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The Problem with Valuing Assets

Getting the best value for assets is the key objective of an office holder in a formal insolvency process.

Where a business is insolvent it is unable to pay debts as they fall due and/or it has liabilities that exceed the total value of assets. As a result the desire to maximise the value of asset realisations is of paramount importance to creditors, shareholder and other stakeholders. An office holder will always strive to achieve the best possible value given the particular circumstances surrounding the assets in question.

A key objective for a purchaser (or investor) conversely is not to pay more for an asset than it is worth.

There are those that will no doubt argue that any price can be justified if there are purchasers willing to pay that price – but TMP argues there has to be some reasoning and rationale behind a sale price.

At TMP, Libby Aird-Brown was recently involved in an interesting case where, in physical numbers, there were a great many assets. Each asset was tiny in size. Individually, each asset was of negligible value, specific to certain geographical areas, cyclical in demand and dependent on another industry’s whims.

Recognising where difficultly and uncertainly lies (and understanding the reason for this) has to be an important part of the valuation process.

The complexities in this example made the process of valuation very difficult for the valuation agent. On the one hand, the assets could have significant value. On the other, they were an onerous liability with which the office holder would have to deal.

At the outset, consideration was given to Administration as a way to sell the business and assets. This could have potentially maximised the value for the assets, but the company was not in a position to fund trading. The bank had also withdrawn support. The period of time required to negotiate any deal that would increase the asset value sufficiently to justify Administration, would also increase the company liabilities significantly.

Liquidation was therefore considered the only available insolvency procedure and was appropriate in respect of the directors’ duties to the general body of creditors.

The outcome was good in that a reasonable amount was realised up-front for the assets from a willing buyer, together with anti-embarrassment clauses being agreed upon. The anti-embarrassment clauses meant that should the assets generate good returns for the purchaser, then the creditors of the insolvent company would benefit.

The reason this worked well was that a key premise of valuing those (or any) assets is that reasonable assumptions can be made, and the right value can be established from those reasonable estimates.

In this case the valuation agent was able to demonstrate reasonable assumptions given the peculiar nature of the assets. He could then demonstrate reasonable estimates given the potential future value of sales to a trading business. The buyer accepted it was not just a question of a number or what he wanted to pay for the assets, but that it was a question of the value those assets were likely to generate for his business.

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TMP Case Summary – London Teashop

Our client is a London based teashop/cafe which offers a wide range of speciality tea. They have three cafes selling homemade food, and these stores are supported by online sales of tea through their website.

Factors leading to business distress

- The company took on a lease to open its third cafe in expensive premises in the west end.

- This outlet did not meet the forecasted sales and the director started using the revenue from the original two successful stores to keep the new store going.

- This became a drain on cashflow and its poor performance was threatening the two other healthy stores and the employment of the ten staff who worked there.

- Having attempted to relaunch the third store three times, management came to the conclusion that the footfall and surrounding area would never be able to support the level of rent demanded for this site.

- In the absence of profitability in their shop, the director contacted TMP as the situation was not sustainable.

- The company was clearly insolvent on both a balance sheet and cashflow basis.

Issues

- The three outlets were run through one company, so the director didn’t have the option to liquidate the underperforming store only.

- The director wanted to continue with the original two stores as they remained profitable, without the other store, the core business was viable.

- Liquidating the company, the leases would terminate for all the stores, so there was uncertainty about whether a new lease would be given.

Outcome

- The company went into a Creditors Voluntary Liquidation (CVL), terminating the leases on all outlets.

- New agreements were negotiated for the two healthy stores so they could continue to use the existing locations.

- The assets of the company were valued by an independent third party for them to be purchased by the new company.

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Excellent Score for TMP

TMP prides itself in the standard and quality of its work and solutions. The display below supports our core ethos as a firm you can rely on and trust. This was echoed in the result which showed TMP scored excellent.

Following a recent survey of TMP’s clients and contacts, we are pleased to present a bubble chart of the words used to describe TMP and its services.

The questions related to level and delivery of service, communication skills, solutions found and our approach to the task.

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TMP Case Summary – Visual Search Technology Company

The company’s technology enabled the navigation and contextual display of similar product images in ‘visual’ categories.

Factors leading to business distress

- Initial seed finance was raised.

- a further full ‘A’ round of financing in was raised the following year. These funds were utilised tot built a solid and scalable platform for its technology.

- Two years later a fashion search destination site was launched, using a lead generation model for income.

- Whilst the site grew the business remained loss making and subsidised its overheads with the remaining equity finance.

- Consequently the company sought to raise a “B” round of financing that would fund the company to profitability.

- The management team talked and worked with a number of potential investors to secure growth capital. A number of term sheets were received from interested parties and enquiries made about acquisitions. However, the offers did not met with the approval of all the existing shareholders.

- nor had the existing shareholders been able to agree on an internal refinancing round.

- despite the best efforts of the management team, the directors were left with no other alternative but to place the company into Administration as it could not afford to pay its debts as they fell due.

Issues

- The directors took independent legal advice to protect their positions and to understand their fiduciary and other duties.

- As a result of recent redundancies from its downsizing, the company could not afford to pay these additional liabilities.

- As is common in buy-outs from Administration, the purchaser was reluctant to take on potentially large liabilities of former employees as a result of TUPE legislation.

- The company successfully entered into compromise agreements with four key former employees. These were concluded and settled prior to the company entering Administration.

Outcome

- The directors resolved to place the company into Administration – the business and assets were valued and sold to an independent third party in its sector.

- The offer received, together with further realisations from debtors, resulted in a significant return to creditors. All creditors were paid in full – 100% plus statutory interest. We have also made a modest distribution to the company’s shareholders, which is very unusual in insolvency.

- This is an infinitely better result for creditors as the alternative to place Pixsta in another insolvency procedure and sell the assets would have resulted in a significantly lower return to creditors.

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TMP Case Summary – Online Advertising Company

Our client developed the technology to allow online advertisers to win consumer engagement and conversion by delivering what consumers crave most in their interactions with brands. This gives advertisers the power to talk to their audiences as individuals rather than generic media targets. The company has a direct sales team in the UK covering Europe, another team focussing on the US, and it is currently signing partnerships to help grow the customer base more rapidly. These partnerships are producing profitable work and repeat business and there is the potential for new investment.

Factors leading to business distress

- The directors changed their target market so they could concentrate on acquiring campaign work.

- As a result the company had to make staff redundant and re-recruit almost 70% of the team due to the skill set requirements changing.

- The predicted forecasts for the company’s partnership with one search engine fell well short of the required revenue in the previous year.

- The combination of the change, and overinvestment in infrastructure against this opportunity, lead the company into its current cashflow difficulties.

Issues

- The company had a large trade creditor making up 65% of creditors by value – if a CVA was to be approved, that creditor would have to support the proposal.

- Negotiations had already been in place with the large creditor to agree repayment terms. The creditor demanded a specific repayment profile, without which it would have issued a winding up petition.

- Three of the existing investors were ready to invest a further £1.2m, but only if a formal deferment could be agreed with the company’s historic creditors.

Outcome

- TMP advised on the restructuring of the company and the directors decided to propose a Company Voluntary Arrangement (CVA) to its creditors.

- A two year CVA was approved with unsecured creditors expecting full repayment – a dividend of 100%.

- It was proposed to pay the largest creditor an amount equating to 25% of its debt, immediately on the approval of the CVA. Although this is unusual in a CVA, this payment was not being made to put the large creditor in better position than other creditors. It was made with a view to obtaining a successful approval of the voluntary arrangement, to secure further funding from existing investors, and thereby to maximise the interests of all creditors.

- Without this support, the CVA would not have been approved and the Company would have entered Administration or Liquidation. In either scenario unsecured creditors would have been unlikely to receive any return from the Company.

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Corporate Finance Client (NGS)

NGS, the client, originally approached TMP for funding to acquire a target business (PCB) that provided a specialist binding service.
The client required £500,000, in part to finance the deal and in part to re-finance existing borrowing and to boost its working capital.

Considerations

A major consideration was whether the business was fundable in its current position. It was already highly geared and its current invoice discounter (“ID”) was looking to reduce the facility or exit from the business entirely.

The challenge for TMP was to find a solution which:

• enabled the business to take advantage of the opportunity to add a specialist binding company to complement its own services

• whilst restructuring the existing business to enable it to continue to trade and be profitable going forward.

Issues

There were a number of stakeholders, all of whom had very different agendas and the challenge was to meet all of their needs whilst maximising creditors’ interests. We had to work together with 4 separate lawyers and 15 separate professionals to pull a deal together within a matter of weeks.

It was important to keep all parties informed of the progress and issues and to ensure that all parties worked together to ensure the final deal could be achieved.

Valuations of the business and assets had to be obtained quickly – we used specialist agents to do this.

It was imperative to ensure that a robust, but short, marketing of the business was undertaken to test the market.

The existing ID provider had to be replaced at short notice. This was done by a specialist lender who quickly assessed the position, performed due diligence and placed a £1.2million facility. This was done in less than 3 weeks from first contact.

Fixed assets were refinanced by the existing asset based lender, who was happy to support the merged business going forward.

Additional working capital was required so a part equity deal was brokered to enable funds to be made available by a specialist lender.
The existing directors and shareholder in PBC wished to retire – their exit from the business and corresponding package was imperative to the deal.

Outcome

A restructuring deal was put together such that the target company became the acquiring company. The mechanism was that the business and assets of NGS were purchased by PBC in a reverse takeover, pre-liquidation sale.

The new ID facility replaced the old facilities in both businesses and the ID provider now provides a facility for the combined business.
The asset based lender refinanced the assets in the target business, allowing vital cash to be released to effect the deal.

The shell company of NGS was recently liquidated.

The businesses were successfully combined and now operate from the original target company’s site under one roof.

All 54 employees of NGS retained their jobs and are currently working for the combined business PBC. This enabled a significant unemployment saving of over £500,000.

The deal used insolvency expertise to maximise creditors’ interests and meet all the stakeholders’ requirements.

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Saving a business needs quick, skilled teamwork by turnaround professionals

A recent article published in the Business Reporter with input from Libby Aird-Brown from TMP.

Firms are as good as their directors during a crisis. Unfortunately, directors often find it difficult to know what to do, which can result in attempts to save a business being too late.
Advice may be given by professionals who themselves lack experience or who do not have the company’s best interests at heart. Often lenders and finance providers, seeking recovery of their loans, will introduce advisers who are normally insolvency practitioners (IPs).

While IPs are experts in dealing with a balance sheet, their advice is often to begin insolvency proceedings and recover assets for creditors. Anyone introduced by a creditor will have conflicting interests and their approach can massively reduce value and hamper turnaround initiatives.

As David Bryan, of Bryan, Mansell & Tilley says, insolvency should be an “absolute last resort”. “Insolvency destroys value and is fee-intensive, whereas turnaround managers preserve more value for all stakeholders. Management should not feel diminished seeking their help.”

Tony Groom, of K2 Business Partners, adds: “Turnaround involves a consensual approach to achieving a viable and sustainable business for the benefit of all stakeholders, including employees and suppliers. Banks and creditors will also be better off.

“Turnaround is a complicated process, going beyond financial restructuring. It always involves operational change and may need a rethink of strategy.”

Justin Stephenson, of Jeffrey Green Russell, says: “Owners and existing management often do not have the full set of skills needed in a turnaround situation. For example, they may be brilliant engineers or salesmen but lack financial back-office help. A turnaround professional will identify what is lacking, allow management to concentrate on what they are good at and supplement management with any skills that were previously lacking.”

Turnaround also involves encouraging proud bosses to accept change. Libby Aird-Brown, of The MacDonald Partnership, says: “Somebody described the decision [to make changes to the business] as a grieving process. A turnaround specialist has to act as family counsel, or shareholder counsel, or emotional counsel.”

But businesses are unsure who to contact in a crisis. Tyrone Courtman, of Cooper Parry, says: “Many business owners find it difficult to plan for the unthinkable, but actually taking expert advice to help them improve business performance sooner will pay enormous dividends. There is an incredible amount of support and experience that can be provided by turnaround professionals, if only we could convince business owners of the need to take it.”

David Hole, of Galen Partners, says: “We need to spread the word about the very benefits that turnaround can bring to the wider business and financial community, and by flushing out those with ulterior motives and sharp practice through professional regulation.”

Measures are being taken to elevate turnaround. The Turnaround Management Association has introduced the EACTP turnaround qualification. This is aimed at reassuring clients through accreditation, and distinguishing experienced turnaround professionals from other advisers and IP’s.

There are hundreds of thousands of businesses in financial difficulties that are rightly worried about the vested interests of advisers. Turnaround professionals are keen to reassure them that help is available.

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Who Lends Wins

With the changes in the economy over the last 5 years, traditional lenders such as banks have been more cautious with their lending criteria. This can put a strain on businesses – in a climate where short term loans and overdraft extensions are not necessarily available to use to ease cashflow.

Insolvencies have been at a surprisingly low level over this period. Is this because of low interest rates or could it be due to the variety of finance options in the market?

Over the last two years we have seen the rise in popularity of various “crowdfunding” platforms such as:

- Funding Circle
- Crowd Cube
- Crowdfunder
- Kickstarter
- Thin Cats

These funders allow the general public to invest in businesses that they ordinarily would never come across. Crowdfunding is offered to businesses for both unsecured investments and equity stakes. So, importantly, there do not have to be assets in the company against which the new investment can be secured (this has been an issue with traditional lending in recent years).

The first place directors tend to look for money is with asset based lenders – securing new finance on (typically) tangible assets such as property, equipment and vehicles, and, most commonly, on debtors and invoices. Invoice discounting and factoring has become a very competitive marketplace. Banks and second tier lenders also operate in this space. This is leading to different products such as single invoice factoring or, in one case, single invoice factoring by auction.

As with all these finance options, the devil is in the detail. Although the requirement for the money can be urgent, it is important to look at the total cost including fees, service charges, limits and termination fees.

Directors often secure finance on their own properties and sign personal guarantees, making them liable should anything go wrong.
This is not new – however, it may be easier for directors to sign up to a costly finance agreement rather than address the underlying issues the business is facing. If they are not making appropriate changes then the new finance could only be a short term solution. This is worth discussing with TMP.

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Banks write-off lowest amount of loans for over 6 years

Today financial capability charity Credit Action releases its Debt Statistics, giving an overview of the financial situation in the UK.

In the 12 months leading up to July 2013, UK Bank and Building Societies wrote-off £3.67 billion of loans to individuals; the lowest amount for over 6 years.

In Q2 of this year, they wrote-off £694 million, of which £371 million was credit card debt – amounting to a daily write-off £7.61m. The total write-offs have continued to follow a steady downward trend since 2012, but the Q2 fall is the most significant since mid-2011.

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TMP Case Summary – Online Digital Media Streaming Company

Our client, a start-up company, was a unique provider for online streaming of digital media content. Although the company was very young, it had converted some key blue chip accounts with potential for rapid growth.

Online streaming is a competitive and growing business as can be seen from companies such as Lovefilm and Netflix.

Factors leading to business distress

- Start-up development costs exceeding budgets
- Technical glitches with early beta tests
- Fragmented management team
- Changes needed to the original business model
- Pressure from key creditors, and
- Withdrawal of funding from majority funder due to the internal issues

Outcome

- TMP advised on a Pre-Packaged Administration sale of the business and assets
- A marketing exercise was carried out involving key competitors, creditors, directors, investors and the market at large
- An in-principle deal was agreed just as the company entered Administration
- The deal involved cash consideration, debt write-down and payment of the Administrator’s fees and expenses
- This meant a small distribution was possible to creditors who otherwise would have received no repayment
- Employees kept their jobs, overheads were streamlined, and an experienced management team was brought in to run the restructured business
- New funding was provided to get the restructured company through the next critical phase

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