Wednesday, June 3, 2009

7 ways to save a failing construction business

With contractors' finances being severely tested by the recession, Andrew Stoneman describes how to salvage parts of a business when it all goes wrong.

Contracting businesses are experiencing acute financial challenges as projects are delayed and developer clients struggle to realise the sales anticipated in development cashflows. This means contractors struggle to hold together teams given the long lead times involved in competing for new work and proceeding with it.

Add to this the difficulty and unpredictability of access to backstop support from the banks, and keeping in the black is a tricky proposition. But there are a number of sound principles that will help a business navigate a passage through the downturn.

1. Monitor cashflow closely - be realistic and act promptlyADVERTISEMENT

7 ways to save a failing construction business


As ever, the imperative is to identify problems brewing as early as possible. Plan responses and ensure that relevant professional support and advice is sought as required.

Businesses should be re-forecasting cashflow at least monthly and contrasting to actuals frequently. Sensitivities require to be applied based on risk assessments for major planned receipts and payments.

If required, bring in professionals in cashflow management, who can help with discussions with clients, subcontractors, suppliers and indeed your funders, and more broadly on delivering operational and financial non-insolvency turnaround support in times of challenge.

2. Collect the debts

A fundamental aspect of cash management is, of course, collection of sums due. Businesses face enormous challenges in ensuring that invoices are paid and that processes are in place to secure payment should the client default. So make sure your internal systems are adequate to ensure that if the client defaults there is sufficient evidence at hand to support your claim.

3. Tax arrears solutions

When the contract cashflow slows down, perhaps one of the first areas where the pressure will pop out is in terms of liabilities to HM Revenue & Customs. The implications of ignoring the issue of arrears, or worse be thought to be looking to take advantage of the Crown creditor, are serious and potentially life threatening to any business.

This is a very delicate area for any business and issues do require to be addressed promptly and professionally. Immediate action must be taken to prevent a difficult situation deteriorating into one where the directors risk losing control. The aim must be to negotiate a realistic and achievable time-to-pay arrangement, hence creating the breathing space to form a plan to address the more fundamental issues facing the business.

4. Strategic options and restructuring

If action is taken early enough, a businesses can avoid risking unplanned insolvency. Contracting is a highly fragmented sector and during this economic downturn many will find that they no longer have the contract base to successfully support their overhead. It may be necessary to identify potentially complementary businesses which together would be in a position to drive out synergies of sufficient scale to ride out the downturn.

5. 'Pre-packaged' administration

If radical surgery is required, it will be necessary to identify the viable parts of the business and mechanisms whereby these can be sustained. This could be through a 'pre-packaged' administration process, which can only be undertaken with the agreement of all contractual stakeholders. It involves selling profitable and cash-generative contracts to a new company, thus offering the opportunity to fulfill client obligations, recover value in contracts and establish a base for a new business going forward.

6. Company voluntary agreement

An alternative to a 'pre-packaged' administration could be a company voluntary arrangement. This can leave owners and management in control of the existing business, but provides for the freezing of sums due to unsecured creditors in return for an agreed and affordable future contributions from future profits, and offers the opportunity for removal of costs.

7. Liquidation

If all other options have been exhausted, liquidation must be considered. This will protect your trade creditors, the bank and possibly the business's owners, through exposure to associated personal guarantees. It will prevent a business from suffering greater losses than necessary and may also protect the directors from a charge of wrongful trading.

Andrew Stoneman is managing partner at Meizies Corporate Restructuring.