Pat Abel, Corporate Finance Partner at Hart Shaw says ‘tired’ firms must consider all options post-lockdown before shutting down

While we are not yet fully out of lockdown, what is becoming increasingly apparent is there are a growing number of business owners that are ‘tired’ and therefore have decided to close their businesses rather than carry on as we emerge from it.

At Hart Shaw, we have already helped a number of business owners to restructure their businesses, as the furlough scheme changes start to have an impact. We provide the full spectrum of services you would expect from a large regional independent accountancy practice, including both corporate recovery and corporate finance. 

So when we get owners approaching us saying they have decided to close their businesses down, the first thing we do is look at the scenario and see if there is a business that could be saved rather than being liquidated.  Clearly, we could always go straight into the liquidation process, but that might not be the best or indeed right solution for the various stakeholders (creditors, employees, suppliers, customers, shareholders).

In a solvent liquidation – where the shareholders have decided to close the business and it has more assets than liabilities – they are obliged to pay off all creditors, including contingent liabilities such as redundancies payments, notice payments, leases etc.

In an insolvent situation –  where the business has more liabilities than assets and/or cannot pay its debts as they fall due – then the government pays for the redundancy costs (within statutory limits) and the liquidator endeavours to sell off the business’s assets and uses those to pay off creditors in proportion to their liabilities. Such distributions to creditors are made after paying the liquidator’s fees and any secured creditors such as bank loans that are secured by debentures/mortgages.

As you can see from the two examples, where a business is solvent, it often make sense to try to find a buyer for the business rather than liquidate it, as the shareholders should realise more than if they had liquidated it. Redundancies and employment related payments can run into the hundreds of thousands, in some cases millions, of pounds. Therefore, selling the business has two key benefits – it protects the jobs for the employees, and it reduces the liabilities, meaning the shareholders receive more when liquidating any residual assets.

In some cases, we have helped organise a management buy-out, which means some of the staff, usually senior or middle management, buy the shares from the current shareholder(s) or we look for a trade buyer.  Where the business has a property, we can organise a reconstruction so that the property can be extracted, and the trading business continues to operate the property on a lease. The existing shareholders retain the value of the property and therefore either continue to receive rent under a lease or sell the freehold to an investor and thus they receive the capital value.

Sometimes it makes sense to sell the business to management or a third-party buyer for a nominal amount, i.e. £1, especially where there are residual assets such as properties. This way, the shareholders benefit from not having to pay for the redundancies and the management and staff preserve their jobs – a win-win!

In these uncertain times, if you are the owner of a business and you feel you have no option but to close the business or that COVID-19 has knocked the final wind out of your sails and you want to get out, please ensure you speak to an adviser as soon as possible about your options.

There are more options than you may think. The beauty of the current furlough scheme is that you still have time to plan before it is too late.

Patrick Abel Corporate Finance Partner Hart Shaw LLP

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