Tactical Approach to Raising Turnaround Finance

Given the above, it is important to have a very structured approach to raising turnaround finance.

Step #1 Establish what assets are available for asset based lending (ABL)
Step #2 Establish the possibility of raising equity
Step #3 Establish the immediate application of funds
Step #4 Establish the creditors compromise if required

The above approach is illustrated by the examples given below. Before doing so it is important to emphasise

Asset Based Lending Depends on Valuations

As discussed above, ABL is based on the premise that the advances will be based on the valuation of the assets in the event of a terminal insolvency.

Each ABL’s advance requirements are different and each deal will have its individual complexities so a formula approach is potentially flawed, but the table below is a useful starting point to understanding how an ABL financing can be structured.

Type of Asset Valuation Principles Percentage Advance
Debtors Recoverable debtors

Indisputable proof of delivery

Debtor is solvent and can pay debt

Exclusions include:

Greater than 90-120 days

Certain foreign jurisdictions

Credit note history

Contras with creditors ledger (payables)

Commercial Property Estimated restricted realisation price (ERRP) with 6 month sale period or open market value (OMV) 60-80%
Plant and Equipment ERRP 60-80%
Stock ERRP but subject to certain exclusions:

1. Criteria:

All stock is assessed in categories

· Finished goods

· Work in progress

· Raw materials

Each category will have different ERPP principles and advance rates

For example, WIP will rarely be fundable, and Raw Materials are only fundable after deducting potential Retention of Title claims.

2. The value of preferential creditors in the event of terminal insolvency may affect the advance (usually only employee claims)

3. Obsolesce and slow moving stock will be reflected in a lower ERRP valuation


The Importance of Valuers in Asset Based Lending

Independent valuers are crucially important for asset based lenders. The independent valuers establish the realisable value of the asset – this provides the basis of the advance.

There are 2 types of valuations that are predominantly used in turnaround finance. These are set out by the Royal Institute of Chartered Surveyors.

Valuation Method
Open Market Value


Rarely used in turnarounds due to risk.However, the OMV reflects the “open market value” of the realisation of assets assuming there is no pressure or urgency for the sale.
Estimated Restricted Realisation Price
The most common valuation method in turnarounds due to risk of failure.*ERRP reflects the forced sale value within a specified time period

Due to the fact that valuers are so important when raising finance in a turnaround it is (usually) a procedural prerequisite to get valuations. In doing so it is important to ensure that the independent valuer is either on the proposed lenders panel or is acceptable to the lender.

It is common to get valuations prior to contacting lenders to establish the shape and structure of the deal. This is demonstrated in the illustration below.

For clarity, valuers should only be used in the valuation of physical assets or property.

The ABL will assess the recoverable value of debtors themselves. However, valuers are occasionally used to value intangibles such as goodwill. It is submitted that chartered surveyors are not the most appropriate professionals to do this. Invariably the best people to provide business valuations are professional accountants or corporate finance houses who specialise in this area. In addition, very few (if any) asset based lenders will provide funds using goodwill as security.

Finally, to re-emphasise it is the (professionally and independently assessed) realisation valuation that is crucial. The accounting net book values have no relevance at all in asset based funding.

Addressing the fundamental lack of available risk capital that can be applied quickly in a financially distressed business

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