A report from R3 shows nearly two thirds of SMEs

entering a CVA terminate early without

completing planned repayments. Given this

significant probability of failure, are creditors

right to assume that a CVA will bring the best

result, and how can they spot when it won’t?

The creditor’s interests are in setting up a deal

that gives maximum return as quickly as possible

whilst preserving the life of the business long

enough to complete the CVA repayments. This is

a balancing act, and judging it is something of an

art form. But it doesn’t need to be a leap of faith.

There are some tell-tale signs that will indicate a

plan that is more likely to succeed, that you can

look out for when you are assessing a CVA

proposal.

5 ways to improve your next CVA outcome

How do you react when a CVA proposal

lands on your desk? For many creditors,

the default assumption is that a CVA

will give a better outcome than

liquidation because it avoids expensive

insolvency costs. Company directors, on

the other hand, often see CVAs as a way

of delaying repayment and avoiding

liquidation, and commitment to a

rescue plan can be low.

GLOBAL COLLECTIONS SOLUTIONS

DELIVERED LOCALLY

Is the CVA realistic and sustainable? What are the total

commitments and how does it compare to previous

cash flow? Are the figures justified? Has sufficient time

been allowed for change to be implemented? Most

business plans are optimistic, so err on the side of

caution when assessing the plan.

Are the reasons for the business failure identified and

addressed? A failing business isn’t going to improve if it

continues doing the same things. As Einstein

reportedly said, insanity is doing the same things and

expecting a different result. There needs to be a clear

plan that addresses the underlying cause for business

failure.

Does the business have the necessary skills to make the

required changes? Often the previous director is not the

person to implement change as they are wedded to

their original ideas, particularly for owner-led

businesses. Is there a business turnaround specialist

involved? Is there anyone new who can drive change, or

a clear indication that the original directors fully

endorse the plan?

What is the level of uncertainty? If the business plan

hinges on landing one crucial deal, it carries a greater

risk than a business with a broader customer base. The

more assumptions and contingencies built into the

plan, the greater the chance of business failure.

Are the nominee’s fees realistic? Ultimately, their fees

come out of the same funds to pay creditors, so it is

important that they are providing a cost effective

service that is allowing cash to flow through to

creditors and that their skills are adding value to the

arrangement.

By giving the CVA proposal proper consideration, you can form an

opinion on the likelihood of a successful outcome. The next step is

to compare this to your next best alternative, usually the

anticipated dividend payment in the event of liquidation.

The CVA arrangement needs to endure long enough to repay

more than the value of a potential dividend payment, so assess the

CVA plan to decide whether it is robust enough to meet this

threshold. Remember that the costs of the CVA will be paid first if

the business falls short of the amount it needs to repay each

month. Liquidation should be your preferred option where the

CVA looks unlikely to reach this target.

GLOBAL COLLECTIONS SOLUTIONS

DELIVERED LOCALLY

Get in touch today to find out more about how Vantage Credit can

resolve all your credit management issues:

Call Lee McChrystal on 07593 955277

Email leemcchrystal@vantage-credit.com 

Visit us at www.vantage-credit.com.