by Sandra Mundy
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7 March 2018Business Restructuring and Insolvency
by Sandra Mundy
In light of a £49m loss for Prezzo’s holding company, it is proposing a Company Voluntary Arrangement (CVA) with its creditors and as part of that plan it is to close 94 restaurants including all outlets branded as Chimichanga.
What is a CVA?
A CVA is a legally binding agreement between a company and its creditors which normally requires creditors to write off part of their debt.
On approval of the arrangement the creditors debts are ‘frozen’ and they only receive distributions periodically and at the end of the arrangement, typically 5 years, any remaining debt is written off.
The company continues trading under the control of the directors generating profits which are paid to the supervisor in order that the distributions to creditors can be made. In order for Prezzo to get its arrangement approved it will require at least 75% by value of its creditors who vote on the proposals to vote in favour.
Clearly there will be issues that need to addressed as part of the CVA to restore the profitability of Prezzo. In the early days this typically centres around cost savings although longer term significantly enhanced profitability usually comes from growing the top line rather than cost saving measures.
Whats’s next for Prezzo?
In this case it has been identified that 94 of the less profitable Prezzo outlets should close. The outlets could be less profitable for a variety of reasons such as low footfall, higher rentals, greater competition locally or poor management etc.
The recent increases in employment costs arising from a hike in the national minimum wage, auto enrolment and apprenticeship levies are likely to have hit employers such as Prezzo that operate in a low wage service industry much harder than most employers.
Consumer confidence and spending has also taken a dip which hits discretionary spending, such as a night out, particularly hard – how much cheaper is it to pick up a supermarket pizza and have this at home with friends?
In the last week we also saw the demise of high street giant Toys R Us a company that was facing similar issues of rising employment costs, poor retail outlet locations and consumers tightening their belts. It could be a rocky road ahead for Britain’s high street.
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