UK: Independent Business Reviews (IBRs)

Last Updated: 11 April 2013
Article by Panos Papas

Not just for banks, IBRs can be a valuable way of assessing risks to your business in time.

People generally think IBRs are carried out for banks. While that is true, I have carried out IBRs for all types of stakeholders, including shareholders, trade creditors, pension fund trustees, and significantly directors of the company itself.

What is involved?

Stakeholders often ask us to advise them on what action they should take, for example based on a set of forecasts they have received from management showing that the cash needed in the business exceeds the current facility limit. In other cases, we have been called in when the business is suffering and already trading beyond its overdraft limit. Typically we would:

  • meet management as soon as possible, asking for example what has gone wrong, what has gone well and also listening to what plans they have for the business's future.
  • look at financial forecasts generally prepared by management or their own accountants, and then reviewed during the IBR. If management prefer, we can produce an integrated spreadsheet model based on management's forecast assumptions to show monthly profit and loss, cash flow and balance sheet the coming 12 months for example.
  • look at turnover, gross margin and overheads. These are often key factors in determining how well a business is performing, and we seek to understand reasons for any shifts in these both historically and in the forecast figures.

It is important that any key changes in performance between the forecast and historic results are investigated thoroughly and credible reasons are given, particularly for any significant upturns in profit. For example, we recently built a model for a business showing the continuation of a trend of falling sales income, which management considered was the most likely scenario. This unfortunately showed the business needing far more cash than its existing lenders were prepared to make available. In our discussions with management, we impressed upon them that the way forward was not to change the forecast assumptions to close the funding gap, but to recognise that it was coming and to take action straight away.

It is important to also look at the company's existing balance sheet and current liquidity, to understand the cash dynamics of the business, and again to check that any changes in assumptions can be supported.We also run sensitivity analysis – 'what if' scenarios to show the effect on cash flow and profit if management's forecasts are not achieved. This can throw up some unusual results. For example, a business we looked at in the construction industry was paying labour costs weekly but was only paid by contractors after 60 days. As we ran a number of scenarios showing what would happen if turnover went up, we found the forecast cash needed in the business also increased considerably.

The business review - an opportunity

Management are often concerned that the business review is a precursor to insolvency. We see the review as an opportunity to assist with identifying ways that a business can be turned around, and we may be able to suggest more appropriate types of funding.

We will always work closely with management and ensure that they are kept informed as to timescales for delivery of our report. Generally we will discuss a draft of our report with management before issuing it in final form, thus avoiding any disagreement on the facts.

Concluding the review

Stakeholders need clear advice – depending on the agreed scope, our review will conclude with a summary of the options available for both the business and the stakeholders and our recommendations on how to minimise their risk by taking decisive action. This can be achieved through a number of different solutions.

Following some recent IBRs we have:

  • introduced management to new investors interested in supporting the business through a difficult trading period.
  • negotiated a time to pay arrangement with HM Revenue and Customs, thereby gaining a breathing space for the business.
  • suggested areas where the business can make improvements, for example to its cost structure, or management team. We may also be engaged more formally in this context to carry out a full business turnaround review.
  • in a case where the business was unsustainable, completed a distressed sale of the business as a pre-packaged administration. Our corporate finance colleagues assisted in the sale and the business is now trading profitably under new ownership, the lenders being repaid in full.

In current circumstances, stakeholders and management need to be more aware of the risks to businesses which continue to operate when underperforming, or where they risk running out of cash. A business review will highlight these risks and offer clear advice as to available options for all parties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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