What happens when you need to downsize your business but you cannot afford to do so? For a lot of directors of companies it is easy to grow, employing new staff and moving to bigger premises. This works well when times are good, however, when there is a need to reduce in size it can be far more difficult. Many companies have experienced this and we have been approached to offer debt advice and assist with the corporate restructuring. For most companies they are looking for cash flow solutions, and we have been able to use a Company Voluntary Arrangement (CVA) to achieve just that.
High staff and property costs often require personal guarantees from Directors
Companies, particularly in the professional or service industry, have high staff and property costs making up the majority of the cost base. With both, the exit costs can be very high. When things are going well companies take on more staff and move to larger premises to keep up with demand. In a lot of cases the directors find that they need to offer personal guarantees in respect of the lease. Whilst these are big commitments, they can be entered in to fairly easily. Whilst things are going well, the costs can be easily met. If there is a downturn in business, the costs can become disproportionate. Most leases have a break clause but these may not be for some time. Unless the relationship with the landlord is so good that they will agree to waive their rights under the lease (unlikely), the landlord would expect that the company continues to pay the rent until it can be terminated, irrespective of whether the company can afford to be there or not.
The exit cost for employees can be expensive, especially where there are loyal, long standing employees. Although the costs are not carried anywhere on the company’s accounts, when it comes to making redundancies it can be very costly and this is not a cost that most companies have allowed for, and they especially can’t be met when the reason for redundancies is because the company cannot afford to meet the employee costs.
How can a CVA help?
This is where a Company Voluntary Arrangement can assist. A CVA is an agreement between the company and its creditors in respect of the debts outstanding. In a lot of cases, the company continues to trade, whilst making contributions in to the arrangement to meet the historical debts. This only works where the company is making enough profit to meet these debts. In a situation where restructuring has already taken place, the more streamlined business should be more profitable as the onerous costs have been stripped out. The CVA can offer these monthly payments to meet the outstanding restructuring debts, and any other creditors, over a period of time, which could be up to five years. Therefore assisting the cash flow of the company, but giving the creditor a better return than if there were no agreement and the company were simply forced in to liquidation due to the redundancy and property exit costs. In a lot of cases, where there are no significant tangible assets, this results in no dividend for the creditors in any event. It therefore seems to be a win win situation.
A CVA can manage redundancy costs
For most directors of small companies though, looking after their employees is a high priority, and as such they want to ensure that they are paid as quickly as possible and directors are concerned that they could be waiting for several years for their money. This is where the Redundancy Payments Office (RPO) step in. Once a CVA is approved, the RPO will process the payments of the employees. Generally paying the redundancy and notice the employees are owed in around a month. The RPO then stands in the shoes of the employees with a CVA and waits for the dividend payments.
The CVA can therefore be an effective tool where there is a viable underlying business, but where it can only work if restructuring is carried out first. Instead of simply closing down and no one receiving anything from the company going forward, it allows for the company to continue, for customers to still get their service and for debts to be paid, although over time.