Over the last few years there has been an increased use of Company Voluntary Arrangements (CVAs) across the casual dining and retail sectors, allowing businesses to create more cost-efficient operating models by enabling them to remove costs from their property portfolios.
Nevertheless, CVAs aren’t exclusively for businesses with large property portfolios or the High Street, they can also support owner managers in other sectors to establish a more sustainable cost base. So, how can business leaders decide if a CVA is right for them?
With the extensive trading disruption from COVID-19, it now looks like the UK economy is beginning to open up and many owner managers finally have increased optimism under the Government’s recovery roadmap. Although, this period of expansion flags up the risk of business failure, especially for companies whose debts have mounted up and have been left with low cash reserves following the pandemic. Scaling up too quickly could lead to overtrading, compromising lender relationships by putting significant pressure on cashflow.
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Who should be using CVAs?
Businesses who are confident about their long-term viability can use restructuring tools, such as a CVA for additional support. Over the past few years, CVAs have mainly been used by retail and casual dining sector businesses, allowing them to renegotiate rents with landlords and reduce costs associated with their property portfolios. Although, there are other ways they can be used to support owner managers.
What is the best CVA structure for your business?
The structure of a CVA can vary drastically, depending on the circumstances of a business. In some cases, a CVA can appear like a debt compromise agreement, involving the allocation of funds to pay creditors over a particular time period and potentially at less than full value. In other cases, a third-party investor, such as a private equity house, could provide funding to pay funds to creditors. This would enable the business to clear debt while securing new working capital finance and protect business continuity. Alternatively, the CVA plan could act as a vehicle for combining the two – obtaining third-party finance while setting aside surplus funding for distribution.
A CVA isn’t always the most appropriate option for every business facing financial pressure. For example, if an organisation’s costs have increased but its revenues have decreased significantly, a CVA is sure to fail due to the low likelihood of generating more income to return a profit. Therefore, owner managers need to ensure their business model is commercially viable before considering the CVA route.
Cashflow forecasting is key
In order for owner managers to better understand their business’ cash position in the near future, effective cash flow forecasting is required. Forecasting models can also be used to assess how unexpected changes to the timeline of the Government’s roadmap or an injection of cash from asset-based lending, for example, may affect the company’s cash position.
Owner managers need to consider if there is scope to persuade creditors to accept reduced payments when developing a CVA proposal, making sure to prioritise preserving their future trading relationship. For example, creditors may consider accepting 50p for every £1 owed to them, and then write off the remainder. This arrangement can help to give investors/lenders the confidence to provide funding, while also playing a significant part in reducing historic debt.
Ensure you have a good understanding before you begin drafting a CVA:
It’s vital for owner managers to have a clear understanding about how a CVA may be used over the next few months. Drafting a CVA proposal can be complex process, in order to succeed in gaining the support of creditors and lenders, guidance from trusted business recovery specialists is essential. The plan will also need to be presented and structured in an attractive way for all stakeholders, focusing on what future revenues, profits and cash collection will look like based on clear evidence. Timing should also be considered carefully; as businesses put their restart plans into action, it is best to wait until the owner manager can be certain about meaningful revenue and see a return to profitability.
The remainder of 2021 is likely to bring further headlines about major retailers turning to CVAs in order to keep their businesses afloat. However, this restructuring tool has considerable potential beyond use on the High Street. As long as owner managers take the time needed to consider all their options carefully, CVAs could prove useful in preserving valuable trading relationships and securing a healthier financial position.
MENZIES BUSINESS RECOVERY TEAM
During this difficult period all businesses are likely to feel the impact of Coronavirus. Our Business Recovery team are on hand to offer practical support and advice to help you proactively manage your situation. Remember early engagement is key so if you are at all in doubt about the future of your business, please do get in touch with us.
For further information on CVAs, or to discuss your specific circumstances with an Insolvency Practitioner, please contact our business recovery team below: