Reviewed: 8th January 2019
If your retail business is struggling to make ends meet, never mind turn a profit, you are far from alone. Changes in consumer spending habits, crippling business rates, and an unpredictable economic and political landscape, have combined to create a ‘perfect storm’ for retail businesses in 2019 – a trading environment that’s going to be extremely difficult to navigate without succumbing to financial difficulty and even potential insolvency.
Recent figures show just how serious the situation is for UK retailers going into 2019 - a total of 1,123 retail stores were closed in the UK’s top 500 high streets in the first half of 2018 alone, a huge jump from the 222 which closed in the same period in 2017.
So what has caused such fragility in the retail sector?
So if you’re a struggling retailer, is there anything you can do to avoid insolvency and prevent ultimate business closure before the situation becomes unmanageable?
A number of formal solutions are available to insolvent retail businesses that could potentially pave a way out of a dire financial situation. You would need to seek the advice of a licensed insolvency practitioner for help in deciding on the best option, however, and also to administer the process.
Company Voluntary Arrangements (CVAs) have been heavily utilised by retail businesses in recent years, with household names including House of Fraser, Mothercare, and New Look, all turning to the insolvency procedure in order to stabilise their business during times of financial distress.
In its simplest terms, a CVA involves paying off a pre-determined proportion of business debts and once in place it freezes additional interest and charges. A single monthly repayment is made over a fixed timescale, typically 2-5 years, and any debt remaining at the end of the term is written off. They are particularly popular with retail stores as there is also the opportunity to exit unprofitable stores and renegotiate leases on others.
A CVA is not a panacea to struggling retail businesses. In order for the process to be successful, there must be a viable business at the heart of things. Recovering after entering a CVA is not a given, and many companies fail to make the operational and structural changes must be made to the business to stop the same mistakes that lead to the initial insolvency reoccurring. If areas of concerns are adequately addressed, then a CVA could give viable businesses the second chance they need to return to profitability.
CVAs have garnered a significant amount of bad press, particularly within the last year, as landlords have spoken out about what they feel is an unfair process resulting in rent reductions having to be given mid-way through a lease agreement. Rival retailers have also hit out at stores utilising this insolvency option, claiming the reduction in rent they often achieve is giving them an unfair advantage over neighbours who are tied into costly lease agreements.
However, you should not let this put you off opting for a CVA if you believe this to be a viable option for your retail business. Administered correctly, a CVA can give your business the opportunity to trade its way out of its current difficulties and pay existing liabilities using future profits as well as saving jobs in the process. With the time and financial breathing space with which to undertake a management and operational restructuring process, as well as ensuring your business model is relevant to current consumer preferences, effecting a successful turnaround is a real possibility.
Toys R Us, House of Fraser, and Maplin are just three retailers who have entered into administration recently. While one of these retailers is still trading, the other two aren’t; this is because administration comes in various guises, each with differing aims and objectives. There are two main types of administration which are commonly utilised by owners of struggling retail businesses:
Trading administration – An insolvency practitioner will be appointed who will take over control of the business and handle its affairs during this time. The store will continue to trade while in administration. During this time a buyer will often be sought although there is a typically short time scale of a few weeks with which to arrange a sale. Alternatively the appointed insolvency practitioner will facilitate an ordered wind down of the company, allowing for stock to be liquidated and a better outcome for creditors realised than if it had immediately been placed into liquidation.
Pre-pack administration – A buyer is sought before the company enters administration either to new or existing owners. An insolvency practitioner will not be appointed as administrator, but instead will be asked to act on the company’s behalf to market the business for sale. Once a buyer is found, the company will appoint administrators and the sale will complete almost immediately afterwards. As part of this process all employees will be transferred over to the new buyer. This can offer a suitable alternative to closure for struggling retail businesses so long as there is an interested buyer with the means to complete on a deal.
A pre-pack administration often represents a much better chance of a positive outcome, whereas a trading administration may be used as a pre-cursor to liquidation.
If you have decided to close your retail shop for good, this will be done through a procedure known as a Creditors’ Voluntary Liquidation (CVL). When you liquidate under these circumstances your business assets are sold at auction, and the proceeds used to repay creditors as far as possible.
A CVL must be done under the guidance of a licensed insolvency practitioner who will facilitate the entire process. As a retailer, they will also be able to help you if you have several stores all trading under one company. It may be that you only want to keep some locations open, while shutting down the less profitable ones.
The retail sector has been under huge strain in recent years, but with predictions of further insolvencies in the industry, it’s an issue that’s not going away. If you’re a business in financial difficulty, we can provide the retail insolvency support you need. Real Business Rescue are insolvency specialists and offer free same-day consultations at Over 70 UK Offices nationwide.