Internal or external factors which put pressure on a business and/or mean that it isn't performing or operating as well as it should be
What is Distress?
Internal or external factors that mean the viability of some or all of the business is threatened
A failure to recognise and address stress in a business may lead to distress.
A failure to recognise and manage distress will more often than not result in either business failure or serious value dilution for key stakeholders.
Timely identification and management of stress and distress will usually save money, jobs and, ultimately, businesses.
We have set out in this guide some key signs of stress or distress to look out for. This note is intended as guidance only and should not be relied on as legal advice. Should you require advice in relation your own specific circumstances, please contact one of our team whose contact details are at the end of this guide.
Signs of Stress
Customer, Supplier and Creditor Relations
Margins on supply contracts becoming tighter
Supplier tightening payment/protection terms (such as retention of title (ROT))
Credit insurance is difficult to find, or it is becoming more difficult or expensive to increase cover
Key suppliers falling behind with deliveries, or decreases in quality of goods, will impact the performance of the business
Disputes with landlords, suppliers or creditors
Customers seeking greater visibility of financial performance before placing an order
Supply chain disruption creating pressure on funding and performance
Overreliance on individual projects, customers, suppliers or contracts
Unplanned-for increase in stock levels
Demand for goods and/or services slowing within the market generally
Signs of Distress
Loss of key supplier or customer Receiving letters of demand, court proceedings, unpaid
judgments, statutory demands and/or winding up petitions Suppliers put the business "on stop" Credit insurers withdraw cover Customers are demanding performance bonds Contracts are being placed elsewhere
Corporate Activity Management
Plans for acquisitions are delayed or shelved due to uncertainty
Disposals are taking longer than anticipated Rebranding or expansion into different sectors may
cause margins to be stretched too thinly Refinancing terms are more expensive than expected
Growth is still pursued, but there is recognition of the need to self-fund.
There is a difficulty in attracting new senior management
Financing has failed or is significantly delayed New borrowings are unavailable Disposals of parts of the business or assets are
contemplated to free up cash or eliminate losses
Sudden focus on cash and cost rather than growth Looking to borrow additional funds to plug cash flow
gaps Significant and quick changes in senior management
and/or at board level Loss of key employees Numerous or irresolvable disputes at board level
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Performance
Lender Attitude Communications Other Issues
Borrowing margins are becoming tighter and headroom in facilities is squeezed
HMRC debt is increasing Profitability, within the business or specific
departments, has fallen or has not grown in line with forecasts Top line growth, which was previously consistent, has plateaued A material increase in borrowing is forecast Emergence of a strong competitor Market conditions are worsening There are sector-specific challenges in the market the business operates in Exchange rate inflation Raw material and/or production cost inflation Inability to pass on increasing costs to customers Increasing overhead costs without a corresponding increase in revenue Business model challenged by technological advances
Borrowing facilities have been (or are expected to be) exceeded
Cash flow has become tight
Credit terms exceeded
Taking longer than usual to pay suppliers
Business is (or is expected to be) in breach of loan covenants
HMRC Time to Pay arrangements have been utilised
Revenue is falling, even though there is growth elsewhere within the market or sector
Earnings before interest, tax and amortisation (EBITA) is insufficient to fund interest, investment or financial commitments
There are acute supply chain problems, e.g. key supplier failure
Significant hikes in prices, e.g. raw materials or energy, that aren't hedged or otherwise budgeted for
Subsidiary company significantly underperforming or loss-making
Lenders are requiring a greater level of information Agreed lender forbearance due to end Existing lenders signal an unwillingness to increase
their exposure Lenders appoint specialists to oversee credit issues
alongside relationship bankers Higher interest payments
Profit warnings Accounting reference date is changed Management are downplaying growth expectations Customer/end-user complaints or disputes
Lenders are requesting the appointment of reporting accountants, or reporting accountants are appointed
Existing lenders are restricting the use or availability of funds, or refusing to advance further monies
Management of the company's accounts has been transferred to a specialist unit within the lender
Loans are being marketed to or have transferred to alternative capital providers
New borrowings are unavailable
Two or more profit warnings Delays to announcements in relation to results Delays in filing accounts Significant uptick in adverse social media reports
Staff shortages Lack of investment in new technologies Doubts over the efficacy of accounting policies
There is an accounting "black hole" Fraud There is a large pension deficit Creditor demands for payment
UK Restructuring & Insolvency Team
John Alderton Partner, Leeds M +44 788 505 8896 E [email protected]
Monika Lorenzo-Perez Partner, London M +44 778 572 0439 E [email protected]
Devinder Singh Partner, Birmingham M +44 772 139 9625 E [email protected]
Russ Hill Partner, Birmingham M +44 792 160 0409 E [email protected]
Charlotte Mller Partner, London M +44 788 180 4970 E [email protected]
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