Greg Palfrey explains how to unlock the value in insolvent hospitality businesses.
Increasing numbers of small or even single unit pubs, clubs and hotel groups are facing operating difficulties and a cashflow crisis. Many of these businesses operate from leased premises and, after refurbishment, borrowers can find themselves at the limit of their facilities with precious little cash available to fund working capital.
Trouble brewing
A disappointing number of these businesses fail due to a combination of operating and financial mismanagement. Constant attention to margins is crucial yet some proprietors have scant knowledge of the margins in wet or dry sales and the industry indicators they should be achieving.
This is usually compounded by a failure to provide lenders with timely information so that when crisis point is reached, there is no flexibility within the facility to buy time for a review and analysis of the options. With the brewery withholding supplies and the landlord knocking on the door, proprietors often feel there is no option other than to return the keys and await the consequences of their failure.
Assessing the situation
In such circumstances, appointing an administrator may seem unjustified due to the likely lack of trading or the prohibitive expense when compared with the costs of liquidation – especially if the lender already has recourse to personal guarantees and the matrimonial home. However, filing a notice of intention to appoint can prevent the landlord from repossessing and allow time to assess the options for trading and an orderly sale of the business and/or an assignment of the lease to realise value. The emphasis when filing such a notice is to give prospective appointees the chance to see whether the business is worth saving. There is no obligation to proceed with an appointment if the review concludes that closure and subsequent liquidation is in the best interests of the creditors.
A realistic assessment of the position taking account of valuation, development potential, type of trade, location, seasonality and actual/potential profitability can usually be made well within any moratorium period. We work closely with a number of agents who specialise in operational matters and who, when working with the benefit of a moratorium, have access to suppliers at short notice in order to recommence trading.
Securing buy-in
A decision to trade on will need the agreement of the lender, who may be asked to fund a further overdraft facility. Co-operation from the principals and key staff is desirable, although it may not be essential where specialist staff can be recruited at short notice to manage entire operations.
Knowing the risks
Administration is not without its risks. Administrators must move quickly to secure the necessary licences and, of course, the bleak outlook for many pubs and clubs presents its own set of challenges. However, at Smith & Williamson, we understand the issues and work with the relevant parties in a diplomatic, effective way to unlock value and reach the best solution possible for all stakeholders.
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.
