Why Company Voluntary Arrangements need to be reviewed

23 May 2018 Consultancy.uk

High street retailers are facing growing pressure from changing consumer behaviour and the e-commerce boom, and as a result a growing number of retailers are falling into administration. Jeremy Smith, Managing Partner at procurement consultancy 4C Associates, shares his views about how Company Voluntary Arrangements (CVAs) have become the go to solution for a number of private equity firms in the retail sector and how this can unfairly affect suppliers. 

Many retailers are caught up in a perfect storm characterised by weak consumer spending, increased competition and the shift to online shopping. The latest figures from the British Retail Consortium and Springboard suggest that high street footfall is plummeting to levels below those seen during the peak of the recession in 2009. 

In this context, Company Voluntary Arrangements (CVAs) are hitting the headlines on a more frequent basis. The Times recently published an article reporting that of the 15 retailers who have either collapsed in 2018 or are considering their options, 7 used CVAs and the majority of the remainder were too far gone to try. If the turnaround is successful then the CVA has clearly been successful however in many circumstances the CVA has just prolonged the inevitable.

CVAs were designed to help businesses keep trading while balancing the need to repay creditors. However, they can and have been abused, typically to the detriment of suppliers. In some cases, private equity firms use CVAs as a means to restructure a business at the cost of someone else. 

Why Company Voluntary Arrangements need to be reviewed

“It’s like blackmail”

Back in March 2016, a supplier to BHS summed up the situation, when they told Drapers Online: “If we don’t support them, then they’ll go into administration. If we do then we’ll lose money. We have no option… it’s like blackmail.” Indeed. It is worth remembering what happened in the food industry back in 2013, when cost-pressure led to the introduction of horsemeat in the supply chain. It is easy to imagine parallels with the current situation, where a lack of security and trust combined with an obligation to slash costs, results in suppliers going out of business and being replaced with less scrupulous entities. 

The alternatives

CVAs should never be seen as a default option. There are many other methods and solutions, which can be applied to restructuring a business. Data analytics, for example, is a tried and tested means to reduce outgoings and impact the bottom line. 4C Associates has developed a suite of tools in this area that has delivered significant savings for businesses. Data is more readily available than ever before and accessing it is quick and cost effective. Insights can be used to collaborate with suppliers, or bring to attention areas where sales can be grown, costs can be sustainably reduced or margin enhanced through better pricing or promo decisions.

Time for change

The truth is that in many cases CVAs are used as a risk-free way to restructure a business, with little or no regard given to impacted suppliers. While not illegal, the option to implement a CVA can be viewed as a ‘get out jail free’ pass and a solution that encourages poor decision making. After all, if there is no risk, why bother investing time and energy in proper planning. For those retailers owned by private equity organisations concerned with ESG stakeholders must question whether there is a fit with social and corporate governance elements. The impacts of ignoring this could be reduced investments by LPs concerned by reputation, so looking at other options before considering CVAs is crucial.

The current situation is not sustainable and having suppliers bear the brunt of the risk for poorly executed business strategies, simply does not make sense. There are many ways to restructure businesses and these would be employed more frequently if the CVA option disappeared, or was only permitted in rare circumstances. The issue is not with the organisations using CVAs as a last resort, or the investors enabling it as an option, but more with the Government allowing them to be used without consequence. Hitting suppliers will only get you so far and will hurt the industry, as a whole, in the long-term. 

Related: Landlords could block KPMG's House of Fraser CVA.


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8 tips for successfully buying or selling a distressed business

18 April 2019 Consultancy.uk

Embarking on the sale of a business is one of the most challenging experiences a management team can undertake. Even serial dealmakers acknowledge that the transaction process can be gruelling, exposing management to a level of scrutiny and challenge through due diligence that can be distinctly uncomfortable.

So, to embark on a sale process when a business is in distress is twice as challenging. While management is urgently trying to keep the business afloat, they are simultaneously required to prepare it for scrutiny by potential acquirers. Tim Wainwright, an experienced Transactions Partner with Eight Advisory, says that this dual requirement means sellers of distressed businesses must focus on presenting their business in a way that supports buyers in identifying value, whilst simultaneously being open about the causes of distress. 

According to Wainwright, sellers of distressed businesses should focus on eight key aspects to ensure they are as well prepared as possible:

  • Cash: In a distressed situation cash truly is king. Accurate forecasting and day-by-day cash balances are often required to ensure any buyer is confident that scarce cash reserves are under proper control. 
  • Equity story and turnaround plan: Any buyer is going to want to understand the proposed turnaround strategy: how is the business going to enact its recovery and what value can be created that means the distressed business is worth saving? Clear presentation of this strategy is essential.
  • The business model: Clear demonstration of how the business model generates cash is required, with analysis that shows how financial performance will respond to key changes – whether these are positive improvements (e.g., increases in revenue) or emerging risks that further damage the business.  Demonstrating the business is resilient enough to cope with these changes can go a long way to assuring investors there is a viable future.
  • Management team: As outlined above, this is a challenging process. The management team are in it together and need to be consistent in presenting the turnaround. Above all, the team needs to be open about the underlying causes that resulted in the distressed situation arising.  A defensive management team who fail to acknowledge root causes of distress are unlikely to resolve the situation.

8 tips for successfully buying or selling a distressed business

  • Financing: More than in any traditional transaction, distressed businesses need to understand the impact on working capital. The distressed situation frequently results in costs rising as credit insurance becomes more difficult to obtain or as customers and suppliers reduce credit. Understanding how these unwind will be important to the potential investors.
  • Employees: Any restructuring programme can be difficult for employees. Maintaining open communications and respecting the need for consultation is the basic requirement. In successful turnarounds, employees are often deeply engaged in designing and developing solutions. Demonstrating a supportive, flexible employee base can often support the sale process.
  • Structuring: Understanding how to structure the business for the proposed acquisition can add significant value. Where possible, asset sales may be preferred, enabling buyers to move forward with limited liabilities. However, impacts on customers, employees and other stakeholders need to be considered.
  • Off balance sheet assets: In the course of selling a distressed business, additional attention is often given to communicating the value of items that may not be fully valued in the financial statements. Brands, intellectual property and historic tax losses are all examples of items that may be of significant value to a purchaser. Highlighting these aspects can make an acquisition more appealing.

“These eight focus areas can help to sell a distressed business and are important in reaching a successful outcome, but it should be noted that it will remain a challenging process,” Wainwright explains. 

With recent studies indicating that the valuation of distressed business is trending north. With increased appetite from buyers who are accustomed to taking on these situations, it is likely that more distressed deals will be seen in the coming months. “Preparing management teams as best as possible for delivering these will be key to ensuring these businesses can pass on to new owners who can hopefully drive the restructuring required to see these succeed,” Wainwright added.