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Taking the fear out of transactional options

Mike Jervis Partner, Restructuring and Insolvency, PwC United Kingdom

One of the more confident predictions we can make of the coming months is that there will be a rise in corporate transactions, as struggling businesses look for strategic options to support their long-term survival. This might mean a merger or acquisition, investment from private equity, the raising of capital or debt, restructuring, a planned exit or, in the worst case, a solvent or insolvent transaction.

It’s likely that any director reading that list would instinctively recoil. That’s a common issue with corporate transactions – they are invariably seen as the last resort when all else has failed, and that leads directors to only consider them when it’s almost too late. But this is definitely a situation where it pays to think ahead and consider all of your options carefully and dispassionately.

Businesses need to pay close attention to four areas in the coming months if they are to survive in exceptionally challenging conditions – cash and liquidity, operations, stakeholder management, and strategic mechanisms. Failure to plan ahead in just one of these four areas is likely to be catastrophic – as my colleague Steve Russell said, it only takes a blowout in one tyre to cause a car to crash.

In practice, though, pride can often get in the way of a serious discussion about transactional options. It’s tempting to hold on in the hope that something will turn up, conditions will improve, or light will appear at the end of the tunnel. The fact is that when a company is in distress, its directors have a legal and enforceable obligation to consider all available options.

The psychological aversion to transactions often has its roots in fear – fear that bringing in a third party means losing control of the business. But that’s not necessarily true. Many of the available options mean that a business that might otherwise have failed not only lives on, but lives on with the original management team still in charge.

So it pays to think ahead, and plan carefully. Here are my top five tips:

Consider your options early. In a normal world, a business will have had plenty of time to consider its options and try to get out of trouble. COVID-19 has created a brutal environment that has left precious little time for management to think. Revenue has been decimated, cash is running out and there’s little or no certainty about when it might end. Any decision to explore strategic mechanisms has to be made quickly.

New mechanisms introduced in the Corporate Insolvency and Governance Act 2020, which came into force in June, can give distressed companies valuable breathing space. For example, it introduced a new free standing moratorium for distressed but viable companies, which provides protection from creditor action while a turnaround plan is put in place.

Prepare the business for a transaction. Struggling businesses have a lot on their plate at the moment and are invariably deep in a cost-cutting exercise. But if a transaction is a serious option, it’s vital to spend whatever is needed to polish the business for the proverbial shop window. This might mean, for example, making sure that due diligence and financial information are robust and ready for potential buyers or investors, trimming costs in a division or business that will need to be sold, or renegotiating onerous contracts.

Choose the right transaction. Choosing the right path and partner for the company and its circumstances is critical. There are a wide range of options, including new alternatives introduced by the Corporate Insolvency and Governance Act – the court-supervised restructuring plan process, for example, provides a mechanism for directors, working with under the supervision of an insolvency practitioner, to deal with financial difficulties.

Broadly, the options fall into two categories:

  • Solvent transactions, including a traditional M&A, the raising of capital or debt, partial sale of a business or its assets, a solvent wind-down or voluntary liquidation.
  • Non-solvent transactions, including CVAs, partial insolvencies, prepackaged business sales, or special administration sales.

Get ready to transact. Once the decision is made, the effort is channelled into a successful transaction. This could involve support from restructuring experts like PwC, project management support, and/or coaching to make sure that directors are prepared. Management’s day job is to manage, not necessarily to sell – so if a transaction is on the horizon, it makes sense to make sure that management is ready and well prepared to answer questions from investors, lenders and other stakeholders.

A strategic mechanism can feel like the nuclear option but there are numerous examples of struggling businesses being saved by the right transaction. So keep calm, think ahead, and remember that we are here to help.

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Mike Jervis

Mike Jervis

Partner, Restructuring and Insolvency, PwC United Kingdom

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