Troubleshooting

TROUBLESHOOTING BY PAT ABEL, CORPORATE FINANCE PARTNER AT HART SHAW Pat says ‘tired’ firms must consider all options post-lockdown before shutting down

POST LOCKDOWN STRATEGIES - ALTERNATIVES TO BUSINESS CLOSURE

While we are not yet fully out of lockdown, what is becoming increasingly apparent is there are a growing number of business owners that are ‘tired’ and therefore have decided to close their businesses rather than carry on as we emerge from it.

At Hart Shaw, we have already helped a number of business owners to restructure their businesses, as the furlough scheme changes start to have an impact. We provide the full spectrum of services you would expect from a large regional independent accountancy practice, including both corporate recovery and corporate finance.

So when we get owners approaching us saying they have decided to close their businesses down, the first thing we do is look at the scenario and see if there is a business that could be saved rather than being liquidated. Clearly, we could always go straight into the liquidation process, but that might not be the best or indeed right solution for the various stakeholders (creditors, employees, suppliers, customers, shareholders).

In a solvent liquidation – where the shareholders have decided to close the business and it has more assets than liabilities – they are obliged to pay off all creditors, including contingent liabilities such as redundancies payments, notice payments, leases etc.

In an insolvent situation – where the business has more liabilities than assets and/or cannot pay its debts as they fall due – then the government pays for the redundancy costs (within statutory limits) and the liquidator endeavours to sell off the business’s assets and uses those to pay off creditors in proportion to their liabilities. Such distributions to creditors are made after paying the liquidator’s fees and any secured creditors such as bank loans that are secured by debentures/mortgages.

As you can see from the two examples, where a business is solvent, it often make sense to try to find a buyer for the business rather than liquidate it, as the shareholders should realise more than if they had liquidated it. Redundancies and employment related payments can run into the hundreds of thousands, in some cases millions, of pounds. Therefore, selling the business has two key benefits – it protects the jobs for the employees, and it reduces the liabilities, meaning the shareholders receive more when liquidating any residual assets.

In some cases, we have helped organise a management buy-out, which means some of the staff, usually senior or middle management, buy the shares from the current shareholder(s) or we look for a trade buyer. Where the business has a property, we can organise a reconstruction so that the property can be extracted, and the trading business continues to operate the property on a lease. The existing shareholders retain the value of the property and therefore either continue to receive rent under a lease or sell the freehold to an investor and thus they receive the capital value.

Sometimes it makes sense to sell the business to management or a thirdparty buyer for a nominal amount, i.e. £1, especially where there are residual assets such as properties. This way, the shareholders benefit from not having to pay for the redundancies and the management and staff preserve their jobs – a win-win!

In these uncertain times, if you are the owner of a business and you feel you have no option but to close the business or that COVID-19 has knocked the final wind out of your sails and you want to get out, please ensure you speak to an adviser as soon as possible about your options.

There are more options than you may think. The beauty of the current furlough scheme is that you still have time to plan before it is too late.

Patrick Abel Corporate Finance Partner Hart Shaw LLP patrick.abel@hartshaw.co.uk

COMMERCIAL PROPERTY –THE PANDEMIC’S PEAKS AND TROUGHS

As a commercial landlord or tenant, there is no doubt that owning or renting commercial property at the moment is not easy. The commercial property market has been hit hard by the COVID-19 pandemic, but is now beginning to show some important green shoots of recovery. unLTD spoke to two local experts to get their take on the impact on the market after COVID-19

PHOTO: DAVID LEE PHOTOGRAPHY LTD

PAUL RUSSELL, PARTNER AT KEEBLES LLP Whether you’re a landlord, seller, tenant or a buyer in the commercial property sector – all have been affected.

Among the hardest hit have been the retail, hospitality and leisure sectors, where social distancing and mandatory closures have all but caused these sectors to grind to a halt. Some businesses in these sectors may not recover at all.

There are plenty of industries at the other end of the scale which have been less badly affected – some have even found this to be a more profitable time. Some of my clients in the services sectors (where working from home was the norm or was very easily possible) and in wholesale, distribution, material fabrication and some areas of manufacturing have continued to work almost as normal and, in a few cases, actually expand their operations.

As a commercial landlord or tenant, there is no doubt that owning or renting commercial property at the moment is not easy. Landlords have been temporarily prevented from terminating leases, but with the best will in the world, few may want to rush into doing so when the ability returns. This may be especially true of high street or office premises.

In theory, there is an opportunity for collaboration between parties – and we are starting to see that. Landlords are giving tenants a bit of space to come through this period. They are offering rent free periods, lower rents or rent review caps in exchange for a tenant either extending the length of their lease or waiving a break right.

There is some concern among tenants, however, that when landlords can start to recover possession of properties from their tenants due to defaults that they will aggressively do so. Landlords know that some tenants have had access to grant funding as a result of the Government’s coronavirus intervention schemes and in turn will be looking to get ‘their slice’. It all depends on the relationship between the parties, the type of property and the sector. People who have been

guarantors to tenants, or former tenants who have guaranteed new tenants’ obligations need to watch out as well – they are not off the hook. The concern is that landlords will start to pursue guarantors or former tenants for the actions of the current tenants. We advise those guarantors to keep their eyes peeled.

The impact of the pandemic has not necessarily been felt across the piste, and there is light at the end of the tunnel. Buying and selling property is difficult, given the uncertainty as to valuations, but the market is seeing activity.

It’s also important to note that other factors outside of the current crisis have not disappeared. Brexit, for one, hasn’t gone away and nor have longstanding issues around skills shortages and access to funding. They may be factors that conspire to take the wind out of a recovery.

ROB DARRINGTON, PARTNER AT COMMERCIAL PROPERTY PARTNERS The last few months have seen huge change for all. The pandemic has forced us all to realign, reconsider and re-plan. However, despite all the uncertainty, the ambiguity and the insecurity, change also brings with it opportunity.

Inevitably plans have been halted, and in some cases scrapped over the last few months, but when asked if the commercial property market will be in a good position ‘post’ COVID-19 the short answer would have to be yes.

When looking back over the last few months, both the industrial and distribution sectors have seen continued demand with many businesses moving their retail efforts to delivery and distribution, while manufacturers have continued to carry out essential work throughout the lockdown period.

The team at CPP has successfully secured deals on behalf of clients within these sectors, and indeed the effects of the pandemic might well work to strengthen some areas.

That isn’t to say every sector will see such a positive outcome. The retail and leisure industries have had a tough couple of months as their doors have had to shut. Overall, I think the leisure industry will ‘bounce-back’ as people start to feel more at ease entering public spaces. And although some businesses might not re-open, it is inevitable that we will see a new wave of entrepreneurs following the furlough period.

But change in the retail/ shopping sector has arguably been on the horizon for some time. The gulf between occupier’s lease requirements and institutional landlords lease expectations has been on the increase for years.

Historically, retail rents have been the highest across all sectors, when compared on a per sq ft basis, with occupiers also taking leases in excess of 20 years to secure prime pitches in city centres. Over recent years retailers have required greater flexibility in their leases.

Also, the change in customer demand (shifting towards online purchasing) has altered the nature of shops, seeing store income decrease. Some forwardthinking institutions have already adopted the retails approach to ‘Turnover Rents’ (where rent is based on a percentage of turnover), but the COVID-19 crisis will inevitably see this trend

accelerated. There will predictably be a period of hardship across this sector post pandemic and capital values will need to be rebalanced to reflect the new mechanism for market rent and lease terms.

When looking at office space, it is likely that this will take a complete reform. Over the last decade, this whole sector has worked towards making new space more efficient by maximising floor layouts to accommodate larger workforces without increasing floor space or compromising the working environment. This runs right through from architectural design, planning, construction and fit out of office space.

This now goes against what occupiers’ requirements will be for space, at least in the short term. Staff will not want to be sat within close proximity of work colleagues for long periods at a time, so it raises the need for companies to readdress what they use office space for.

Generally, most companies after ironing out initial technical hiccups have realised that the transition to remote working has actually been fairly straightforward, and once children return to school in September many employees will be able to be just as productive from home as in the office.

Therefore, many businesses are expected to adopt a more agile working policy, which will result in fewer people in the office at any one time. It is also expected that larger corporates may see their main offices become more of a ‘Hub’ for meeting spaces, workshops, project areas, training, etc, with many companies relying on interactive space to drive the business culture.

Those businesses at the smaller end of the market may therefore now look to reduce their office space ‘norm’ to save on overheads and to ensure they are in a stronger position for 2021. Although others may look to expand their office space to respond to social distancing.

At CPP we’ve already started to receive a number of enquiries for both possible outcomes, so it will be a case of waiting to see what the overall effects on supply and demand will be. And if this year has taught us anything so far it is the willingness people have to adapt and change to their surroundings, and I think this will be telling in all areas of the commercial property market.

A TECHNOLOGICAL SOLUTION TO HELP FIRMS COMBAT FLOODING With storms and the resulting flooding on the rise, unLTD caught up with Mark Barlow, MD of Sheffield-based IFM Insurance Brokers, for the lowdown on how new technology is enabling a ‘different type of cover to be introduced’

Storms Ciara and Dennis brought widespread flooding and damage across many parts of Yorkshire earlier in the year and we have witnessed another bout of flash flooding this June. Sadly, major flooding incidents across the county seem to be happening annually as climate change continues to bring more volatile and unpredictable weather conditions. What’s more, flood defences that have been installed across our region seem to do little to combat the devastating impact of flooding, or have just moved the problem downstream.

With the unpredictability of flooding and the damage it causes set to continue, businesses are rightly looking to insurers to help them get back on their feet as soon as possible. To put this in to perspective, insurer AVIVA, saw a 285 per cent surge in calls and claims as it helps to repair the damage caused by Storm Ciara, with areas such as Sheffield and Bradford badly affected.

Insurance challenge for business

For businesses across South Yorkshire the issue of flooding is extremely worrying as the government-backed Flood Re Scheme is not available. This means that small businesses in particular are increasingly struggling to get insurance when located in high flood risk areas. This can have severe consequences, as being unable to claim for a flood loss would put the sustainability and longevity of a business in jeopardy. Plus, it can create real difficulties in getting loans, managing cash flow, entering into contracts and acquiring and selling property.

So what are the options for small businesses? If a firm is struggling to obtain flood insurance, it’s always worth contacting IFM Insurance who can navigate the insurance market to see what options are available. Some insurers work on different flood risk maps to others and a different insurer may provide the cover a business needs.

A technological solution

New technology is now available which has enabled a different type of cover to be introduced. At IFM we have partnered with FloodFlash, which gives our clients an innovative, technology-led solution, enabling them to obtain flood insurance in highrisk areas.

FloodFlash gives firms fast and flexible cover by using the latest in data modelling and connected technology. It provides a fixed payment to a business as soon as sensors detect that the water level at their property has risen above a pre-agreed level and is available to anyone, irrespective of whether or not they have been declined flood cover previously.

Getting claims paid quickly has a huge impact on a flooded business. They can start recovering quicker and long-term property damage from factors like mould can

With the unpredictability of flooding and the damage it causes set to continue, businesses are rightly looking to insurers to help them get back on their feet as soon as possible.

be prevented. Fast payouts also have a massive impact on the emotional trauma caused by floods. By having FloodFlash installed, firms can have the financial security within days of being affected by a flood.

IFM Insurance Brokers www.ifminsurance.co.uk 0114 268 4606

MANAGING DIRECTOR, MARK BARLOW