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

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.

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.

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.