By Dominic Dumville, Corporate Restructuring Partner, Mercer Hole (www.mercerhole.co.uk)
The lifting of Covid restrictions being delayed until 19 July in England could be the final straw for some businesses, but not all distressed businesses follow the same path. What are the options for a business regarding insolvency and what do hospitality businesses need to know?
Of the many rescue focused insolvency tools in the UK, the most common is the Administration, where the primary objective of an Administrator is to rescue the company ‘as a going concern’ ie to get the business back on its feet and enable the limited company to continue to exist.
Where a rescue is unattainable the administrator must protect and realise as much value as possible for the creditors before the company enters liquidation or dissolution.
There are certain types of trading company where the most valuable asset lies within the trade of the business itself. A few intangible components are what generates profits and those are the components a purchaser would be willing to pay for: the brand, its reputation, well-developed and protected ‘know-how’, a website and the order book.
This type of asset however, is particularly vulnerable to bad news, its value can halve or even disappear should the business grind to a halt and enter a liquidation. A pre-packaged sale solves this problem; the business operations are uninterrupted, the transaction is executed almost immediately after the company enters administration and key customers and suppliers don’t notice until it’s completed.
While no two cases are the same, a struggling hospitality business that is approaching Administration would be a candidate for a pre-packaged sale. For example, the most valuable part of a hotel business that doesn’t own the freehold is likely to lie within the existing bookings, the name and reputation of the hotel, the website, repeat customers and relationships with business referrers, all of which would evaporate should it get out in the public domain that an insolvency is looming.The best time for loyal cash paying customers to find out about financial hardship is the day after the problem has been solved.
So what do directors of hospitality businesses need to know about the prepack process?
Not a silver bullet – A prepack is not a silver bullet that will fix everything. If the core business has historically struggled to generate positive cashflows, the new business will face the same struggles unless the new owner can do something to increase turnover or reduce costs. If the problem has a historical over-geared financing structure, or pandemic related unmanageable liabilities, the new entity stands a chance of creating profits from a clean slate.
Not always happy ever after – while the new company will be able to operate from clean slate, it will not completely escape the impact of the insolvency process; a number of former suppliers and possibly customers may have lost significant sums in the administration. The buyer in a pre-pack may find suppliers looking to put prices up and others unwilling to trade with the new company all together regardless of who’s to blame.
It’s not a simple process – While the administrator will take up a lot of the strain, placing a company into administration is not a simple stress-free process. There’s a lot of work to do before the formal appointment, particularly where a pre-packaged sale is the chosen strategy.
Free market – Probably the most complained about feature of a pre-pack is the fact that the directors of the failed entity are not prohibited from being the purchaser. Bearing in mind the Administrator’s duty is to achieve best value, during the pre-appointment period there needs to be a thorough yet discrete marketing exercise when bids will be invited from as many potential buyers as possible. It is far from a certain, there- fore, that the directors will be the successful bidder.
Landlords onboard – Stakeholders that are key to the future success of the new business need to be brought onboard early in the planning process. Needless to say landlord buy-in is a key piece of the jigsaw for any hospitality business rescue as they may have power to derail the whole process. It’s in these kind of conversations where restructuring professionals are able to bring their experience and add value.
