The global financial crises cannot be ignored. Here we highlight some of the consequences of that downturn on business.
Transactions
Generally, companies are more “cashflow” conscious and are preserving cash resources. However, cash rich companies have been taking advantage of the buyer’s market: acquisition terms tend to be more buyer friendly, distressed companies are being sold at bargain prices, and much less consideration is being paid up front with higher percentages being deferred over longer periods with linked in set-off rights in case of buyer warranty and other claims.
Debt is now much more difficult to acquire, fewer banks are lending and the banks are lending less with the loan to value against assets reduced to 70% or less. Borrowing costs are also higher, with covenants given in banking documentation being far more onerous. More security is also being requested. This has resulted in a decrease in high leveraged buyouts and an increase in raising equity: using shares instead of cash through rights issues and open offers to existing shareholders, placings, management buyouts or buy ins etc. In 2005 the average buyout was 1/3 equity to 2/3 debt and by 2008 this position had almost reversed.
Purchase/Supply Contracts
Many businesses who inadvisably agreed terms on a handshake are now asking for funds “up front” and are putting in place more onerous and specific terms of business to ensure they will be paid and liability exposure is minimised: for example, credit terms have become shorter and there has been a move towards bank/parent guaranteed letters of credit. Credit insurance has also boomed, notwithstanding the premiums for such insurance can be high.
Increased Litigation
Contract breaches have increased leading to litigation: every pound counts! Standards required are much higher as the competition is greater, with businesses competing more readily at lower cost.
Shareholders, no longer content on reaping the rewards of dividends, are also increasingly expecting more from fellow shareholders through unfair prejudice claims and from directors through claims for breaches of fiduciary/statutory duties.
Insolvency practitioners are also generally more alert to wrongful trading (trading when the company is technically insolvent) with increased insolvencies and business sales through “pre-packaged” administrations.