Tyrone Courtman, partner RSM Restructuring Advisory LLP says, “In the current environment, there will be many, hitherto successful businesses, who find, because of the COVID-19 pandemic, that the unthinkable has or is happening. Those challenges may bring into question the businesses very survival and increase the need for the management to seek expert turnaround/restructuring support.”
Hasan Mirza, partner at AG Associates, believes that organisations should consider five questions when weighing up its future. Asking yourself these questions will help you get a picture of which approach to take.
However, it can still be incredibly challenging to know when to opt for a turnaround, liquidation or company voluntary agreement (CVA). Mirza explains: "The decision-making process really rests on two critical factors: creditors and cash, and the earlier the decision is made to call in an expert, the better the chance of saving the core business."
The five questions
- Is the core business worth saving?
- Is the management team up to the task?
- Will the key customers remain loyal?
- Have only a few creditors issued proceedings?
- Is there good communication with the key stakeholders?
Harnessing the support of creditors
Securing the support of existing creditors is critical to any turnaround procedure. It partly centres on whether the creditors are owed large balances and see your client as significant to their business. Mirza says: "In most turnarounds, the smaller creditors tend to be more aggressive and it is easier to pay them off. Where there is less at stake, the propensity to issue county court proceedings or winding up orders may be greater, and companies need to be mindful of this."
Galvanising support will rely upon existing credibility. Has the client been good to their word, always paid in 30 to 45 days and kept to their credit terms? A client has to be able to have an honest conversation with creditors, based upon their history of honouring payment terms, to obtain credit again for any new debt incurred. An arrangement is then put in place for the old debt.
Injecting new cash
The second key ingredient is cash. It's very difficult to turnaround a business without some 'new' funds. Arguably any cash injection should not be put towards clearing the outstanding payables, but to providing suppliers with a reason to continue supplying goods or services.
"Any element of new cash does not have to be generated at the same level as when the business was first started, as many suppliers may be willing to provide credit," says Mirza. "The question is how to raise new cash when the business is already experiencing financial difficulty, which has been a key blocker in obtaining government-backed CBILs loans.
"The limited main options are raising funds from personal sources or holding on to the existing cash in the business for a longer period. The latter is done through deferring payments that are not immediately detrimental to the day to day business operations and by making new proposals to external stakeholders such as landlords for rent-free periods or security deposit waivers. Amenability will vary from landlord to landlord. There may also be a scope to cut existing borrowing rates depending on the nature of the finance provider."
The more supportive the creditors are and the higher the levels of new cash available, the greater the chance of saving the business. That should inform whether to choose a turnaround or a formal insolvency procedure.
Hazan Mirza and Tyrone Courtman will be talking about business turnarounds in more detail as part of ICAEW Virtually Live, alongside Nila Khan from ICAEW's Practitioner Business Advisers (PBA) Community. The PBA Community is free to join at icaew.com/pba and you can also read the full article there.
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