Joph Young, qualified Insolvency Practitioner with over 20 years’ practical experience at Leonard Curtis, shares an insight into pressures a business may face, signs to look out for and the different options available if becoming insolvent.
What business pressures are you seeing?
The companies we are advising are typically dealing with historical debt and are therefore susceptible to fluctuations in their sales pipelines. Companies with a high number of employees are especially vulnerable at the moment, with the increases in the national insurance contributions and the minimum wage having a major impact. When you consider a lot of these businesses are running on tight margins, it can be the straw that breaks the camel’s back.
There is usually a combination of historical financial issues, sector specific issues, one off events, competing technical advances that are too great to overcome, or simply changes in customers’ buying behaviours and the challenges of competing with cheaper imported alternatives.
In recent months the Government has provided HMRC with additional resources in an effort to focus on the collection process of unpaid taxes.
This adds to the pressure on an already struggling business. Our specialist time-to-pay (TTP) team meet with clients facing these issues, then contact HMRC on their behalf to assess the prospects of TTP. Their skillset is in negotiating these arrangements with HMRC and other key creditors, with a strong track record of agreeing longer-term or more complicated arrangements, even in cases where the client has already been turned down. They can also help get in place interest free unsecured loans from Redundancy Payments Office to fund redundancies.
What are the warning signs?
There are seven key things to be aware of:
1. Don’t bury your head
It’s very easy for any business manager to fall into the ‘hoping for the best’ trap, as business owners are naturally optimistic, and the alternative is too terrible to contemplate. It’s essential to take stock of the reality of the situation, including external factors such as what is happening in the market, then bring the management team or trusted advisors together to review the strategy and decide what needs to change. This needs to be done at an early stage of any distress. It is worth saying that even if a formal insolvency process becomes necessary, it doesn’t always mean the end of the road. Our focus is always to go forward with purpose whatever that looks like for a business owner.
2. Forecast, and then challenge it
Regular forecasting, particularly cashflow, is extremely important for any business, not just for survival, but also to identify opportunities for growth. Once projections have been pulled together – for both best and worst possible scenarios – they are an extremely effective guide to developing long-term strategy and managing day to day operations. Take time to regularly review and challenge your forecast to work out how you can bridge any gaps in your cashflow.
3. Act quickly when you see trouble ahead
The longer it takes to acknowledge difficulties, the quicker they accelerate, and the more problematic they become. If caught unawares, often by the time the ‘cashflow crunch’ hits and creditors are chasing for payment the options for remedial action reduce. It is also important to understand what your business means to you. We meet with many business owners who, when they really think about it, don’t want to spend every day fighting fires. They recognise that sometimes it is better to work for someone else. We always ask business owners what ‘good’ looks like for them and then formulate a plan to make the best of the situation.
4. Ask for help
Nobody should be afraid of asking for help, there is plenty of trusted support available from qualified professionals, including Leonard Curtis, and we have a very open-door approach. Five years on from Covid 19, times remain challenging for many businesses, but again, a greater proportion of them can certainly be saved if issues are taken on board and specialist advice sought early.
5. Be a good communicator
Once you have identified the cause of the distress and developed a plan to deal with the situation, communicating well with employees, customers and suppliers – the key people around your business – will help turn a distressed situation around. So, knowing what to say and when to say it is important and part of the guidance we can provide. This should just be a natural extension of what you would normally be doing – knowledge from communication helps understand customers’ requirements and challenges and identify early any problems with potential debtors. Being honest with employees – at the right time – to inform and reassure if you can, is fundamental – especially if there is a recovery plan involving their support or you need to manage any exits professionally.
6. Engage with lenders and creditors
The simple advice is to engage with lenders and creditors at an early stage, especially where difficult messages need to be conveyed. And, if you make a promise to pay later as part of a deferral arrangement, stick to it, otherwise, your credibility may be damaged and confidence in your ability to manage the situation is lost.
7. Don’t be afraid of insolvency
Confusion surrounding the insolvency process – and fear of repercussions from seeking advice from a corporate recovery professional – means that many owner managers often leave it too late to get help. Asking an insolvency practitioner (IP) for guidance does not automatically lead to the closure of the business. The key thing to remember is as cashflow pressures increase your options typically decrease. So, if you call us on a Wednesday and you say you can’t pay the staff on Friday there is not much we can do, but if you see the warning signs with a three-month window, we often have more options available and time to implement them.
Our priority – and that of most restructuring firms – is always to try to save a business if possible. Where we are consulted early enough, we can often develop a practical strategy to put the company back on a steady footing. Whether that be sourcing new finance, arrange a time to pay with HMRC, make informal payment plans with creditors, start communications with creditors, or operational restructuring.
What are the insolvency options?
Insolvency options can help rescue the company, business or manage an orderly wind down of affairs. An insolvency is sometimes the right option; the last thing you want is to over engineer the wrong approach. One of the options may be a Company Voluntary Arrangement (CVA). As well as engaging creditors up-front, a CVA offers flexibility and is a helpful recovery option to address cashflow issues, provided there is an underlying viable business.
Pre-pack administrations can also be the right option in certain circumstances, and they are subject to external scrutiny – particularly where business sales to connected parties are involved. This typically follows an accelerated merger and acquisition process. This is a structured and robust sales process, which is looking to generate interest in the business from as many parties as possible. This often includes the management team. We circulate an anonymised ‘Teaser’ to potential interested parties and to various distressed investor databases and websites.
The key point is to try and generate a competitive sales process, as we are looking to maximise the asset realisations for the benefit of the creditors. This is heavily regulated and a detailed report is produced by the IP to outline the approach to the creditors. Any acquiring party – if connected to the original business – is required to obtain a further report by an external evaluator. Although this is funded by the interested party, it gives creditors a measure of comfort that a structured and robust AMA process has been run.
Make sure you take IP advice to help you navigate the correct path. Those who get it wrong could face ongoing challenges from creditors including HMRC and the Insolvency Service.
