Building can be a precarious game – with high-value contracts, sub-contractors to pay and an uncertain business landscape it is fair to say that more than a few building companies have come to a cropper after an unforeseen issue hits them.
If you find yourself in cash flow difficulties then it is possible that an insolvency practitioner may recommend that you look at a Creditors Voluntary Arrangement or CVA to get your business through the rough times.
What is a CVA?
A CVA is a formal agreement between the company and its creditors to pay off the liabilities due over a defined period of time. It gives the company breathing space during which it can continue to trade and work out its difficulties.
The CVA will be worked out by the Insolvency Professional and the directors of the company and will feature business plans and cash flow forecasts that allow the creditors to have some measure of comfort that they will get paid at least a percentage of what they are owed.
What are the downsides?
It would be foolish to think that a CVA is a completely pain-free method of managing debt.
The Insolvency Practitioner will be able to talk you through the issues for your particular building company but there are some general points you will need to be mindful of.
Firstly, many contracts and leases (such as the lease for your office or yard) will include a clause that negates the contract if you make any arrangement with creditors. In this case, you will need to carefully negotiate the situation or you may find your business no longer has a home!
Going into a CVA is likely to cause issues with current suppliers who are likely to be slightly annoyed at having to wait for their money however in the building game it’s true to say that most suppliers will have seen this many times before and will be well versed in what a CVA entails.
The uncertainty around any creditors arrangement will certainly be felt by staff who may not understand fully what a CVA means to them and the business so it is important that the owners explain to their staff what is happening and how it will affect them.
Are there any upsides?
If you find yourself in financial difficulty it can be a black time and with everything that goes on the CVA can seem like it is a wholly negative thing. It would be a mistake to think this because there are some significant upsides to a CVA for your building business.
The most speedily felt effect is that the phone stops ringing with angry creditors. Because their debt is now part of the CVA the debt collection process is null and void so calls and letters will cease.
With the ending of the debt collection process there begins to be more positivity around the company as there is less chance of suddenly being wound up by an aggressive creditor.
The business will also start to have some certainty around planning. Instead of constantly robbing Peter to pay Paul the company will have a single monthly or quarterly payment to make and because it has been planned meticulously it will be tough but manageable.
Through the entire process of the CVA, the directors of the business remain in control. Whilst they are being heavily advised by their chosen Insolvency Practitioner the ownership and management of the company stays with the original group. This is in direct contrast with other forms of debt action such as compulsory administration or liquidation where the directors lose control and are in the hands of a court-appointed person.
During the CVA process, the directors will have to produce a realistic business plan and cash flow forecast that can be used to convince the creditors that the company has a genuine chance of survival. This ends up being one of the key side benefits of a CVA.
For many businesses this will be the first time they have done this and the experience can prove life (or at least business) changing. For the first time, the company will go through a planning phase that shows where it is going and identifies the key drivers that will allow the company to be successful.
For other companies being forced to refresh their business plan and to have a second pair of eyes give input can prove to be incredibly useful
To sum up
It would be foolish to suggest that going through a CVA will not affect your building company in any way whatsoever.
In fact, the likelihood is that the CVA will have a profound effect but that isn’t necessarily a bad thing and the business could well exit the CVA in a much better state than it entered and with directors who have learned some valuable lessons from the process.
The key takeaway from this is that the directors need to get the advice of a licenced professional Insolvency Practitioner early on to give the business the best chance of survival.