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Bridging the Gap – Rescues in the Context of Partnership FailureBridging the Gap, Rescues in the Context of Partnership Failure

» Posted on: 23 October 2009
» Posted by: Andrew Livesey
» Service area: Business Support and Restructuring & Insolvency

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Whilst in the context of the current recession the headlines have been made by the big retailers and the manufacturing sector, evidence is emerging of a crisis amongst professional partnerships.

Already this year we have seen administrations and the consequent break-up of two commercial law practices in Fox Hays based in Leeds and Lees Lloyd Whitley based in the North West. The daily rumour mill is of significant and increasing pressure on a number of the regions “big” law firms with a shift to 4-day weeks, defections of key partners, and speculation on an increasing level of calls on equity partners to contribute to the funding gap.

A partnership, even an LLP partnership is a difficult vehicle for a substantial business with many organisations moving towards a hybrid quasi-corporate structure as a management tool. It is also true to say that many professional partnerships existed on a ‘special’ relationship with the banking industry whereby, arguably, the subjective view of the worth of the brand and its individual partners took precedence over the objective view of the underlying value of the business.

The current trend is for lenders to take a much more critical view as to the degree of their exposure both to the business unit and the individual partners against the quality of the assets, in particular levels of work in progress and recoverability of debts, as lenders look to reduce their exposure by balancing out debt funding against partner capital.

Professional firms are also difficult to fund outside of traditional bank cash flow lending. As the quality of assets can be difficult to assess because there are concentrations of sales and debt on single projects or a narrow range of clients, access to other financial markets such as asset based lending is almost non-existent. The withdrawal from the market place of a raft of secondary lenders providing professional practice finance for VAT and tax payments has exacerbated the credit squeeze.

The dynamics of this type of business are such that often any significant extension in the client payment profile, most obviously as a result of the liquidity squeeze on clients themselves, can have a dramatic if not devastating affect on the cash requirement.

The fundamentals of a turnaround solution are no different to a professional partnership than any other business. Critical to any solution will be the ability to focus the business on cash generative work and to match cost to productivity. Driving through efficiencies and implementing strategies to mitigate against risk of over exposure on fees or debt will be more critical than at any other time.

An appreciation of the working cash requirement, the likely pressure points on the business and a positive dialog with the lenders will all feature in the mix. The structure tools to ring fence the assets of the business through administration and voluntary arrangement are all available to some degree if it is necessary to put the business through a formal process in order to secure refinance and emerge on the other side.

The single most important issue is to recognise the problem before it becomes too acute and to be able to put forward a workable solution when called on to do so.

Taylors has substantial experience across many sectors in advising business including professional and other partnerships on turnaround and re-finance solutions.

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