The Office for Budget Responsibility recently published its assessment of the likely impact of Covid-19 on the UK economy.
While a sharp downturn and contraction in GDP appears inevitable in the short term, an almost equally sharp “bounce-back” is forecast once businesses are able to get back to work at full tilt. Nonetheless, merely surviving this downturn, and its immediate aftermath, will prove a huge challenge for businesses across a wide range of sectors. Sam Martin, Senior Associate at Wiggin, explains that four key areas businesses should be focussing on in the short-term to ensure their durability include cash flow, raising finance, restructuring and, potentially, planning for a sale.
Ultimately, for a lot of businesses, survival may depend on cash flow and the ability to reduce operating costs in the medium term. Whilst steps in this direction may have already been taken, such as negotiating revised payments schedules with suppliers, businesses will come under increased pressure in the immediate lockdown aftermath as these temporary arrangements and deferments come to an end.
Those which have utilised the Coronavirus Job Retention Scheme (CJRS) to furlough employees, for example, will need to provide for returning employees from a financial and wellbeing perspective. Increased capacity for employees to work from home or on a rotational basis may be required and social distancing measures will need to be implemented for commuting to and from the workplace.
Movement within the workplace may also require a redesign of the environment. If it looks like redundancies will be a necessity, businesses must factor in a lead time of at least three to four weeks as this is not an easy or quick process.
Businesses should also look to reduce ongoing overheads as far as possible: termination provisions regarding non-essential services and supplies should be reviewed and existing assets should be repurposed or reused. Some businesses may want to look to divest themselves of any non-core assets (even if this means they are sold at a discount) while others could look to accelerate other cost saving measures they were otherwise considering.
When it comes to ongoing property rental, the obligation to pay does not stop even for commercial tenants, despite their current protection against eviction. Opening dialogue with landlords now with a view to revising or restructuring rental payments over the long term is likely to be beneficial. For businesses who are more easily able to adapt to remote working, the current climate may be an opportunity to reduce their physical footprint on a more permanent basis by downscaling their rental property or utilising shared work spaces.
The UK Government has also announced tax concessions to assist with cash flow issues; Companies House have confirmed that businesses due to submit annual accounts may apply for a three month deferral to the filing date and HMRC have stated that VAT payments due between 20 March 2020 and 30 June 2020 may be deferred by businesses up to 31 March 2021, to name a couple. SMEs with a research and development function should also consider whether they can access or increase R&D Tax Credit claims, which can result in cash payment back from HMRC.
In addition to reducing overheads, many businesses will nevertheless need to raise funds. For most SMEs the most viable source of funding is likely to be existing shareholders or lending via a recently introduced government scheme. When it comes to approaching institutional investors, managers must be careful to ensure they understand an investor’s existing rights – for example, arrangements between a business and an investor will often include “swamping rights” which typically allow the investor enhanced control rights where the business is in financial distress. In negotiating additional funding, managers need also to be mindful that any measures taken don’t prejudice other rights holders, make the business beholden to the investor or adversely impact management’s control rights on a longer-term basis. For example, investors may prefer to make funds available via convertible loan notes (convertible into equity on the occurrence of certain conditions) – such loans can carry unforeseen consequences if not carefully negotiated. As such, it is advisable managers seek professional advice when negotiating any new arrangements with investors.
Government schemes that managers can look to raise capital from include the recently announced Future Fund, due to launch this month. While full details on the eligibility criteria and application process have still yet to be published, the principle is that the UK Government will provide funding, in the form of convertible loan notes, of between £125,000 and £5,000,000 to eligible companies – likely to be unlisted UK companies with a substantive economic presence in the UK who have raised at least £250,000 in equity investment in the last five years and can attract the equivalent match funding from third-party private investors.
The UK Government has also introduced the Coronavirus Business Interruption Loan Scheme (CBILS) and the equivalent for large businesses (CLBILS) (whereby accredited commercial lenders can provide advances to businesses on terms of up to six years and of which 80% will be guaranteed by the government) and most recently “Bounce Back Loans” (BBL).
The latter are smaller loans which are 100% guaranteed by the government. In the case of BBL and loans under CBILS, the first 12 months of fees and interest will also be covered by the British Business Bank.
For some businesses, the financial stress caused by Covid-19 will require them to look at restructuring or planning for sale. Where managers are confident that the core of their business is sound, a solvent or insolvent restructuring could be an effective tool for rescue.
For example, a “Pre-pack” administration, where a company pre-arranges its sale to a pre-determined buyer – often existing owners or the management team – could be considered. On the other hand, for businesses considering exploring a sale to an external buyer, a lot of work can be done during the current climate to speed up the process down the line.
This includes home-side due diligence exercises, creating virtual data rooms, auditing intellectual property rights, regularising contractual arrangements, putting in place employee incentive schemes, and cleaning up the balance sheet.
While no-one knows how long the immediate Covid-19 crisis will last, it is certain that it will have long-term ramifications for lots of businesses. Those management teams who are proactive and adaptable will be best-placed to lead their businesses through to better times ahead and ensure their businesses comes out leaner and more productive for having survived.
