Rebuilding with a CVA
How a CVA helped a groundworks business manage the loss of a major contract and survive to tell the tale.
Our client was a £6m turnover groundworks contractor.
A second generation family business, its customer base was mainly made up of local authorities; one large local authority in particular accounted for over a third of its income.
The company had been historically profitable, but shrinking local authority budgets had reduced margins, so that recent trading had been tougher and cash flow was more stretched than it had been historically.
A change of key personnel in the purchasing department of the company’s main customer meant that in only a few months the amount of work being obtained form that customer shrunk to almost nothing. This quickly affected cash flow and the company’s management became concerned that their cash resources would be exhausted long before they were able to replace the lost income form other sources – a process they expected to take up to two years.
The client approached us for advice on how they could manage their cash flow whilst they rebuilt their sales.
The business had been profitable for many years and, although it had become too reliant on one customer, there appeared to be a reasonable prospect that the company could recover to a position where it would be cash generative given time. But large creditor arrears were building up along with threats of legal action by creditors.
We worked with the company’s accountants to prepare trading forecasts which suggested that with some cost savings, the company should return to profit and begin to generate surplus cash in 18 to 24 months. This surplus cash would be sufficient to repay creditors 60p in the £ over a five year period. We also calculated that creditors would only receive about 10 to 15p in the £ if the company entered liquidation (the alternative if a CVA wasn’t approved).
Based on these figures we issued a proposal to creditors offering repayment of 60p in the £ over a five year period and showing the likely return in a liquidation scenario.
A CVA needs to be approved by 75% (in value) of creditors. Following some negotiations with creditors, particularly HMRC, we were able to obtain almost unanimous support for the proposals and the CVA was approved.
With the approval of the CVA, the company’s cash flow problems were immediately settled. Management could re-focus on the business – growing the order book and making cost savings.
The Company returned to profit broadly in line with forecast and continues to make the contributions required under the CVA proposal. It is now less than two years form successfully concluding the CVA.
What if a CVA isn't right for my business?
There’s a wide range of solutions to cash flow problems – one size doesn’t fit all. Contact us to discuss your situation and we’ll give you an honest appraisal of your options and how we can help.
The sooner you seek advice, the more options you have and the better the prospect of success.
The benefits of a CVA
Although they don’t work in all scenarios, CVAs can be a win-win for all parties.
Management retains control of the company and can focus on running the business, rather than the day-to-day firefighting which comes with cash flow pressure.
Although the creditors will not usually recover all their monies, the CVA proposal clearly sets out what they will receive if a CVA isn’t approved (usually a liquidation scenario), so they have a clear choice between two alternatives and direct input into the outcome.
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