28 January 2022

After a difficult 18 months, the UK economy still faces challenges. Following the withdrawal of government support measures, companies must now deal with inflationary cost pressures, supply chain issues, labour shortages and an uncertain economic outlook.

Many previously robust businesses are struggling to identify solutions to these issues, which is undermining their viability. In many cases, key stakeholders in businesses, notably management and equity investors, are finding themselves excluded from the capital structure. This often weakens performance and is a disincentive to future investment.

To ensure businesses are best positioned for a tough trading environment, all stakeholders’ interests must be realigned for the ‘new normal’.

How to review

Given the momentous changes affecting UK businesses over the past 18 months, companies must review their performance to identify weaknesses in their business model and to set short and medium-term priorities. Considerations include:

Changes in the market

The business environment can change quickly, from new competitors and innovations to a general slowdown in the economy linked to the pandemic. There have been winners and losers over the past 18 months, with business models both positively and negatively affected. Initially the lockdown predominantly hit the retail sector, but subsequently the impact of coronavirus and Brexit has reached a range of sectors, notably construction, manufacturing and logistics. The underlying themes for many businesses are the same – volatile trading, high input costs, and the inability to secure staff and key components. As a result, many businesses are reviewing their business models to identify new market opportunities, cost savings and opportunities to improve performance. This exercise should ensure your business is structured for the ‘new normal,’ and not with an expectation that trading will return to the way it was before coronavirus.

Problem contracts / services

Many companies have encountered serious issues with contractual obligations over the past 18 months, undermining their viability. These issues include significant delays to projects starting, inflationary pressures on fixed-price contracts, and being unable to recruit and retain the required staff. If the underlying business remains viable, a reorganisation of the contractual base can address the losses and ongoing costs associated with problem contracts.

Senior management plans and incentives

Losses associated with the pandemic and other issues have lowered the value of numerous businesses. This reduction in value can be driven by a decline in both EBITDA (earnings before interest, tax, depreciation and amortisation – a very close approximation to the cash generated by a business) and the multiple applied to EBITDA. The associated value of a business can therefore be less than the value of the secured debt, meaning the secured lenders are the effective owners of the business – and so any equity holders are out of the money, while share-based incentives held by senior management become worthless. If the underlying business remains viable, a reorganisation addressing the levels of debt and operational costs may significantly improve the value of the business and the associated incentives.

The ‘new normal’: appropriate staff levels, funding and operational costs

The past 18 months have seen the UK adapt to the ‘new normal’; working from home, home-schooling, lockdown, quarantine and wearing face masks in public – all of which has had a significant impact on personal, social and economic interactions. The ‘new normal’ requires companies to improvise and adapt to overcome its associated issues. A thorough review of company operations, with a view of the markets in which it operates and the general direction of travel, will highlight the issues.

Unsustainable creditor pressure and other supply problems

The government introduced moratoriums to prevent recovery action by creditors during the pandemic, and HMRC offered generous deferrals and Time to Pay agreements which gave businesses vital breathing space. However, the limitation on statutory demands and winding up petitions fell away from 30 September 2021 and landlords will also regain the ability to use Commercial Rent Arears Recovery (CRAR) from 25 March 2022. Companies must act now to address the mounting pressures.

Understanding free cash flow

At first glance, many companies seem financially healthy – trade is picking up and they have cash in the bank. However, many businesses have stretched creditor terms and built-up significant creditor arrears, including rent, and HMRC debts. Many cash positions are artificially high, and as trading normalises the unwinding of these arrears coupled with weakening performance will place significant strain on company cash flow. Many businesses are not equipped to prepare accurate forecasts so as to manage this process and inform their stakeholders.

How can we help?

RSM’s team of experienced professionals can assist at each stage of the process, including:

  • Sector analysis – As a full-service firm, we are well-versed in dealing with a wide variety of industries and the issues therein. Our industry experts keep abreast of both current and forecast developments, and so can advise on the associated threats and help you to take advantage of opportunities.
  • Cost reduction identification and implementation – Our operational experts have considerable experience in driving efficiencies across a wide range of business sectors, including liaising with the relevant stakeholders, and advising on the available options. We have a proven track record of successfully turning around projects in tight timescales.
  • Stakeholder engagement and alignment – Our experts have worked with numerous lenders and management teams to ensure the optimum balance between debt, equity and incentivisation. This has contributed to driving the recovery of struggling businesses.
  • Performance improvement step plan – A detailed step plan is an essential part of any reorganisation. This ensures each stakeholder understands their role and responsibilities, the associated timescale and the overall direction of travel. Our reorganisation teams have extensive experience in this area, liaising with our internal experts to understand the nuances of each sector.
  • Funding options – Our debt advisory experts draw on a large pool of funding providers to deliver tailored solutions to a wide variety of situations, such as short-term working capital funding, distressed funding support, asset purchases or funding restructuring processes.
  • Restructuring options analysis – While value is best preserved via early engagement, we can react swiftly to deteriorating situations by liaising quickly and effectively with the relevant stakeholders. We also have extensive experience in implementing strategies to address creditor pressure (including cash flow management) and supply chain issues, ranging from immediate actions to longer-term plans.

Our Restructuring Advisory team can help with all of the above. Contact Damian Webb or Gordon Thomson today to discuss your current circumstances. 

Damian Webb
Damian Webb
Partner and co-head of Restructuring
Damian Webb
Damian Webb
Partner and co-head of Restructuring