Assessing credible options for businesses in challenging situations

After the initial shock of lockdown and the immediate focus on liquidity, business owners are now contemplating life after lockdown.

The lifeline of government funding through furloughing, emergency COVID loans and crown debt deferral has created breathing space for the planning and consideration of the post-COVID business plan. Alongside this, banks have seen an unprecedented drawdown of working capital facilities as management teams seek further cash headroom.

So, where does this leave us?

Many companies are now weighed down with excessive debt and business plans pregnant with several, inherent risks:

  1. Despite the support of furloughing the reality for many businesses is the need to re-structure the workforce through redundancy or site closure. Whilst all business owners will hope for a speedy recovery, for many, recovery will follow a much flatter curve or not come at all
  2. Cash will still be king, necessitating the deferral or cancellation of investment activity which could be key to future equity returns
  3. Strategies will be required to generate enough cash to repay debt incurred during the crisis. Whilst crown creditors may not rush to liquidate positions, other external lenders will increasingly look to have the debt repaid. As buyers of distressed assets return to the market in the second half of 2020, this may encourage more lenders to seek debt repayment by the sale of indebted trading businesses through administration, destroying any hope of a return to shareholders

For business owners facing these issues, the need for credible options is critical. Whilst today businesses may expect to be cash generative and profitable over the next six months, this may be at levels insufficient to service the current levels of debt in the business and with little capacity to absorb unexpected bumps in the road, leaving businesses at risk of future insolvency.

A credible option

One option is an expedited, managed sale process, primarily focused on strategic buyers.

One option to owners in this situation is an expedited, managed sale process, primarily focused on strategic buyers. Many of these acquirers are based overseas and given the time required to properly assess strategic interest would not normally participate in a formal administration process. A managed sale process has a much greater chance of maximising value by identifying buyers early and ensuring the business is presented in the most attractive way by advisers who are specialists in the sector and often have existing relationships with such parties. Initiating discussions in the months leading up to a sale event rather than days before an administration avoids the erosion of strategic value.

There is limited downside in assessing strategic appetite early. Discussions can be accelerated or decelerated depending on how the business trades. If recovery comes sooner, then owners have the option of holding on for longer-term recovery. If conditions do not improve, or indeed worsen, then the existence of pre-qualified, strategic buyers provides all stakeholders with confidence that an acceptable, expedited deal can be achieved and could be critical to obtaining lender support during a solvent sale process.

Clearwater International has significant experience in delivering value in these types of situations. A global footprint ensures strategic trade interest can be quickly assessed and a partner-led sector focus ensures the value of a deal is clearly articulated to each buyer.

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