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Developing A Business Approach To Survive

Developing A Business Approach To Survive. Author: John A Waller, Director. Reviewed November 26th,2022.

During the worldwide Coronavirus COVID-19 pandemic, many UK businesses struggle to survive. The UK government has put various support packages in place along with numerous suspensions relating to companies’ house and tax.

For a business to survive moving forward. A robust achievable business plan is required to help directors rebuild after the pandemic.

Struggling business remains stressful and demanding for directors to manage appropriately. It can then affect the whole team, along with the possible failure of the business, so having significant impact issues personally on the stakeholders financially and health-wise. 

To consider gambling on your business’s future utilising monies contributed from your family or friends or perhaps deferring payments to your business’ creditors is, however, fraught with danger.

The ethical hurdles involved in risking other peoples’ money are an essential stressor for most individuals.

Developing A Business Approach To Survive And Why Businesses Struggle?

Businesses often struggle due to:

  • Develop beyond the existing management and directors’ skill set;
  • ability to control the business operationally;
  • Ill health of members of senior managers and critical directors;
  • losing interest in the industry.

Many businesses rely too heavily on a sole customer or supplier. Other businesses in this ever-changing world find technological developments have eroded their competitive position, or perhaps poor management has stunted growth. 

Developing A Business Approach To Survive And Remedial Action

Reverting to a strong, vibrant commercial standing requires a strategic action plan. There are several short-term corrective actions which remain an option:

1. Recognising unnecessary assets and selling them off;

2. Turning stocks to cash;

3. Using a more proactive recovery method for debtors;

4. Longer payment terms from the company’s suppliers;

5. Examining factoring or invoice financing options.

There are also three restructuring or turnaround options:

  • Hive down;
  • company voluntary arrangement;  
  • administration.

Recent changes allow a monitor to be appointed, allowing a company to retrench over twenty business days. Referred to as a Moratorium. 

Hive Down & Pre Pack Liquidation

This strategy is suitable for a struggling business during a restructuring process while fending off a potential liquidation with a new corporate owner in control. The intended restructure is pre-packaged and agreed upon with secured creditors before initiating a liquidation.

The failing business then sells assets to a new corporate entity at market value, agreed by an independent market valuation. The purchaser may be the failed company’s current management team or its existing directors. It therefore requires specific steps to avoid Phoenix company issues emerging later.

An arms-length sale, transacted by a licensed insolvency practitioner following appointment, may occur to an unrelated third party. The former director is not involved in the management or directorship role; therefore, he avoids creating newco as a phoenix company.

Once assets are sold, the company enters liquidation. 

Company Voluntary Arrangement (CVA)

A CVA is when a company seeks the approval of its creditors to freeze the debt it owes at a given date. Then under the supervision of a Licensed Insolvency Practitioner, propose a plan for agreement by the creditors while requiring a 75% approval to repay them over a set time, perhaps at a percentage in the pound, while stopping creditor action. The agreement is then a legally binding agreement for all parties to it.

CVA’s provide a breathing space for companies. So they turn the fortunes around while still being able to trade. 

Administration

This option gives a struggling company undergoing financial difficulties breathing space and handles perhaps immediate creditor pressures for what may be a viable company. An appointed administrator (Licensed Insolvency Practitioner) reviews the business fundamentals and issues a report to creditors with their recommended course of action.

The Administrator has eight weeks to issue the report.

A Company Administration tends to benefit both secured and unsecured creditors more than a liquidation. Administration leads to an Administrator managing the company for a set period, using the aegis of a company rescue plan.

An administration formally begins following the appointment of an administrator by a secured creditor, by the board, or perhaps the outcome of a shareholder decision. The administration of a company is more expensive than a CVA and often considered for medium to larger companies. The actual operation of an Administration is more costly, as mandated statutory compliance and reporting requirements remain required.

When administration ends

The administration ends when either:

  • The Administrator achieves the purpose of administration. e.g. a CVA has been agreed with the companies creditors;
  • The Administrator’s term ceases. It ends automatically after a year, but you may apply for an extension.

Upon the administration ceasing, protection against any legal action your creditors take also ceases.

Summary

Some businesses may discover themselves in distressed financial situations. The critical point, however, to survival and ongoing growth is to recognise a strategically sustainable path for your business. That may involve some restructuring or combined with a hive down, company voluntary arrangement or administration answer.

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