VA is a process designed to help businesses address significant financial distress under the guidance of an appointed administrator. It can provide a quick resolution to your struggles, improve your chances of staying in business, and ease the mental strain. It also typically offers a better outcome for creditors than liquidation and can avoid legal action.
The VA process typically takes 25 – 30 days. It’s vital for businesses considering this path to understand both the immediate costs and the strategic value it can offer in the long term.
The cost of the Voluntary Administration will depend on:
- the size of the company
- the complexity of the financial hardship
- the number and type of creditors
- the work that needs to be performed.
This article aims to demystify the costs associated with VA and help business owners plan more effectively, emphasising how this investment can potentially secure their business’s future.
Components of VA Costs
Administrator Fees
Administrators charge fees for managing the VA process, which is critical for steering the business through its financial turmoil.
Factors Influencing Fees – These fees vary based on the business’s size and complexity, the nature of its assets and liabilities, and the duration of the VA process.
Fee Structures – Fees can be structured as fixed amounts, hourly rates, or a percentage of the assets, depending on the agreement with the administrator.
Legal Fees
Legal expertise is crucial in drafting the Deed of Company Arrangement (DOCA), negotiating with creditors, and handling related legal proceedings.
Cost Variation – Legal fees will vary based on the complexity of the business’s issues and the legal counsel chosen. High-quality legal advice can be a significant factor in the success of the VA.
Other Professional Fees
Other professionals, such as accountants or industry experts, may be necessary to provide specialised insights or audit services.
Reasons for Costs – These fees are investments in ensuring that all aspects of the VA are handled with precision, from financial assessments to operational restructuring.
Benefits of Voluntary Administration and Its Cost-Effectiveness
Voluntary Administration (VA) serves as a preventive measure against more severe financial outcomes that could irreparably harm a business and its stakeholders.
Preventing Liquidation
The most direct benefit of VA is avoiding liquidation. Liquidation often results in the cessation of business operations and the selling of assets at distressed prices, which can lead to significantly lower returns for creditors. Moreover, the stigma associated with liquidation can damage business relationships and the brand, making recovery or future business endeavours more challenging.
Impact on Creditors and Credit Ratings
By choosing VA, businesses can negotiate with creditors under structured terms, potentially allowing for partial repayments that might not be feasible in a liquidation scenario. This not only helps maintain better relationships with creditors but can also positively impact the business’s credit rating over the long term, as opposed to the more damaging effects of declaring bankruptcy or undergoing liquidation.
Preserving the Business
One of the primary advantages of VA is the ability to keep the business operational, which is vital for preserving the value of the business’s brand and market position. Keeping the doors open means maintaining customer relationships and revenue streams, which are often lost in liquidation.
Job Preservation
VA can also protect employment, which is beneficial not only for employees but for the overall economy. Maintaining employment helps preserve operational expertise and industry knowledge, which can be crucial for the business’s recovery phase.
Asset Protection
Unlike liquidation, where assets are sold off, VA allows for the strategic use of assets to generate income or be restructured for better efficiency. This proactive approach helps maintain asset value and can lead to better financial health post-administration.
Restructuring for Success
VA offers a structured environment to reassess and reorganise the business’s operations and financial obligations, setting the stage for sustainable growth and stability.
Debt Restructuring
VA often involves renegotiating debt terms with creditors, which can include reducing the debt burden, extending payment terms, or converting debt into equity. This restructuring can reduce immediate financial pressures and align debt obligations with realistic operational projections.
Operational Improvements
During VA, businesses have the opportunity to streamline operations, eliminate inefficiencies, and focus on core profitable areas. This might involve cutting non-essential departments, improving production processes, or adopting new technologies to reduce costs and enhance productivity.
Strategic Redirection
VA provides a chance to pivot business strategies to adapt to current market conditions. This might involve exploring new markets, diversifying product lines, or revising pricing strategies to meet consumer demand better and improve competitive positioning.
Funding the VA Process
- Asset Sales and Refinancing: Some businesses may fund VA by selling non-core assets or through refinancing arrangements.
- External Investors: Attracting investment can be a viable option for funding the VA process without depleting operational funds.
- Negotiations and Streamlining: Businesses can negotiate fee structures with administrators and lawyers or streamline processes to reduce costs and time involved.
Understanding The Cost And Value Of Voluntary Administration
The decision to enter Voluntary Administration should not be taken lightly. However, with the right planning and strategic use of VA, the long-term benefits can significantly outweigh these initial expenses. VA offers a lifeline to potentially restore and enhance a company’s value and operational stability, which is invaluable during times of distress.
While there are upfront costs and challenges involved, the potential to avoid more damaging outcomes, preserve the business’s core value, and strategically reposition for the future provides a compelling argument for considering VA as a viable option during financial distress. By focusing on these long-term advantages, business owners can make informed decisions that prioritise sustainable success over temporary relief.
For business owners facing daunting financial challenges, we encourage you to seek professional advice for a tailored estimate and strategic guidance.
Contact SALEA Advisory for expert support and to explore how Voluntary Administration could be the right step for your business’s future.
