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A practical guide to hibernating your business

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Since early March when the first few cases of COVID-19 were reported in the UK, I suspect there is not a business in the country that has not been affected by what followed.  Be it an immediate drop off in turnover, problems further up the supply chain or employees not able to perform their function, almost all businesses will need to do something if they are going to come out the other side in one piece. 

Many Directors’ instinct will be to quickly contract or ‘mothball’ the business; stopping all payments, locking up and leaving a ’back in June’ sign on the door.  My fear is that directors who don’t take a moment to think through some of the consequences may find themselves in more difficulties down the line.

With a little planning and thought however, directors can to put the company into a state more akin to hibernation. This more measured and planned approach will minimise the mess to be dealt with when the time is right to ‘come alive’ again.

This article is the Mercer & Hole’s practical guide for business owners looking to do exactly that, hibernate their business.

Have perspective

Everybody has been impacted in some way. It is imperative therefore that you stop to consider the world-view of those that you will be talking to over the next few weeks; being overly bullish with people who are grappling with their own problems might not get the outcome you’re hoping for.

Negotiate

There is little precedent as to what should normally occur in these circumstances. I see this as a good thing; it’s an opportunity to negotiate, be creative and find novel solutions. Consider the position of those you are negotiating with, be they employees or customers, and establish what are their needs and priorities. Where both negotiating parties want the same thing (to survive) there doesn’t need to be a winner and loser. Explore new terms, offer an incentive, can you make payment in kind? Is the something you can give at minimal immediate cost to your business but with high perceived value?  Landlords for example have their own expenditure to meet so may struggle to give you a rent-free period, but on balance they may prefer to give some sort of discount now and keep a good tenant, perhaps with a tweak to the lease in their favour.

Slowing liabilities

A director’s instinct may be to hang on to cash, but they shouldn’t overlook the opportunity to slow accruing liabilities. Plan now to avoid coming back to a mountain of bills that could choke the business.  Are there costs which can be paused entirely or reduced during this hibernation period: hire charges, subscriptions, retainers, security, IT, advertising or maintenance. Rather than not paying suppliers thereby delaying the problem and eroding goodwill you may have built up, have a conversation now.

Talk to your employees

For businesses where the wage bill is one of its largest expenses, managing the expectations of your workers will be critical.  This is a very delicate issue particularly as what is good for your business is not necessarily what is good for your employees; some may like the idea of being designated furlough, taking three months in the garden on 80% of their salary but you may need them, or some of them to keep going. Just because you have entered into a contract of employment doesn’t mean a solution cannot be found. A little legal advice may be necessary to formalise what is agreed.

For those employees staying on, can you agree to defer part of their wages in return for a bonus later in the year or another benefit? More holiday allowance or increased pension contribution? As I have said, there is little precedent for circumstances like these so be a creative as you need to be.

Government support

The government has announced a number of generous financial support measures ranging from emergency loans to business rates grants and job protections schemes. I won’t go into detail here but business owners should do some investigation as they may prove invaluable. A CBIL loan could be a lifeline for a well hibernated business, enabling it to continue to pay those liabilities that are still accruing as they become due.

Take advice

My final recommendation is to take advice. As corporate advisory professionals we have made business out of solving problems with the right tools. Any director who feels they are out of their depth trying to keep the business going while solving it’s financial problems should not hesitate to get professional help. This could be the difference between a right or wrong decision or a successful or unsuccessful negotiation.

It may be that one of the existing or newly announced Insolvency Act tools is the key you need to unlock the rescue of your business.

Our Corporate Restructuring and Insolvency Team, who are specialists in advising on response to a financial crisis. They will advise on and use existing tools and, when they are introduced, these new measures.

If you require advice on any of the issues raised in this article, please contact one of our Corporate Advisory partners.

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