An IT big data and cloud services company with a history of steady, profitable growth and three main business lines, each generating one-third of £10m revenue, was hit by two unforeseen customer problems that threatened the business' survival.
One of the firm's large clients had itself hit financial problems and had stopped trading, leaving £100,000 in bad debt; then, a second client had gone into insolvency, leaving the company with both businesses lost and a £500,000 unrecoverable claim. These events put the business under a severe cash drain. The company also had a third major customer, Nokia, with an annual business of £2m, half of which was paid annually and in advance, but it was still five months away from the renewal date and payment.
The capable financial controller producing cash flow and performance forecasts but had no experience operating under intense creditor pressure. The forecasts showed a viable business with positive cash flow and positive EBITDA, but only if it could navigate through the coming months until the Nokia payment. Creditor recovery actions, however, would not allow sufficient time without a more convincing plan and process. Approaches had been made to potential investors who sought to control the business and offload debts and claims through an insolvency process, and so the company declined the investments. The shareholders were unwilling to lose their business and knew that any insolvency process would risk losing the Nokia contract and future viability.
The CEO approached a turnaround manager, a certified turnaround professional (CTP), who acted outside of insolvency, and instead focused on company rescue through operational improvement and consensual arrangements with creditors and stakeholders. Working in a hands-on, advisory capacity, the CTP advanced cost savings in the less profitable contracts and downsized the business without endangering the core activity. He engaged with key creditors advising on the plans and the enhanced chances of recovery if they cooperated with the plan:
- The CTP identified additional asset based lender (ABL) funding by changing the invoice discounting provider and at the appropriate time with creditors' support
- The ABL funder approached Nokia to bring forward invoicing by three months to provide extra liquidity.
Five months after the engagement, the CTP ended his involvement, leaving the company back at positive EBITDA and positive cash flows and in a strong position to restore old contracts, now on a profitable basis.
Over five months, the business went from the threat of insolvency and loss of key customers and employees to a repositioned business with more profitable contracts and better financial performance.
The moral of this story? The key to survival for the shareholders was not to proceed with insolvency protection but to engage a CTP as a consensual restructuring advisor.
This situation happened before COVID-19 and before the Corporate Insolvency and Governance Act (CIGA) of July 2020. CIGA provides a 20/40-day delay where a company is protected from creditors to present a restructuring business plan for Court approval under the supervision of an insolvency professional (IP).
While the CIGA has its merits, it is unlikely that it would have brought success in this case without a prior engagement with a CTP who could prepare the groundwork for the business plan and save the client base before the engagement with the IP. Just the threat of the delay would probably have been sufficient to keep creditors' support and successful recovery without resorting to CIGA protection.
For SME businesses that see themselves in similar positions as we emerge from problems brought about by the COVID-19 pandemic, help is available through early engagement with a CTP or turnaround specialists who do not practice – and are aware of the risks to shareholder value of – insolvency processes.
The lesson from this case is that it pays to choose your advisors wisely if you want to keep as much control of your business, its value and the recovery process as possible.