Five steps to preserve the value of your business

  • 27 Apr 2021

By Andrew Tate, Partner and Head of Restructuring at Kreston Reeves

Recent FSB research suggests some 250,000 small businesses could face collapse as a direct result of the Covid-19 pandemic. The past 12 months have, without doubt, been some of the toughest trading conditions for businesses in living memory and, sadly, many will not survive.

But many businesses that were successful before the pandemic are likely to be successful again post-Covid. Business owners need to remember that their skills, hard work, assets, intellectual property and enterprise may hold value and can once again be used to create a viable business.

 

Financial problems can seem like an insurmountable barrier and the prospect of losing everything is gut-wrenching. Business owners in this position who have invested considerable time, effort and funds into their business should stop, take a step back, seek advice and explore every avenue to preserve as much value in their business as they can.

Legally, if a business becomes insolvent then its directors owe a duty to its creditors to maximise the money which can be returned to them, and preserving value can be in the interests of creditors too. What is not allowed is to move value out of a business at the expense of its creditors.

Here are five things small business owners might want to consider.

Seek support

Businesses have been quick to take advantage of the government support that has been made available to them, and new pockets of cash continue to be made available. Review current borrowing, explore other funding options, consider refinancing debt over a longer period of time. Avoiding a cashflow problem is the best way to preserve a business if it can be successful once again.

 

Consider a sale

The M&A market is once again gathering pace, with businesses with deep reserves looking to grow and expand through acquisition. For businesses that are struggling but with an underlying sound business model, it may be possible to find a buyer before it collapses into insolvency. The business may not achieve the value it once held, but a sale may help save the business, protect the livelihoods of its employees and get debts paid off.

Protect assets and IP

Many businesses will have developed their own technology and intellectual property. If a business falls into insolvency this will be sold to the highest bidder, leaving the business owner without the ability to rebuild a business using previous ideas, inspiration and hard graft.

The structure of a business can play a useful role in protecting that intellectual property. Businesses are often structured so that the technology and intellectual property assets are held in a separate entity with the trading business taking a licence on that technology. The knowhow is protected from trading blips caused by economic or other causes.

A business which is in difficulties already cannot ‘strip’ out its assets and put them in another company without that being challenged by a liquidator. But if such a structure is put in place at the outset of a business venture or while the business is in good shape for sound commercial reasons, then this is allowed.

 

Mothballing

If you can’t see your funds lasting until the economy or sector improves, you should explore whether your business, like many others, can be temporarily mothballed. This can be achieved by reducing all costs and overheads as far as possible, and that will mean discussions with landlords, suppliers and, of course, employees. These will undoubtedly be difficult discussions to have, particularly with businesses in similar positions.

Communication is the key and maintaining a good relationship with your business stakeholders will help to ensure a sympathetic reception if you need to have these conversations. If this route is an option, careful planning is also needed when bringing the business out of hibernation.

More information on mothballing a business can be found at https://www.krestonreeves.com/news/mothballing-business-an-option/

Restructuring

Take some time to look ahead. If you can’t see a clear vision of your business getting out of the pandemic based on your reasonable expectations of a recovery, chat to a restructuring specialist about options which could help. Discussing possible options and seeing more potential strategies for survival open up will make you feel more in control of your own destiny.

 

The UK now has new tools available to help businesses with problems. Helpful solutions are available, such as being able to buy some time at a critical stage and asking creditors to defer or write off debt in a controlled way. For businesses which have no choice but to take on more debt as a result of the lockdowns, having more time to pay it back or even reducing the amount which eventually has to be paid, could mean the difference between survival or the loss of your hard-won business venture.

 

 

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