Despite having survived a global pandemic, some companies still face challenges. While many companies seem financially healthy – trade is good, and they have cash in the bank, some have built-up significant creditor arrears, including rent and Revenue debts – driving the need for a rigorous review process. Many previously robust businesses are struggling to identify solutions to these issues, which is undermining their viability. In many cases, key stakeholders in businesses, notably management and equity investors, are finding themselves excluded from the capital structure. This often weakens performance and is a disincentive to future investment.

How to review

To ensure businesses are best positioned for a tough trading environment, Companies must Review their performance to identify weaknesses in their business model and to set short and medium-term priorities. Considerations include:

Changes in the market

The business environment can change quickly, from new competitors and innovations to a general slowdown in the economy. The underlying themes for many businesses are the same – volatile trading, high input costs, and the inability to secure staff and key components. As a result, many businesses are reviewing their business models to identify new market opportunities, cost savings and opportunities to improve performance. 

Problem contracts / services

Many companies have encountered serious issues with contractual obligations over the past number of years, undermining their viability. These issues include significant delays to projects starting, inflationary pressures on fixed-price contracts, and being unable to recruit and retain the required staff. If the underlying business remains viable, a reorganisation of the contractual base can address the losses and ongoing costs associated with problem contracts.

Preserving business value

Losses associated with a variety of geo-political, economic and strategic issues have adversely impacted the value of many businesses, primarily due to a decline in EBITDA and any associated multiple.  The associated value of a business can therefore be less than the value of the secured debt, meaning the secured lenders are the effective owners of the business. If the underlying business remains viable, a reorganisation addressing the levels of debt and operational costs may significantly improve the value of the business.

Understanding cash flow

At first glance, many companies seem financially healthy – trade is picking up and they have cash in the bank. However, many businesses have stretched creditor terms and built-up significant creditor arrears, including rent and Revenue debts. Many cash positions are artificially high, and as trading normalises the unwinding of these arrears coupled with weakening performance will place significant strain on company cash flow. Many businesses are not equipped to prepare accurate forecasts to manage this process and inform their stakeholders.