Do you have retail clients who need to restructure?Published on 25th October 2019 2019-10-25T11:00:00+00:00 - Last update on 28th November 2019 2019-11-28T10:47:35+00:00
The high street is under pressure. Many independent shops have closed down and even some of the big names – like BHS – have followed Woolworths into oblivion. Debenhams has gone into administration, and will probably not be the last.
As an accountant, it is easy for you to see the reasons why. The overheads of running a high street business are high and getting higher, while the internet has brought online shopping - and cut prices - for everything from clothing to groceries. Shoppers on the high street may even choose what they want in store and cut the cost by ordering online. As a result, your clients in the retail sector may be suffering.
But if your clients approach you as their accountant, what can you do to help?
The restructuring options
There are, in fact, several options that may be open for a retail company looking to restructure. It may no longer be easy to find another business to take over a retailer as a going concern, even when it has assets such as property in prime retail locations, but it might still be worthwhile looking at debt for equity swaps, pre-pack sales and CVAs with clients whose only alternative is a formal - and painful - bankruptcy.
Company voluntary arrangements (CVA)
CVAs are, essentially, a formal agreement between a company and its creditors which produces a better return than an insolvent liquidation for all concerned.
75% of creditors must agree to set up a CVA. They are becoming common in the retail sector, especially when landlords are faced with serious losses due to exposure to the multi-site operations of a retail operator.
They can allow a company to negotiate a reduction in future payments of rent and, in some cases, the complete vacation of premises as part of the proposals. Landlords may receive at least some rent and see continuation as preferable to no rent and empty units – which are becoming increasingly difficult to fill.
The advantages of a CVA for the company are obvious. A CVA lasts for between 3 and 5 years and permits the company, if approved, to exit from leases or reduce the lease payments to allow the company to restructure based on better cash flow. However, a significant number of CVAs fail and the company will, ultimately, end up in administration or liquidation.
A “pre-pack” is a sale by the company and its office-holders and can be arranged on the appointment of administrators of a company where all the work towards completion of the transaction is undertaken in advance. It can allow the company to be wound up, the assets to be acquired by a successor, and the business to resume.
The big advantage of a “pre-pack” is that it allows the sale of the business assets as a going concern and the continuation of the business. One disadvantage of this process is that commercial agreements terminate on the administration of the company and the buyer has to re-negotiate terms - which may not be a simple process.
Debt for equity?
The practice of “swapping” debt for an equity stake has been long-established as a method of extinguishing debt. Normally companies have to pay out cash to pay off their debts. However, if the borrower and lender can both agree, something with an equivalent of the value of cash can also be paid instead of cash.
In case of debt to equity swaps, loans are paid off with equity. The lender usually receives less than the face value of the debt but more than the depreciated market value. On the other hand, the debtor no longer faces default and the ill repute that is inevitable with it.
Debt-to-equity swaps are common in the financial world. Most commonly, a financial institution such as an insurer or a bank will hold the new shares after the original debt is transformed into equity shares.
How can you help?
Clients will often turn to you as their accountant when they have identified a need for restructuring.
At Rangewell, we can help you give them the support they need.
We are experts in all aspects of business finance. Not only do we know all the different types of business funding available, we know the lenders who can offer the most competitive rates, and those who may be the most appropriate when the challenge is out of the ordinary.
If it is possible, we will provide a financial lifeline for your clients. Not only are all our services free for you to call on as an accountant partner, but we also make no charge to your clients.
In fact, we may be able to pass commission from lenders on to your practice.
To find out more about working partnerships with Rangewell to find better answers to your clients digital transformation and other funding needs, call us at Rangewell on 020 3637 4150 - or email [email protected]
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