduce costs, improve sales and strengthen operational efficiencies, and it is likely that they will need professional help, support and guidance to do this effectively. Furthermore, communication with creditors is often highly sensitive and without their support and agreement a CVA would not be possible to execute.
Alternatively, the recent introduction of the Corporate Insolvency and Governance Act 2020 (CIGA): Moratorium and Restructuring Plan, also provides a way for companies to address their financial pressures and subsequently be rescued as a going concern. Simply put, it allows for greater flexibility and creates ‘breathing space’ and can last for anywhere between 20 days – 12 months depending on creditor consent and/or court orders.
There also remains the original rescue tool of an administration. An administration can, in the right circumstances, facilitate the rescue of a business through a pre-packaged sale or by providing time to continue trading whilst the business is restructured or sold.
Assessing your current situation, having frank discussions, focusing on doing the basics well and acting quickly, is vital for any organisation in today’s environment, as we continue to move through the ongoing impacts of COVID-19.