AdvisoryMatters

Stephen Goderski, Partner and Head of our Advisory team , identifies the challenges of the current economic landscape and highlights how his clients have successfully turned uncertainty into opportunity.

A recession, a record numbers of insolvencies, spiralling wage claims, low consumer confidence, council tax rises, below-inflation wage increases, job cuts, increasing household debt, war – the news is not the place to go to these days if you are looking to be uplifted. 

I think we should however occasionally look at it through a different prism.  The economic conditions are creating opportunity for those with the vision and ability to think strategically.

Let’s take the example that we’ve been working with over the past few months:

Reviewing your business and assessing profitability

A logistics company with depots all over the UK, suffered the double whammy of wage inflation (which was particularly bad in that sector) and rocketing fuel costs. The business had been chasing turnover, and had diversified over the previous years into areas that at best had broken even, but were now failing to even do that.

After a review of the whole business, it was apparent that over two-thirds of the workforce were involved in parts of the business which were losing money.  Add to this the cost of financing a fleet of unprofitable vehicles and  numerous potentially unrequired depots.  A rationalisation swiftly followed, financed in part by the Redundancy Payment Services Financial Assistance Scheme, and what emerged was a leaner version with hugely reduced fixed costs and a net profit at the end of each month.

One of the exercises they also undertook was to assess profitability of each customer to the business. To their surprise, their three largest customers by turnover, actually lost them money. Following this, they estimated a decent profit margin on a customer-by-customer basis, putting customers who were either costing them money or from whom they made insufficient profit, on notice that their rates were changing. Significantly.

Somewhat to their surprise, they lost hardly any customers.  Even where their rates were higher than their competitors or the ‘market-rate’, their reputation for reliability counted for plenty and it turned out that their customers were prepared to pay a premium for such peace of mind.

An alternative route: Formal insolvency and CVA’s

The economic climate is also providing no end of opportunities for investors, acquirers, consolidators and entrepreneurs. These transactions often utilise a formal insolvency process as a means of dispensing with the need for excessive due diligence.  After all, why have the worry of a liability coming to light, months or even years later, when that same creditor can be subject to a formal insolvency process underpinning the transaction in the first place?

The most obvious process will be the much-discussed pre-packaged administration where a sale of a company’s business completes minutes after the appointment of administrators, the necessary advertising, negotiating and signing of contracts having all taken place in the lead up to the administrators’ appointment. There are certain businesses which need to be sold by way of a pre-pack, i.e. would you give a company in administration a deposit for some furniture to be delivered in 12 weeks’ time? Neither would anyone else – the perfect example of a business that needs to be pre-packed if it is to go through an insolvency process.

Another alternative is a Company Voluntary Arrangement (CVA). Once in place, a CVA ring-fences a company’s creditors, making the business extremely attractive for a prospective sale or merger.  You should however note that a share sale in these circumstances will likely either be prohibited by the terms of the Arrangement or require specific approval by the creditors bound by it. This is to prevent owners profiteering at the expense of the company’s creditors in circumstances where one day they hold shares in an insolvent company, and the next the creditors of that company are bound by a 5-year Arrangement from which they might get a return of, say, 40% of their debt by the end of the 5 years, making those same shares potentially very valuable indeed. 

It is for creditors to be vigilant in such circumstances. A CVA proposal can literally be whatever the company’s directors want it to be, but creditors do not have to accept what they are being offered.  It is perfectly acceptable for a creditor to conditionally accept a proposal ‘with modifications’. Such modifications might well be that the shares cannot be sold without the approval of creditors. This should, in theory, lead to some extra funds being made available to creditors as part of the wider transaction or alternatively an acceleration of the payments envisaged under the original proposal.  Our Creditor Services team are on hand to support with circumstances like this.

Every cloud…

In examples like this, it is clear that uncertainty creates opportunity. This might be changing the culture of a business, obtaining investment, changing the nature of a business itself, acquiring competitors, suppliers or distributers. This may be a once-in-a-generation chance to change, and we would love to you undertake that exciting journey.

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