The overall debt level of independent UK businesses has more than quadrupled in the past year, increasing from £0.5 billion to £2.2 billion. The trend is not news to anyone. Still, a new report from an industry panel released 20 July on behalf concludes 150,000 of these local businesses “face imminent collapse” because they’re under a “huge debt mountain” of unsustainable loans taken out during the pandemic.

The fourth in the series of Grimsey Review Papers, led by Bill Grimsey (former chief executive of Iceland and Wickes), noted that independent retail and independent hospitality businesses accounted for half of the debt for these struggling enterprises. Overall, the businesses “face five times the debt they had going into the pandemic.”

The report documents the catastrophic cost to local communities when these terminally overleveraged businesses fail and recommends a number of government measures to save them, including needed adjustments to the “Levelling Up” programme and deferral of interest and HMRC enforcement for another year.

Business valuers analysing these businesses may need to adjust their assumptions, procedures, and even methods. Even short-term cash-flow forecasts must be risk-adjusted when it’s uncertain whether those cash flows will exist in 30 or 60 days. The government response to this report is also uncertain, so analysts can’t tell whether a programmatic solution might save the day.

For valuers:

• Any analysis must include a judgment of the likelihood that the standard of value will be anything other than liquidation. As of this date, without clear mandates of support, it appears impossible that these businesses will survive (as one valuer said, “All of the relatives and mattresses have been exhausted and there’s still 5X leverage.”)
• It may be helpful to specifically document debt coverage capabilities under multiple scenarios.
• Lattice or even option modelling might help derive clearer support for whether a “cliff” event can be avoided.

The full report can be accessed here.