UK: Restructuring & Recovery Quarterly Bulletin, Winter 2008

Last Updated: 29 December 2008
Article by Anthony Spicer

As the economy slides deeper into recession, we offer a survival kit to help you prepare for the downturn. We also look at how retailers can keep their businesses on track and examine how the nursing home and health club sectors are coping in the current climate.


Welcome to the winter edition of our quarterly bulletin, brought to you by Smith & Williamson's Restructuring & Recovery team.

There have been dramatic changes in the economy since the last edition of our bulletin. It is no longer a conjecture – we now accept that the UK is in recession. What, if anything, the Government can do to help ease the situation has been the subject of fierce debate.

In the hope that the UK will begin to recover by mid-2009, the Chancellor's Pre-Budget Report announced a range of measures with the aim of reducing the depth and duration of the recession. Whether or not these measures will have the desired effect is uncertain, but what is certain is that the UK economy will face an increase in national debt at unprecedented levels for years to come.

The 2.5% reduction in VAT has been introduced to encourage consumer spending. However, it may have little impact as substantial discounts are already being offered on the high street. Indeed, for retailers and other businesses with VAT liabilities – particularly those businesses with debt finance – the reduction in VAT will have an undesired negative impact on cash flow.

The Chancellor has rolled the dice. Now it is the job of restructuring and recovery professionals to assess how long and how deep this recession will be and, on that basis, decide how much additional resource we need to put in place in terms of both staffing levels and new products and services.

I am delighted that Mark Boughey has joined us as an associate director in our Bristol office. In this edition, Mark provides businesses with a helpful check list for surviving the recession. This bulletin also sees Barry Knight outlining why some retailers get into difficulties and offering advice on how they can keep their businesses on track. In addition, James Money reports on care homes, while Steve Tancock describes how a health club was given a new lease of life.


The care home sector is under increasing scrutiny from lenders. James Money asks why?

Despite an ageing population, care homes are appearing with greater frequency on the watch list for lenders. To establish why, we need to consider recent industry regulations and key performance indicators (KPIs).

There are three main categories of care homes.

  1. Care only: without nursing care.
  2. Nursing: with nursing care.
  3. Other: specialist homes for high dependency patients or homes for non-elderly patients.

These categories can be split further between those homes that were purposebuilt or adapted after 2002, and those that were built earlier. The significance of the date relates to the 1999 European Union regulations, held back by the UK Parliament until 2002, which introduced minimum room sizes and more stringent requirements for en-suite facilities, lifts and other access and safety features. The UK has allowed pre-existing, i.e. pre-2002, homes to retain original room sizes and room sharing facilities. But as these buildings were often adapted from guest houses or private homes, they are becoming less attractive when compared to new, purpose-built care homes.

The state of the industry

The KPIs for the industry are occupancy rates, average fees, payroll costs as a percentage of fees, non-payroll costs as a percentage of fees, and profit margins.

Average occupancy rates have been relatively steady, though there is a marked difference between the more affluent South East (c96%) and, say, the East Midlands (c86%).

Average fees are increasing year on year. On average, homes in the 'other' category charge a weekly fee of £1,750, far exceeding those of 'nursing' (£600) and 'care only' (£570) homes.

After recent year-on-year increases, average payroll costs as a percentage of revenue have stopped increasing, while non-payroll costs have shown a marginal increase.

Average profit margins are marginally down on prior years.

KPI trends are based on average figures. However, a closer look shows that homes offering specialist care have significantly higher fees which typically offset the higher costs associated with these homes; as a result, they enjoy higher profit margins.

Also, fee rates vary considerably between private and local authority patients. Fees for local authority funded patients have risen by less than those for private patients.

So, who is on the casualty list?

A number of old, adapted or pre-2002 homes now have to compete with modern purpose-built facilities. They will face reduced fee income as private patients favour modern buildings, combined with the increased operating costs associated with the older building type.

Generally, investor demand for care homes remains high. The casualties are often the older homes facing competition from new entrants, homes in less affluent areas which do not benefit from strong private demand and, of course, the usual suspects who simply fail to forecast their borrowing correctly.


Mark Boughey, recently appointed associate director in our Bristol office, provides a check list to guide you through the downturn.

It looks like the British economy is entering a sustained period of recession. World stock markets, mergers & acquisitions multiples and the availability of leverage debt, which were flourishing before the global credit crisis, have come to a shuddering halt.

We all know that the boom years couldn't have gone on forever. The 'buy now, pay later' personal debt culture and escalating house prices just weren't sustainable. However, the majority of us could never have envisaged the level of chaos that unfolded this summer; nor could we have predicted the fall of certain global financial organisations.

What's on the horizon?

The question no one can answer is to what extent this crisis will impact on individuals and UK businesses. Speaking to the South West Region business community, it's clear that businessmen, bankers and professionals are all nervous about what lies ahead. Over the past few weeks, we've seen first-hand the impact of the crisis in dealings with companies in the retail, construction and travel sectors. Turnaround professionals appear to be busy and insolvency practitioners are gearing up for what could be a period of higher work volumes; this could be the lull before the storm.

Packing a metaphorical survival kit might be a helpful way for businesses to think about things over the coming weeks. They need to be ready to deal with the downturn.

The essential survival guide

1. Take a map and compass (not a satnav)

The businesses that survive the economic downturn will have planned their route and have a strategy in place to weather the storm, whether it be aggressive sales growth, cost cutting or diversification. The companies that flourish will be the ones prepared to change direction, if necessary, and find alternative routes. They may face a longer route, with scaled back operations and decreased capital expenditure, but they will be the ones more likely to reach their destination. However, those who take the 'satnav' route and simply 'key in' their destination, sit back and allow themselves to be guided are bound to get lost or caught up with the rest.

2. Carry a fully charged mobile phone and store your favourite numbers

Communication is key to survival. Regular dialogue with funders, creditors, employees and trusted advisers will be essential so that action plans can be put in place to deal with problems that may arise such as shortages of cash, breaches of covenants or operational difficulties.

3. Take ready cash

It's been said that lack of profitability suffocates a business, but lack of cash will kill it. In a period of difficult trading, cash will be king. Businesses need to manage their cash and working capital actively, for example through the use of a rolling three-month cash flow forecast. Where possible, they should build headroom into these projections to help deal with unforeseen problems. If necessary, they can turn to specialist commercial finance providers who will give loans secured by assets and help inject short-term cash into the business.

4. Wear a hard hat

Credit insurers are a key stakeholder in a business, even if businesses don't realise it. Maintain an open dialogue with them; not doing so could have a negative impact on the company's credit rating and could cause significant problems if cover ends up being withdrawn and terms cannot be agreed with suppliers. Credit insurers should be viewed as friends and, if not already in place for key or material customers, considered as a short-term option to offer protection from a default on a debt.

5. Don't travel alone

A trusted adviser can be a good travelling companion and act as a sounding board. Other companions, who may not have travelled with you before, should also be invited along. For example, strategic partnerships with competitors or companies further up or down the supply chain may improve your chances of survival.

6. Know your escape route

Finally, businesses should think through and prepare a back-up plan so that, if required, they can make a timely exit through an appropriate mechanism, maximising value for shareholders and creditors. If the business finds itself in financial difficulty, there is more chance of finding a solution if exit route options have been considered in advance.


Barry Knight advises retailers on how to keep their business on track.

Why do so many retailers get into difficulties, even in good times? There are three major reasons that might cause them to stumble.

Low barriers to entry

First, the financial barriers to entry into the UK's retail sector are very low. With an investment of about £40,000, someone could set up a shop within a month. This means that there are thousands of small retailers all competing against each other.


The second factor is over-expansion. If you get it right, you can very quickly generate substantial cash flow. This often allows the acquisition of a second site, then a third, fifth, tenth and so on.

In our experience, the tipping point is between 15 and 20 stores. At this stage, the infrastructure can start to crack. The retailer may not have the necessary expertise to manage what is now a reasonable-sized business. In addition, the novelty factor of the product offering may start to wear off. Established retailers may spot the opportunity and start to compete. Under such external threats, footfall can drop suddenly and business simply evaporates.

Retail is detail

Third, and most importantly, businesses ultimately go bust for one reason: they run out of cash. Good cash forecasting and bank facility management are fundamental.

To survive, retailers must sell above cost and overheads while maintaining sufficient liquidity. For sales, it boils down to making sure that the right quantities of stock are in the right store, at the right time and at the right price. For costs and liquidity, the management of cash collection and constant monitoring of cost of sales and overheads are vital. Get this right, and problems can be identified and rectified at an early stage. Get it wrong, and you suffer.

Given the ease with which consumers can stop or reduce spending, and the current pressures on inflation and house prices, retailers are arguably more vulnerable than other sectors.

Five golden rules

1. Produce regular forecasts

Aim for monthly forecasts, with cash flow being the most important. Run sensitivity analyses to compare your cash position and bank facilities. Make sure items of capital expenditure are identified.

2. Set realistic banking covenants

These should reflect the risk inherent in the business and should not simply be intended to achieve the cheapest cost of borrowing.

3. Don't hold on to old stock

Old stock ties up working capital, so if it isn't selling, discount the price and get rid of it. If stock doesn't sell this year, it's unlikely to sell next year.

4. Check out the competition

Keep a watchful eye on competitors. If you are doing something different, make sure that you are right and they are wrong. Adjust your business model when required.

5. Stay alert

If you realise there is a problem, work out a solution that can be presented to creditors. Don't just assume you can trade your way out of problems. Recognise that banks, in particular, don't like shocks.


Just when it appeared all was lost, the landlord stepped in. Steve Tancock reports.

The Green Health Club, located in a village near Ashford in Kent, had once been a successful, thriving business with over 800 members. However, when its directors approached our Maidstone team earlier this year, they described the situation as "desperate" and believed that they were no longer able to trade.

In poor health

The club had suffered a big fall in membership numbers and had failed to negotiate a lower passing rent with its landlord. The directors felt they had no alternative other than to go into administration, appointing Smith & Williamson as administrators.

Shocked staff and members were informed of the situation and the club was temporarily closed. Some employees had not been paid for a while and were already considering alternative employment. The local competition, aware of the situation, had begun to offer special deals to lure members away. In short, the club was on the verge of total collapse.

The landlord steps in

Initially, the landlord had been adamant in refusing to negotiate the terms of the lease and stated that all arrears would have to be paid before he would consent to any arrangement. We carried out further reviews and investigations into the business but, given that an arrangement with the landlord looked unlikely, we concluded that we would have to close the business rapidly.

However, at a meeting with the landlord, where we presented him with the stark alternatives, we were able to negotiate a surprising, but satisfactory, conclusion: He made an offer to purchase the business himself!

Back in shape

In order to make sure staff and members stayed with the club, it was vital to keep lines of communication open. We worked with the landlord, ensuring that the local media publicised the situation and kept everyone up to date on developments.

Within 36 hours, the sale was completed and the club reopened its doors in time for a busy weekend.

It will be interesting to see what steps other landlords will be prepared to take as they are faced with increasing voids along the high street.

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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