Subsidiary facing closure following a poor Ofsted inspection.
This resulted in the termination of certain contracts.
The impact on the Group could have been significantly adverse.
This was to limit the damage that the subsidiary closure would have on the rest of the Group and try and retain as much business as possible. There was also the potential impact of significant adverse local publicity as young people and school children would lose their place of learning in the middle of an academic term.
The following steps were taken:
- Worked with the Administrator to agree the timings of the process and the point at which the ‘Notice to Appoint Administrators’ needed to be filed to allow the subsidiary time to reorganise.
- Identify which sites needed to be transferred to new owners via a Pre-pack arrangement and which sites could be retained in a ‘new company’.
- A New subsidiary was formed to take on the trade, assets and staff that could be transferred. I worked with the Administrator to agree ‘Arms-length valuations’ via an Independent third party for the sites and plan the Pre-pack process.
- Novated key contracts to the new company by working closely with Local Government.
- Agreed additional funding from our lending bank to provide extra liquidity for the first few months of the new company’s trade. In the time available, this could only be done by Directors agreeing additional overdraft facilities which were re-financed later.
- The company started with 5 sites which were converted into ‘Alternative Schools’. A model and operating structure was quickly developed so that the Managing Director would easily understand what was expected to achieve operating break-even and ultimately profitability.
- The outcome was that the Administration was straight forward as 15 sites out of 17 remained in use. In addition 90 jobs were retained.
- Operating budgets and cashflow forecasts were put in place for each site in the ‘new company’ which established the parameters as to how the company should operate in regard to staffing and resources. The plan was to grow at two sites per year. Based on 3 year forecasts this level of growth was sustainable without putting pressure on the overall Group’s cashflow. As it is a Schools Business, a key consideration was to ensure that there was sufficient liquidity in the early summer to last until mid-September.
- As soon as the business stabilised and the Group management accounting result for the full financial year was known, I started the process of raising additional finance. A crowdfunded bond issue was organised. This replaced the bank debt and overdraft removing director’s guarantees and gave the company additional liquidity to continue The bond issue removed any audit issues in regard to the sign off of accounts as it proved a stable source of medium-term funding. The whole process took approximately 6 months.
The outcome was that by the end of year 2, the new subsidiary’s targets were met. Revenue had grown from £0.2m in the first quarter to over £2.1m and breakeven profitability had been achieved. By the end of the 4th year of trade, revenue had nearly doubled again, and it had become the largest subsidiary in the group, trading from more than 12 sites.
Part of the success of the subsidiary’s growth can be put down to the initial framework put in place by myself and the management team. As the FD, I was quick to see the potential and was able to limit the downside risks and grow the business when there were significant cash constraints and persuade the other Board Directors that this was a strategy worth pursuing. My expertise in arranging financing meant that the Group did not face the financial pressures that it otherwise would have faced.
EFM Expert: Oliver Barkes