What makes a good CVA and why it works

Traditional retail and restaurant operations have historically been a robust proposition, as reflected by our history, geography and social behaviours. This has led to long term investment and businesses having a largely fixed cost base, i.e. fixed rents, rates, minimum staff numbers, etc. 

This business model was considered a sound proposition, but has recently been undermined by the rise of the internet and changes in shopping and dining habits. 

These issues, coupled with the political and economic uncertainty associated with Brexit, have led to significant like-for-like declines in sales for many bricks and mortar retailers. 

With a largely long term and contracted fixed cost base, many operators have had limited tools to counter the sudden deterioration in sales leading to many sites and businesses becoming uneconomic.

What is a CVA?

A CVA is a contractual agreement between a company and its creditors in which outstanding liabilities are compromised or contractual terms are amended. 

As an example, it may be that creditors are paid 50p in the £ as compared to the outstanding balance or that contractual rent is reduced by circa 25 per cent for a period. 

Essentially, it is a proposal from a company to its creditors in which they are offering a better alternative than administration or liquidation. 

However, to be binding, the proposal needs the support of 75 per cent of creditors by value.

How CVAs can assist businesses

The aim of CVAs is to make businesses viable, hence they focus on reducing costs to reflect the new norms. 

In respect of property costs within a CVA you will typically see rents being reduced to current market rents and uneconomic leases terminated. 

However, it is important that the overall business operation is properly reviewed as focusing on a short-term reduction in property costs is unlikely to be successful. 

Therefore, you will typically see a new investment and marketing strategy within a CVA, together with compromises to trade and other creditors. By strategically reviewing all aspects of the business, the likelihood of short and long term success is dramatically improved.

Can a CVA assist my business?

If your business is viable and has a long-term future, but the current trading has been fundamentally undermined by either a one-off factor or a structural issue, a CVA could present an opportunity to rapidly restructure your business and to return it to profitability.

What are the issues with a CVA?

There are a number of key points that businesses need to consider before committing to a CVA:

  • The process and outcome are uncertain, and the company needs the support of 75 per cent of its creditors for the CVA to be effective;
  • In the event that the CVA is rejected it is probable the company will go into administration or liquidation; and
  • There could be publicity which could impact on trading – businesses can expect to see changes to trade terms, perhaps driving an adverse movement in working capital.

Summary

CVAs present a real option for businesses to rapidly restructure. 

Successful CVAs are typified by an overall strategic plan in which the CVA is one of a range of factors that assist in turning around a business. Recent successful CVAs we have worked on have been supported by new investment (including re-branding, capex into sites, etc), new management and strategic changes to marketing channels.

Working closely with clients and following the principles set out above have ensured that all RSM’s CVAs have been successful and in a difficult trading environment all the businesses are currently trading robustly.

For more information, please contact Damian Webb

RSM’s retail restructuring team have recently advised on a range of CVAs, including Thai Leisure, Abokado, Aldo UK and Thomas Sabo.