With the news earlier this week that Scotland’s restrictions are being released in line with expectations, we are expecting that a number of clients will be entering into discussions with banks and lenders about their facilities and future requirements. In some circumstances, the lender may request that an Independent Business Review be carried out. Shona Campbell sets out all you need to know about Independent Business Reviews.
What is an independent business review?
It’s a review of the financial position of a business, normally initiated by a bank when they have concerns with a borrower. The bank will want to understand more about the financial position of the company and the risks. The output is a formal written report to the bank with recommendations. It is to help the bank assess its options. Most often it is a lender that requires it but other stakeholders may request them such as a key creditor, investor or public body. An Independent Business Review is often abbreviated to “IBR”.
It’s an accountancy based review, so normally it will be carried out by an accountancy firm. Usually, it’s a team led by an insolvency practitioner or turnaround/restructuring specialist from within that firm. The company will have to provide the information to review.
Lenders tend to have a panel of firms to do this work. Most lenders will offer the client a choice of two or three firms and fee quotes. Companies should review these carefully, of course, there will be a tendency to go with the cheapest, but check the proposed timescales and what the fee quote includes. Scope creep and increased fees can sometimes be an issue.
Some lenders will be happy to appoint another party if the client wishes. The party will need to have relevant experience.
The company will pay the costs of the IBR. For even small businesses it is likely to be several thousands.
What sort of concerns?
It could be a specific incident, or a general worsening of the position has triggered a red flag for the bank.
Often it’s a mix of reasons such as declining security cover for the bank, lack of confidence in management and consistent poor reporting. There may have been defaults, excesses or a request for additional funding. If you do not understand, then you should ask why. The bank should put any concerns that they have in writing.
As we move out of lockdown we think there will be many businesses where they will not be able to meet their ongoing debt payments in line with the current repayment profiles so they will need to renegotiate with the bank. We expect this to lead to more IBRs as we move out of lockdown. This is because many businesses are carrying a record level of debt that they need to restructure.
It’s worth remembering that any insolvencies after 1 December 2020, HMRC has a preferential status for VAT, PAYE, CIS, employee NI and student loan deductions. This means that HMRC will get a bigger share of the pot at the end of an insolvency than they would before. This additional share comes at the expense of floating charge holders. This means that businesses coming up for their annual renewal may find that the bank has changed their view – even if the business believes that the position has not worsened. Some businesses that are approaching renewals or currently seeking funding may find it more difficult and a lender might address this by requiring an IBR.
I do not want it, do I have to have it?
Often a business will think it is not necessary. You will have concerns that it will take up significant management time that could be spent better in other ways. You will also likely have concerns about the cost that is involved and that this will take time that may cost the business certain opportunities. It is a signal that the bank has serious concerns and you should take this seriously. Unless you have a fast exit from the lender already planned such as a re-bank or sale, resistance will only impact the relationship with the lender which may be under threat of lack of trust and credibility.
There may be some positives:
- Commentary, option or analysis in the report that you may find enlightening
- Businesses tend to find that the discussions with the restructuring professionals involved can be constructive
- Clarity will be provided around what the available options and risks are
- It can rebuild any credibility or trust if that has been lost
What is the process/what will it look at?
A typical process is as follows:
- Scope defined, timetable and engagement letters agreed (both the bank and the company will sign the engagement letter)
- Information request list (if the information is not available you will have to prepare it, you might need external assistance
- Review commences – pre-COVID this would often be on company premises, but much more likely to be remote now
- Draft report prepared for comment by the business. This will largely be restricted to factual accuracy, but it will give you an opportunity to comment on the report
- Final report presented to lender and findings discussed with you.
What will the review look at?
There is no set scope, but typically the IBR would cover the following:
- a review of the current financial position
- current balance sheet realisable asset values (known as an Estimated Outcome Statement or EOS)
- trading forecasts
- cashflow projections
- sensitivity analysis will be applied (e.g. what happens is a certain contract is delayed or if sales are lower than forecast)
- business plans
- market and competitor analysis
- organisation structure and management capability
In some instances, the bank may instruct a limited scope review which only looks at a specific area such as short term cash or options.
What is the Estimated Outcome Statement?
The IBR will usually include preparation of an “Estimated Outcome Statement” which is a review of the balance sheet. Realisable values will be applied to the assets, the costs of realisation estimated and all liabilities included. It is to provide the bank with the answer to the question “Is there a risk to the bank’s lending?”.
Preparation of the EOS could involve a detailed look at ageing and recoverability of the book debts. External valuations may be instructed for certain assets (such as properties). There will be more than one scenario worked through so that the bank can see the risk to the lending in each option. The bank may also want to understand what the worst-case scenario looks like.
Often the EOS is not shared with the company and only made available to the secured lender where the lender will not want to prejudice its position if the directors or shareholders of the business are likely to be involved in an option.
What happens once the review is complete?
The findings and recommendations in the report will be discussed and a course of action decided upon.
If the bank wishes to continue to support, there may be conditions such as additional security, a re-bank of certain facilities or the sale of a specific asset or division. If the bank continues to support then they may require ongoing monitoring of the situation meaning provision of additional management information and follow up reviews.
It may be that the bank offers short term support until the sale of business, additional equity investment or a full re-bank. We may reach a point in the future where post covid debt write-offs become a generally accepted option.
In the absence of any of these, the company may be looking at an insolvency scenario.
It can sometimes feel like the bank holds all the cards. It can be helpful for clients to discuss reports with another insolvency/restructuring professional to get another viewpoint and understand what can be negotiated.
Get in touch
Henderson Loggie’s Business Recovery & Insolvency team are happy to answer any questions you have on this topic.