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Avoiding insolvency in estate agency and the property business

publication date: Apr 5, 2009
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Hanging manThere are few sectors left unaffected by this recession, but the first and worst hit has undoubtedly been the property industry. But prudent management and decisive action can keep a business out of insolvency. And even if an insolvency process becomes unavoidable, it doesn’t always mean the end of the road.

For many managers and agents in property this is the most challenging trading period they have ever witnessed. The residential housing market is expected to remain subdued until 2010 and with businesses, particularly high street retailers, suffering as a result of the credit crunch, the commercial property market is providing no respite. So what sets apart those businesses that will ride out the storm and go on to achieve greater success when the market recovers? 

Firstly it is imperative that management teams be vigilant of the early warning signs of a business heading into trouble. In today’s climate, with funders being more cautious than ever before, these can quickly escalate if not addressed immediately. These could include: 

• Gaps in financial information and slipping budgetary controls 
• A significant drop in working capital 
• A lack of cost controls 
• Increasing overdraft 
• Deferred or delayed VAT and PAYE payments 
• Unhealthy dependence on a small number of key clients or suppliers 
• Poor staff retention 
• Loss of key clients 
• Disputes among directors and senior managers 
• Deteriorating relationship with funders 

At different times most businesses will experience one or other of these factors. But a combination of two or more over a sustained period is usually a signal that something is going wrong. When confronted with these challenges, executives can spread themselves too thinly – ‘fire fighting’ in a bid to resolve the company’s current predicament. This can result in unresolved issues escalating and cause the stakeholders of the business, including banks and other funders, to become uncertain about their position. 

CONTROLLING THE CASH

Difficult though it may be, managers must try and take a step back from the coal face. There are immediate actions that can be taken to alleviate some of the pressure. Firstly, cashflow controls need to be tightened and pressures on working capital reduced. This may require analysing the operations of the business closely, particularly if a period of quick expansion was pursued during a benign economy that has left an agency with unprofitable outlets or a landlord with a too broad portfolio. These are often tough decisions, but they must be made quickly to safeguard the business as a whole. 

Secondly, if an arrangement with a funder exists, be it a bank or an asset-based lender, it is far better to confront financial performance issues rather than wait until you are unable to pay them. It is also wise to solicit the expertise of a turnaround professional. This is often less daunting than approaching a funding partner for advice, and they will help to prepare a robust, professional business case with which to negotiate with a lender. 

Each business is different, but options could include negotiating a new funding package, installing an interim turnaround manager, providing managerial support to the company’s existing finance function, compiling financial documents on the company’s behalf or even rescheduling mounting VAT or PAYE payments. With a strong business case, it is possible to collaborate with HM Revenue & Customs to help troubled businesses restructure VAT and PAYE payments through a time-to-pay arrangement. By ring-fencing the VAT and PAYE arrears, it gives managers of otherwise viable businesses some breathing space. 

The aim of a turnaround strategy is to free management to concentrate on the bigger picture. However, in the unfortunate circumstances that the above techniques prove insufficient to save the business, the help of an Insolvency Practitioner (IP) must be enlisted and it is important that this help is sought sooner rather than later. 

BACK FROM THE BRINK 

There is a misconception that asking an IP for advice will automatically lead to the business being closed down. On the contrary, even if a formal insolvency process becomes necessary, it doesn’t always mean the end of the road for the company; a corporate recovery adviser is far more likely to be able to save a business if they are enlisted at the first signs of trouble. If an administration is required for instance, it is designed to give the business some breathing space. 

It allows the company to restructure and together with the IP, management can identify the best path forward. In some cases, it could be that it makes sense for the existing directors to buy the business out of administration. Provided robust due diligence is carried out, the market value for the company is achieved and the interests of all stakeholders are considered, this can often be the best outcome. It allows the business to continue trading, so satisfying creditors and maintaining continuity for clients and suppliers. 

Alternatively, administrators may be able to run the business as a going concern while a buyer is sought. Often this can result in a stronger entity moving forward, safeguarding jobs and being far better equipped to trade through a challenging economy. Rather than trying to ignore problems to the point where they escalate beyond management’s control, it is crucial that managers seek advice as early as possible. A corporate recovery adviser’s goal will be to save the business and rather than being viewed as the corporate undertaker, they are often a struggling company’s best chance of being saved.

Leonard Curtis is a corporate rescue and recovery practice, with six offices throughout the UK. The firm employs almost 100 staff with 12 qualified insolvency practitioners (IPs). Leonard Curtis recently won mid-sized Corporate Recovery Firm of the Year at the Insolvency and Rescue Awards 2008. Under the Leonard Curtis (LC) umbrella, the firm delivers formal IP services through LC Insolvency and Recovery Services, turnaround and VAT and PAYE re-structuring services through LC Corporate Strategies, free assistance to companies searching for a re-financing solution through the LC Factoring Advisory Service and practical assistance to directors and funders via LC Asset Protection and LC Collections.