Post Pandemic Poker?
Stick or Twist?
The covid pandemic has undoubtedly brought unprecedented challenges and has changed the economic outlook for some time to come.
The government support measures have in general terms been a lifeline for many businesses that would have otherwise fallen by the wayside. The opportunity to furlough staff has given them breathing space to restructure the business and some prospects for the future.
However, the decision for owner managers to continue to support and invest in their businesses is now clouded in the light of CBILS and bounce-back loans taken from the government and HMRC arrears accrued during the pandemic together with the renewed secondary preferential status of certain HMRC liabilities.
Many of the clients we have been seeing, have been paying their suppliers so that the trade position is relatively clean, with the added exception of a build-up of landlord arrears in some cases. Owner managers are, however, looking at whether they should carry on with the company as it stands, or whether they can use an insolvency process to “play fresh cards” and start over again?
Acting in the best interests of creditors is paramount but many businesses may well be cash flow solvent, having utilised the various government support packages available, but they are also burdened with significant long-term debt resulting in significant liabilities in excess of their assets.
Closing a business at this time may not be the right thing to do allowing it to trade out of the position while utilising the deferred payment schemes available to them.
Continued mothballing of businesses is likely to be impossible once the support measures are removed and are therefore, likely to result in a reduced value and outcome for creditors and other stakeholders.
This makes for some challenging decisions for directors who will see the attraction to wipe the slate clean and to potentially acquire an unburdened business but ethically is this the right thing to do and should they continue the business to return to profit and service the debt over time?
The protracted nature of lockdowns and continued uncertainty of re-opening has affected many businesses but has been particularly hard in certain sectors.
We have seen an increasing number of enquiries from gymnasiums, soft play centres, restaurants, audio-visual and event support businesses that are solvent but with significant uncertainty in terms of the sector being released from lockdown and, more importantly, little certainty for the return in demand for their respective services.
We have dealt with several business owners who have seen their reserves depleted through the pandemic that simply had no appetite to continue with the uncertainty and risk to their investment and they have taken the decision to “play the cards they hold” and wind down those businesses and take the equity out now rather than risk it all.
A New Deal?
Prior to the pandemic, we would see a reluctance from directors to use an insolvency process other than in last resort. This is in part due to the impact on suppliers and employees but also the potential damage to reputation.
With the pandemic, it is the playing cards that have changed. We are seeing that trade suppliers have been paid to a large extent, and the employees furloughed to protect them as much as possible.
It is the debt mix that has changed with it predominantly being HMRC in respect of deferred taxes or the Bank in respect of the government supported loans where there are either none, or somewhat limited personal guarantee exposure.
This is likely to see less of an emotional barrier to using an insolvency process and if there is ever a time to explain the reasons for needing such a process – it is on the back of a global pandemic!
The answer is, of course, that directors should consider the interests of all creditors when making decisions and it may be more appropriate to keep trading and repay the debt over time.
Reading the Cards?
We are now seeing an increasing number of owner managed businesses that are quite simply not used to being in debt and have previously reinvested profits to cover the lean periods.
Cash management and forecasting has suddenly come to the fore for stakeholders who are not used to the new business environment. Producing accurate forecasts is a challenge at the best of times but who can predict what may happen over the next few months as we are released from lockdown restrictions?
Many family run businesses would never have expected to be in the financial position they are now facing, and they may lack the experience to weather the storm.
There are, however, two recurring questions from the key stakeholders which are: –
- How much money does the business need to get through the next 12-18 months of restart and recovery?
- Will there remain a viable business in the long-term, taking into account the many changes that are now likely, or forecast to impact business and customer behaviour in the future?
The concern is making out of character or rash decisions and therefore seeking the appropriate advice will be critical.