Patisserie Valerie appoints KPMG administrators after collapse

25 January 2019

Following the emergence of a £20 million black hole in its accounts three months before, café chain Patisserie Valerie has collapsed into administration. The company struggled to return to stability, while scrambling to uncover the extent of its short-fall in cash flow, and has now brought KPMG on board to oversee the sale of its assets, jeopardising some 3,000 jobs across Britain.

In a statement to the London Stock Exchange in early January 2019, Patisserie Holdings announced that a fraudulent misstatement of its accounts – initially uncovered in October 2018 – involved thousands of false entries into the company's ledgers, and was far worse than initially feared. It also explained that the cash flow and profitability of the business had been overstated in the past, and was “materially below that announced in the trading update on 12 October 2018, which was based on limited work carried out over a 48-hour period."

As the situation seemingly continued to rapidly deteriorate, the Birmingham headquartered company brought in Big Four firm KPMG to explore “all options”, including falling into insolvency. Initially, however, KPMG was drafted in to advise the group on what routes it could take “to recover from the devastating effects of the fraud, and to preserve value for its stakeholders going forward.” Having apparently exhausted that avenue, the announcement has finally come that Patisserie Valerie has collapsed into administration, with KPMG already in place to oversee proceedings.

Patisserie Valerie appoints KPMG administrators after collapse

Parent company Patisserie Holdings said, "As a direct result of the significant fraud referred to in previous announcements, it has been unable to renew its bank facilities, and therefore regrettably the business does not have sufficient funding to meet its liabilities as they fall due."

The bakery chain told the press that discussions with its lenders HSBC and Barclays to extend a standstill agreement had failed to produce the required result. As a result, Patisserie Holdings was left with no option but to appoint KPMG as administrator, putting as many as 3,000 jobs at risk across the UK.

To that end, KPMG has already confirmed that while it will continue to trade from 121 out of 200 stores, 70 of the chain’s cafes and concessions are to be closed over the coming week, resulting in a "significant number" of redundancies. Meanwhile, Chair Luke Johnson has extended a £3 million interest-free loan to ensure January wages are paid to all staff in the on-going business.

Blair Nimmo, Head of Restructuring at KPMG and a joint administrator of Patisserie Holdings, said, "Our intention is to continue trading across the profitable stores, as collectively the brands have a strong presence on the high street and have proven very popular with consumers. At the same time, we will be seeking a buyer for the business and are hopeful of a good level of interest."


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8 tips for successfully buying or selling a distressed business

18 April 2019

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.