As the UK continues to remove the many restrictions on industry and people, some businesses are emerging from hibernation after a very difficult period, especially in the hospitality, retail, leisure, charity, and healthcare sectors. These businesses face many financial, operational, and other challenges, including negotiation and repayment of accrued rent, as well as paying back government support.
Fred Satow, a Director in our Restructuring and Insolvency team and Frank Ofonagoro, a Managing Director in our Financial Advisory team look at what businesses need to do to optimise their operation as some come out of cold.
Operational challenges and performing an options analysis
Some of the operational challenges businesses will face include creating or developing existing business models, such as improving or establishing an online presence, or creating a completely new business, as is the case for Lloyds Bank – which is planning to enter into the residential property market as a landlord (where it will in effect be competing with its own buy to let borrower customers) – and Marks & Spencer which plans to convert part of its Marble Arch store into office space.
Such changes to existing business models or development of new business models may impact positively on profitability and capital structure as well as working capital requirements. Equally, some elements of the business may have been rendered loss–making or no longer viable due to COVID-19. In these circumstances, management may need to conduct a review of the group's portfolio of businesses and an options analysis to identify whether individual businesses fall into the 'retain', 'divest', 'expand' or 'invest' categories, as explained in more detail below.
This review may lead to a decision to shed or wind down what are now deemed non-core businesses. And in turn this decision may lead to closing or eliminating those legal entities through which the non-core business is carried out – this is often called 'corporate simplification'.
This article provides guidance on some of the issues which arise in portfolio business reviews, options analysis, managed exits, wind downs or corporate simplification – eliminating a legal entity.
Many of these processes detailed below can be managed and executed in-house, apart from a solvent liquidation, which requires a liquidator with an insolvency licence from a recognised professional body. However, they are often outsourced to professional services firms like ours, so that the in-house team can concentrate on running the businesses and avoid any emotional attachment to it.
Portfolio review and options analysis
In performing a review of a group's portfolio of businesses, it will be necessary to consider the following for each business:
- Capital employed
- Competitive position currently and in the future
A well-established review matrix is that invented by the Boston Consulting Group. This seeks to allocate businesses to the following categories: cash cow (high market share in slow growing industry), star (high market share in a fast growing industry), dog (low market share in a slow growing industry) and question marks (low market share in a high growth market).
Once this review is complete, it will be necessary to assess the 'dog' businesses and what options are feasible:
- Can the business be converted into another category by investment or other change?
- Is it possible to sell the business?
- Are other options available?
If no other options are available, it may be necessary to consider a managed exit or wind down of the business.
Managed exits and wind downs
The aim of this process is to exit the business at minimal cost to, or whilst maximising, cash recoveries for the group. This will involve planning and consideration of operational, commercial / contractual, stakeholder, regulatory, property and asset, people, and financial issues. Some of these are discussed briefly below.
Perhaps the first point to consider is whether the entity is solvent, i.e. has an excess of assets over liabilities. If not, it is possible to eliminate an entity if its only liabilities are to group entities, although tax advice should be taken beforehand. It is also possible to make an entity solvent. It is advisable to ensure that all assets have been realised and all liabilities paid or dealt with which may require specialist advice from valuers and others. Dealing with all assets and liabilities often means that the last assets (or liabilities) to be dealt with are inter-company balances. Tax advice should be taken before considering waiving or not paying any such liabilities, particularly if the debtor and creditor are in different tax jurisdictions.
It is essential that detailed due diligence is undertaken to identify any banking, compliance and risk, insurance, IT, intellectual property, litigation, property, regulatory, etc issues and deal with them. An obvious matter is whether the name of the entity has any commercial or other value and requires saving. It will also be necessary to consider the effect of the wind down on other group businesses as regards sales and profitability and other viewpoints. Entities often have 'hidden' assets or liabilities which are not shown on their latest balance sheet but need to be identified and resolved.
All tax liabilities need to be agreed and settled, the entity deregistered for VAT, the PAYE / NI scheme closed, Corporation Tax, Stamp Duty and all other taxes dealt with. The ultimate closure of the business may generate a capital gain or loss for the shareholders. Tax planning and advice will be needed to mitigate any tax liabilities arising on a gain deal with any loss.
There are many pitfalls to avoid. Here are a few:
- Where an entity has sold its business and assets and given warranties to the purchaser, it is often not possible to eliminate it unless the warranties have expired, or agreement of the purchaser has been obtained.
- Assets can be transferred intra-group without generating a taxable gain, but this gain may become taxable if the relevant entities leave the tax group.
- Where an entity has assigned a lease and the subsequent assignee becomes insolvent, it is possible for the lessor to claim against the original assignee.
- Care should also be taken to deal with VAT groups, pension schemes, group liabilities such as cross-guarantees and other such issues and liabilities.
In essence corporate simplification involves the elimination of one or more legal entities from a group structure by 'striking off' or members' voluntary (solvent) liquidation. Striking off an entity is to apply to have it removed from the Register of Companies at Companies House. It then ceases to exist and to own any assets.
Members' voluntary liquidation is a process initiated by directors and controlled by shareholders which leads to the appointment of a liquidator who will realise all the entity's assets, deduct agreed costs, pay all outstanding creditors and return the remaining funds to shareholders. Both lead to the entity ceasing to exist.
Get in touch with a member of our team
The above is just a brief introduction to some very complex issues. We can assist you with refinancing existing debt, business portfolio review and options analysis, managed exits and wind downs or corporate simplification. Get in touch with either Frank or Fred or contact one of our offices to find out more.
Building financial fortitude: support for advisers and businesses
To survive and thrive, businesses need to be resilient and robust. As a highly experienced business-advisory firm, we talk to hundreds of businesses daily and understands they need support to tackle issues proactively and move beyond the challenges. That's why we created Building financial fortitude, a programme designed to provide information, insight and support on the key issues businesses and professional advisers are facing now and will need to tackle in the future. You can look at what's coming up in our programme in our short video.
Originally Published 20 May 2021
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.