Recent years have seen a wave of CVAs being used across the retail and casual dining sectors, enabling businesses to remove costs from their property portfolios and create a more cost-efficient operating model. However, CVAs don’t only work on the High Street or for businesses with large property portfolios, they can also provide benefits for owner managers in other sectors who are looking to establish a more sustainable cost base. So, how can business leaders decide if a CVA is right for them?
After months of trading disruption, the Government’s roadmap to recovery means there is finally a light at the end of the tunnel for many owner managers and the UK economy has begun to open up again. However, this period of scaling up brings with it a risk of business failure, particularly for companies with low cash reserves or debts that have mounted up during the pandemic. Taking on too much business too quickly could lead to overtrading, placing significant pressure on cashflow and compromising lender relationships.
Making use of restructuring tools, such as the Company Voluntary Arrangement (CVA) could prove a lifeline for some businesses, where they are confident about their longer-term viability. In recent years, CVAs have been widely used by businesses in the retail and casual dining sectors, allowing them to reduce the cost base of their property portfolios and renegotiate rents with landlords. However, they can also be used to support owner managers in other ways.
The structure of a CVA can vary widely, depending on the particular business and its requirements. In some scenarios, a CVA can look like a debt compromise agreement, involving the allocation of funds to pay creditors over a particular time period and potentially at a lower value. In other cases, a third-party investor, such as a private equity house, could provide funding to pay off 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 won’t necessarily work for every business facing financial pressure. If an organisation’s costs have risen and its revenues have dipped significantly, a CVA is likely to fail if it is not possible to generate more income and return a profit. As such, owner managers must ensure that their business model is commercially viable before taking the CVA route.
Effective cashflow forecasting can help owner managers to better understand their business’ cash position six or twelve months down the line. 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.
When developing a CVA proposal, owner managers should consider whether there’s scope to persuade creditors to accept reduced payments, with a view to preserving their future trading relationship. For example, creditors may be prepared to accept 50p for every £1 owed to them and then write off the remainder. This type of arrangement can play a part in reducing historic debt, while giving lenders/investors the confidence to provide funding.
It’s vital for owner managers to have a clear understanding about how a CVA might be used over the coming months. Drafting a CVA proposal can be complex and to succeed in gaining the support of creditors and lenders, guidance from trusted business recovery specialists is essential. The plan will also need to present a view, backed up with clear evidence, of what future revenues, profits and cash collection will look like and should be structured in a way that is attractive to all stakeholders. 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 prop up their businesses. However, this restructuring tool has considerable potential beyond 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.
Simon Underwood is a partner in the business recovery team at accountancy firm, Menzies LLP
