The process
Whilst it is difficult to generalise the process, since every business is different, there are certain steps that are usually implemented or considered. Some of these steps are shown below:
Cost reduction
The amount of cash available is usually limited and therefore the first consideration is to reduce the payments that need to be made during the trading period.
Unfortunately in many businesses a large proportion of the cost relates to employees and in an attempt to reduce costs it is often necessary for a number of employees to be made redundant. The decision may also be made to remove existing senior management since often they represent a significant cost to the business.
Other cost reduction initiatives may be put into place such as the return of equipment, company cars, etc. to the finance company.
Restructuring
If the objective is to rescue the entity through a restructuring process then this will be put into motion.
This may, for example, involve raising new finance or proposing a repayment agreement to creditors through a Company, Partnership or Individual Voluntary Arrangement.
Suppliers
Suppliers would be contacted to determine whether they will continue to supply the business and upon what terms. Vital suppliers will be contacted as a matter of priority and will be those who are needed immediately such as raw material suppliers and haulage firms.
A decision may have been made to use existing stock rather than purchase new materials and therefore this process may not be necessary.
Customers
Customers will be contacted to establish whether they wish to continue to buy goods or services from the business.
Often customers will be asked for payment up front for goods and sometimes it may be necessary to seek a price rise. There will also be changes to the other terms of trade for example there will normally be no guarantee with the product.
Sell the business
In parallel to the other processes, a number of parties will be contacted to establish a dialogue over whether they are interested in acquiring the business. Such parties include; customers, suppliers, competitors, management team, interested employees and the Insolvency Practitioner’s own contacts in the industry.
An advertisement may be placed in relevant publications such as the financial times or trade publications. Interested parties will usually be required to sign a confidentiality agreement and following receipt issued with a sales memorandum prepared by the Insolvency Practitioner or their staff.
The next stage is often site visits and usually several parties will visit the site to look around, discuss the situation with management and to review the commercial and financial position of the business.
A deadline for offers will have been set based usually upon the length of time funding is available to continue to trade. Any offers received will be confidential and will not be outlined to employees.
Whilst a sale is being pursued the practitioner responsible should consult with the representatives of the workforce. Such consultation will often be limited to providing information regarding the progress made.
Information gathering
Recovery processes require a significant amount of information to be gathered and certain staff, usually in the finance function will be provided with a list of information requirements. This information is usually required for;
Selling the business: Potential purchasers will require significant levels of information about the business in order to make a decision;
Reporting: reports to creditors are often required and information is required from the entity such as management accounts;
Investigations: It may be necessary for the person appointed to investigate the reasons for the business failing or whether there is any wrongdoing by the management team;
Creditors: Information to enable the practitioner to agree creditor claims, including HM Revenue and Customs (e.g. VAT returns completing, p35, p14s/p60s); and
Assets: The Practitioner will require information that will assist in establishing what assets the business has. This could include potential tax refunds, insurance claims, etc.
