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CVA Case Study West Midlands Software development company

15 November 2013

This company developed software for estate agents clients and was a spin out of a quoted (London Stock Exchange) company. It had a good management team but sales had not come through at the forecast level.

The Chief Executive was a very experienced industry man with two previous floats behind him. Together with a Birmingham based venture capital investor he had put in quite a large investment to keep the ship above the waterline for several months.

Eventually the board was unable to raise any more from the shareholders and was forced to call a board meeting to discuss the companys insolvent position. The VCs non-executive director knew KSA of old and called us from the meeting to ask for our MD to attend a meeting the next day.

Keith Steven and our former West Midlands director Gordon Boden, met the board next day in Birmingham and talked through the accounts, the cashflow crisis and the fact that the MD had been removed under a compromise agreement, but the company could not afford to pay the debt to her.

We were assured by a large sales spreadsheet that sales were bound to take off with v4 of the software and that two national chains were about to buy the product. Sales were c1m annually at that time, but break even analysis suggested £1.4m was the target and then once sales reached £2m it was a cash cow. In our experience software companies always show forecasts to be cash cows!

So our strategy was a HOLDING CVA until the company could prove its forecasts. KSA has developed the HOLDING CVA as a unique way of using the CVA flexibility to offer a deal. The creditors were invited to vote for a 5 year CVA with fixed contributions for one year and then within that year a second creditors meeting will be held to finalise the ongoing payment to creditors.

The director loved this idea as they were convinced that with only £500k of debt to unsecured creditors the company would pay off the CVA within 18 months!

CVA was duly approved despite the ex MD issuing 2 consecutive winding up petitions both of which we defeated. At that time we warned that we thought the sales director was weak, produced great spreadsheets abut did not deliver what eh was there forr - sales.

Some 4 months later we were informed that the company was short of cash and the shareholders raised some new capital from an outside source.

A little after that we heard from the supervisor that sales had failed to come through and had actually fallen from previous levels. The Inland Revenue were seeing new tax (PAYE) arrears and they petitioned the supervisor to wind the company up. So our innovative CVA worked very well but the company simply failed to deliver on sales despite further investment in marketing.

The lesson here was don't believe sales forecasts that promise fantastic cashflow when doing a CVA! We always work with directors to make their forecasts prudent and realistic, to help ensure that the CVA is achievable. We learned years ago that over forecasting sales and profits is a sure way to lead to CVA FAILURE.

I suppose another lesson we learned, over again on this case, was that we should have followed through more stridently on our warnings that the sales director was a weak link. We did not believe he was capable after the CVA was approved and told the CEO this. He chose to ignore us and the rest is history as they say.



Category: CVA

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