As a globally connected industry, the automotive industry was one of the first sectors to suffer significant disruption as the COVID-19 pandemic took hold. The subsequent fallout has hit every part of the automotive industry from those involved in the design, development, and manufacturing of vehicles, through to the dealerships who sell the finished product to the public. For those working in vehicle manufacturing plants and car forecourts, as well as the numerous companies who form part of the interconnected supply chain, 2020 has presented challenges like never before.
Supply chains were interrupted as parts manufacturers in China were ordered to cease operations, limiting production capacity, and hindering exports. This disruption has continued as the virus spread around the world, forcing manufacturing in plants across Europe, and indeed the world, to be halted.
While factories have reopened, the need for enhanced PPE and increased social distancing to protect the safety of employees, has seen production slowed, resulting in output falling.
Away from manufacturing and supply chain issues, dealerships have also seen the demand for vehicles take a sharp decline as consumers re-assess their need for a vehicle, in particular their need for a new one. With the shift to working from home coupled with curtailed opportunities for travelling and socialising, many individuals have seen their car spend much of the year sitting on the driveway.
When this is coupled with general fears around a potential recession, or an otherwise protracted economic downturn, a perfect storm of dampened consumer confidence has resulted, something which could take some time to turn around.
If your automotive business is experiencing falling revenues and plummeting profits, you may be considering whether your company has a future. Whether you own a car dealership or a factory manufacturing vehicles or component parts, if you are experiencing significant financial distress, you may be considering placing your automotive company into liquidation
If your automotive company is already insolvent, liquidation would be achieved by placing the company into a direct-initiated insolvency process called a Creditors’ Voluntary Liquidation – or CVL. You will need to appoint a licensed insolvency practitioner who will then be able to take care of the whole process on your company’s behalf.
This will involve identifying any assets belonging to the company - which in the case of an automotive business may include vehicles, component parts, and machinery – before arranging for these to be valued and sold. Profits obtained through the sale of assets will then be split amongst the company’s outstanding creditors according to a designated hierarchy as set out in the Insolvency Act 1986. Any company debt which remains outstanding after this point will be written off when the company is liquidated, unless this borrowing has been secured with a personal guarantee.
Liquidating your automotive business will mean the end of your company. While this is not something which was likely to be part of your plans, in some instances, liquidation can be the best option available when a company becomes insolvent. Voluntarily placing your company into liquidation will allow for eligible staff to claim redundancy, as well as shielding the company’s existing creditors from experiencing further losses which could well be the outcome if you continue to trade and continue to see revenue decline.
As the director of an insolvent company you have a number of legal responsibilities, one of which is to not partake in any behaviour which could worsen the position of your creditors. By seeking the advice of an insolvency practitioner at the first signs of trouble, you are not only helping to protect your creditor’s interests, but you are also demonstrating a desire to adhere to your duties when you become aware your automotive business is insolvent.
When the effects of the COVID-19 pandemic began to be felt in the UK, the government introduced a series of measures aimed at stablising businesses across the country as the nation prepared to enter lockdown. As businesses across almost all sectors and of all sizes were negatively impacted by this level of business interruption, a variety of initiatives from government-backed loans, through to payment holidays, tax deferral schemes, as well as the ability to furlough staff, were made available.
If your automotive business was forced to close its doors during the lockdown period, or if operations had to be scaled down considerably, it is likely that you were able to utilize the Coronavirus Job Retention Scheme (CJRS), and furlough those employees for whom there was inadequate work for them to complete.
This scheme allowed automotive companies to save money on wages while trade was halted, although many businesses still had significant overheads which had to be met, eating into what may have already been stretched cash reserves.
In order to help bridge this gap in cash flow, automotive companies are able to obtain out a government-backed loan through either the Bounce Back Loan scheme or the Coronavirus Business Interruption Loan Scheme (CBILS). The most appropriate scheme to use will depend on a number of factors including the size of your company and the level of borrowing required. Both schemes offer loans on extremely favourable terms, including an interest-free period, security to the bank provided by the government rather than the company director/shareholder, as well as a commitment to help those who struggle to repay the loans in the future.
If your automotive company is looking to take out additional borrowing, and you are sure the business will be able to afford the repayments both now and also in the future, the CBILS and Bounce Back Loan Scheme are well worth consider, However, if your automotive business is already heavily indebted and you are already struggling to keep up with your monthly outgoings, adding further debt is unlikely to be an appropriate solution.
Before taking out any more borrowing, regardless of how appealing it may be in the current climate, you need to assess whether your automotive business has a viable future, and if not, whether piling on yet more debt is likely to change this. Unless you are confident that your automotive company has a good chance to return to profitability, obtaining a loan could simply just be delaying the inevitable and adding to the challenges you are already facing.
If you have considered the option of taking a government-backed loan, and are unsure as to whether this is appropriate for your company; or if you feel such a loan will not be enough to help your business, taking advice from a licensed insolvency practitioner should be a priority. They will be able to take an objective view of your company and help you understand your options whether you want to close, sell, or rescue your automotive business.
Anthony’s car dealership business had grown over the years from its initial site in a midsized city, through to a chain of seven locations throughout the North East of England.
COVID-19 saw sales drop dramatically over the Spring, and although Anthony did see sales slowly begin to recover over the summer, trade was still well below usual levels.
Despite the downturn in trade, Anthony remained confident that the company had a future, and therefore contacted Real Business Rescue in order to better understand his options for saving the business. After speaking to a licensed insolvency practitioner, it was decided that although the company was seeing revenue increase, its current liabilities were too high and needed to be cut.
All sites were operated from leased premises, the cost of which was a significant outlay for the company. A CVA was proposed to creditors, including the company’s landlords, in an effort to reduce the company’s unsustainable outgoings. Following negotiations with creditors and landlords, the CVA was eventually passed, resulting in the company’s ongoing costs being reduced to a more manageable level.
As part of the process two of the company’s less profitable sites were shut down in order to further reduce costs and allow time, money, and resources to be diverted to more fruitful areas of the business. Unfortunately, some members of staff did have to be made redundant, but a number of the longest-serving employees were able to be transferred to nearby locations.
If you have come to the decision that you do not wish to continue operating your automotive company, this does not necessarily mean that the business has to close.
Even in a challenging and uncertain climate, there are always investors looking for their next acquisition opportunity. This does not mean that every automotive business is saleable, but if yours is deemed a desirable prospect, the opportunity for brokering a sale could allow you to walk away from the company while the business continues to trade on.
If demand across the automotive sector is slow to pick up, a consolidation of the industry could occur, meaning more mergers and acquisitions take place as existing companies look to strengthen their portfolio and geographical coverage without the risks associated with launching in a new area or entering a new market from a standing start.
Being able to sell your automotive business will often come down to how desirable it is seen to an outsider. This could be due to the assets it has, its location, customer base, reputation within the area, or any number of other factors.
If you are considering selling your automotive business, your first step needs to be to ascertain whether it is going to be saleable. This is best done by enlisting the help of a corporate finance expert who will be able to assess your business and view it within the current marketplace. If selling the business is deemed to be a possibility, the next step is for a valuation to be arranged, before the business can be marketed to potential purchasers.
At Real Business Rescue we have a specialist corporate finance team can help explore this option with you and your fellow shareholders. Once, appointed we will be with you throughout the entire process offering comprehensive support from the initial valuation, through the due diligence process, right through the transaction completing.
We will utilise our own database of investors contacts in order to speed up the process of finding a proceedable buyer, while also ensuring you negotiate the best price possible for the business.
If, for any reason, we do not believe that your business is going to attract a buyer, you can continue to explore options for rescuing or closing the company with your insolvency practitioner.
If your automotive business was performing well prior to the pandemic, the current problems it is facing does not necessarily need to mean the end for your business. It may just mean that the company needs to undergo a process of restructuring – whether operational, financial, or a combination of both – in order to get it back on track.
Supply chain disruption may take a while to recover to pre-COVID stability, meaning those within the automotive industry need to have a solid, robust, yet flexible plan for the short- and medium-term. Manufacturing capacity may have to be streamlined to preserve both funds and resources, as well as a consideration as to whether your organization needs to exit unprofitable markets to preserve cash reserves during this time.
Our team of business turnaround experts will explore every possible option of saving your business, whether this is the entire company, or those elements of it which are deemed viable. Whereas voluntarily placing a company into liquidation is done through a CVL, when it comes to rescuing a financially distressed business, there are a whole host of options for achieving this.
If your automotive company has found itself operating on increasingly reduced income and you are at risk of defaulting on covenants, or other financial arrangements, we can help with liaising with the bank on your company’s behalf to find a way forward.
Entering into negotiations with your creditors may be the best way of stablising your company in the short term, while waiting for revenues to increase. This type of negotiation could be aimed at one creditor in particular – such as a bank, HMRC, or a supplier – or alternatively, you could propose a repayment plan with a number of creditors at one time.
This is done by way of a legally-binding repayment plan known as a Company Voluntary Arrangement (CVA). CVAs are a formal insolvency process and therefore they can only be entered into with the supervision of a licensed insolvency practitioner. A typical CVA will run over 3-5 years and allow for a financially distressed company to pay back its outstanding debts at a rate which is financially sustainable. Depending on what the company can afford to repay, some debt may wiped out during the process.
Your appointed insolvency practitioner will draw up a proposal which takes into account your company’s level of debt as well as its ability to repay, and will subsequently present this to creditors who must then vote on whether the proposal is acceptable. At least 75% (by value) of the company’s creditors must give their agreement to the proposed CVA in order for it to be implemented. Once agreed the CVA becomes legally binding on all parties.
The thing to remember about a CVA is that it works on the principle of using future income to repay current liabilities. Due to this, only those companies which can demonstrate long-term future viability to their creditors are likely to be able to successfully negotiate a CVA.
An accelerated version of this process known as a Fast-Track CVA, aims to achieve the same result for both company and creditors alike, but with less intervention needed by the insolvency practitioner. This not only speeds up the process, but also considerably cuts down the professional fees incurred over the duration.
For those automotive businesses which are experiencing growing creditor pressure, legal threats, or simply those that require more time for a workable solution to be devised, placing the company into administration may be the most appropriate solution. A company cannot remain in administration indefinitely, although the process does allow for additional time and space to consider all available options.
If your automotive business is general performing adequately, but it is in need of an injection of capital to top up its working cash reserves or to allow operations to be kicked back into action, our in-house commercial finance team are here to help.
We can help you access the government-backed loans schemes, as well as advising you which option is most suitable for your company, its size, and its immediate funding needs. We can also help you when it comes to refinancing existing company borrowing, something which can be a challenge at the best of times, but particularly in the current climate.
Some lenders have lessened their appetite for risk during this period of economic uncertainty, while others are focusing their attentions on those applying for the government-back loan schemes. If your business performance has recently fallen, it may be more challenging to demonstrate to lenders your ability to service your liabilities, particularly if your trading performance has fallen behind projected forecasts.
We can liaise with lenders on your behalf, ensuring your case for refinancing is presented in the most appealing light, while explaining the issues your business may have faced in the wake of the COVID-19 pandemic. Our team are also able to access external credit control support for your company if required.
If your automotive business is trading as a limited company, there is a good chance that you also classed an employee of the business as well as its director. This could be particularly important if your company becomes insolvent and you enter a formal liquidation process such as a CVL.
While your employees will be able to make a claim for redundancy upon the liquidation of the company, so will you. There are a number of criteria which you must meet in order to qualify for a redundancy payout, but if you have worked for your automotive company for a minimum of 16 hours per week for at least two years, as well as being paid a regular salary for this work through PAYE, it is highly likely that you will have a valid redundancy claim.
The amount you may be in line for will be calculated based on your length of service with the company, your age at the time of redundancy, and the salary you were paid through PAYE. You may also be entitled to other statutory entitlements such as unpaid wages, unpaid holiday, and notice pay, all of which could boost your final total considerably.
As part of the liquidation process, your appointed insolvency practitioner will be able to refer you to a fully regulated claims management firm who can help qualify your entitlement to claim.
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