Why a CVA could be the right choice at the right time for your company
If a business has no viable way forward then liquidation is usually the best option – and it’s a tough decision for a business owner that grasps the reality, let alone one that hasn’t joined the dots fully.
It’s a similar pattern to the five stages of grief, first identified by Swiss American psychiatrist Elisabeth Kübler-Ross in 1969.
Some business owners go through a very similar journey when deciding what to do about a company that has no realistic path to profitability anymore.
Easily the most common phase as all the warning signs including mounting debts, VAT and bounce back loan arrears are ignored or written off as temporary setbacks or problems that can easily be solved if they have a couple of good trading months.
Sadly by the time directors understand the depth of the problems they’re facing, it’s too late to build an alternative strategy and they really only have liquidation left as a viable option.
Another common reaction to problems is to react aggressively to them.
Work harder, work longer and if that doesn’t immediately transform fortunes when you’re physically and mentally tired, reflect on how It’s just not fair.
It’s not fair that they’ve worked so hard and things haven’t gone to plan. It’s not fair that the pandemic hadn’t happened when it did, or lockdown came along, or several other things that stopped the business from succeeding again – if only they hadn’t happened.
From a business perspective, this is the phase when some of the most serious mistakes a director could make occur.
Not deliberately but because they see the solution to their company’s problems through a binary “yes/no” lens. They become more prone to think that if they can just get one loan or arrange more financing or stock, no matter how steep the terms or if they can repay at all, then everything else will fall into place and will automatically lead to a good outcome.
Offering personal guarantees for loans when they might not be able to afford it under normal circumstances is a good example of bargaining under the influence of professional grief.
Sometimes not choosing to act is a choice in itself but if you’re facing the demise of the business you’ve poured your heart and soul into, then it can easily lead to sadness and depression that will stop you thinking and acting logically and rationally.
What’s worse is that this is the time when directors need a clear focus and determination to make the right decisions under the stress of a financially struggling business – but this can be undone if they begin to lose hope and give up while there is still a chance to positively affect the outcome.
The final stage of grief is when everything makes sense and the griever understands the process, their role in it and what is expected of them.
The tragedy for a lot of businesses is that by the time owners and directors reach this stage and are mentally and emotionally able to make the decisions required to rescue or revive their company’s fortunes, it’s too late to affect the outcome.
But what directors and owners of those businesses wouldn’t give to have a genuine chance of being able to survive and could return to making money if they can keep trading for a little while longer?
For some this is the reality and what is the best course of action for these businesses?
A company voluntary arrangement (CVA) might be the perfect solution to both satisfy creditors and give the business a recognised path back to profit.
Like liquidation, a CVA is a formal insolvency process that has to be overseen by a licensed insolvency professional but instead of closing a company down, it provides a way forward for a business to continue trading and pay off debts while it does so.
The second part of this is critical as creditors have to agree to a business undergoing the process and will usually also have to agree to write off a proportion of any accrued debt in order to give the company a better chance of being viable and getting any kind of repayment.
In return for this generosity, creditors will receive regular payments to repay the remaining debt over a period of months, usually five years.
The business will continue to trade during this time, jobs will be saved and creditors will get back some of their funds whereas in a liquidation the probability would be they wouldn’t receive anything close to this amount – if any.
Another advantage of a CVA is that it immediately halts all creditor activity such as winding up petitions and bailiff visits while the process proceeds.
Chris Horner, insolvency director with BusinessRescueExpert.co.uk said: “If a company’s debts and circumstances are too difficult to overcome then liquidation is nearly always the proper way forward.
“But if directors take advice early enough in the process and there is a clear and compelling case for the business to be successful if some circumstances are changed or debt removed, then a CVA might literally be a viable alternative.
“A CVA doesn’t guarantee a positive outcome – the directors still have to do their jobs well and the business still has to make a profit, function properly and make regular repayments to creditors. If any of these don’t happen then the company might still be closed down and liquidated.
“Every company and circumstances are different and their owners and directors will have a lot of questions about the CVA process.
“But we can answer the most important one right now – does a CVA give a business hope and a fighting chance? Yes it does.”
An important part, possibly the most important part of the grieving process is time.
It’s also the one in most short supply as small problems turn into big ones in the blink of an eye. It’s the same with businesses.
Issues that can be solved and managed if tackled at the right time can become insurmountable, drastically reducing the options available to a business owner to make the necessary decisions to rescue or restructure their business.
With the end of September already in sight, the window of opportunity to act to protect a company before creditors can take action is getting smaller every day.
Don’t waste the time that’s still available to you – get in touch with one of our advisors today to arrange a free initial consultation.
Once we get a clear picture of your circumstances, we can recommend various causes of action you can take that can really make a difference but only if you act on them soon.
Otherwise time might just be the first thing to get away from you.