Neil Dingley of Moore Recovery in Stoke on Trent explains how an Independent Business Review can show the stability of a company as well as its financial viability.

What is an Independent Business Review?

As the name suggests, an Independent Business Review (IBR) is a review of a company carried out by an independent third party with no previous connection to the company. Typically, an IBR will be done at the request of a stakeholder in the business, such as a bank or other financial institution or investor.

There is no pre-determined format for an IBR, however reviews normally look at:

• a ‘snapshot’ of a company’s financial position at the date of the review
• the company’s future trading forecasts in the short to medium term, including cash flow projections and profit and loss forecasts
• the overall business model and financial strategies

An IBR will provide an assessment of the company’s management strengths and capabilities, as well as recommendations for the directors on any areas of weakness which need to be addressed.

Why get an Independent Business Review?

An IBR will provide a secured lender or bank and the directors of a company an indication of the stability of the company at a given point in time and an idea of its financial viability in the immediate future. It will highlight any areas of concern which need to be addressed in order to for the company to continue successfully. In simple terms, an IBR will give an indication to a bank or other secured lender as to how ‘safe’ its security is.

From the point of view of the directors, an IBR and its recommendations should be treated as part of their statutory and fiduciary duties to the company and as part of overall good governance and corporate responsibility.

Who carries out the Independent Business Review?

An IBR can be undertaken by an accountant who is not connected to the company. However, due to the nature of the review, IBRs are usually done by an Insolvency Practitioner (IP) or turnaround specialist. This is often the case if the IBR has been requested by the bank or other secured lender. The reviewer will base their review on the information provided by the company and its accountants.

What does an Independent Business Review look at?

An IBR will look at several areas:

1) It will contain an assessment of the company’s current financial position. This usually takes the form of a Statement of Affairs or Estimated Outcome Statement and is essentially a review of the current balance sheet, paying attention to the value of assets and the recoverability of book debts. For example, it will look at debtor days and creditor days, ie how quickly does the company collect in its debts from its customers and how quickly does it pay its own creditors.

A review of the current profit and loss account will reveal if there are any underlying profitability issues with, for example, specific service areas or product lines. In short it will seek to provide answers to the questions:

• How stable is the company at present and how secure is the Bank’s lending?
• How secure would the Bank’s lending be if the company were to enter administration or liquidation? 

It may be necessary to obtain an up to date valuation of any freehold or leasehold interests and any other assets of significant value.

2) It will then look at future profit and cash flow forecasts, stress testing the underlying assumptions and applying a level of sensitivity analysis.

3) An IBR will also often look at the broader picture, performing a SWOT analysis of the business, reviewing the corporate and management structure and assessing the business when compared to its competitors and the market place in general.

What happens after an Independent Business Review?

Once the IBR is completed, it will be written up as a formal report. If the IBR has been carried out at the request of the bank or other secured lender, the report and its recommendations will be discussed between the lender, the directors and the reviewer.

For the lender to continue its support, any recommendations should be implemented. If the lender has any serious concerns, it’s likely that the company will be monitored more closely than would otherwise be the case. This typically involves the provision of more regular and more detailed Management Information (MI) to the lender. 

From the directors’ perspective, if the IBR was undertaken at the request of the bank or other secured lender, it’s likely that a specific incident or other aspect of the company’s financial performance sparked the review in the first place. Therefore, the findings and recommendations of the IBR should be taken seriously.

About the author

Neil Dingley is an Insolvency Practitioner and Partner of Moore Recovery in Stoke on Trent and has a background in information technology and accountancy.

See also

What are the responsibilities and duties of a company director?

What you need to know about Corporate Insolvency and Governance Bill

Company profiles

Insolvency notices

Image: Getty Images

Publication date: 26 August 2020

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.