I am often asked what the main cause of the company failures I see is. Put very simplistically it is due to more money being spent than is made. In the case of a Formula One team the potential income is substantial, however so is the potential expenditure. Looking at other teams it is clear to see the millions that can be made, however millions can also be lost. To be able to compete at the highest level significant investment must be made from the outset and throughout, the rewards from this can be huge, but then again so are the risks.
Without the correct level of investment, it is not possible to get the most up to date technology and equipment. As a consequence the team is unable to compete with those that do have this investment. Being unable to compete leads to a drop in income as sponsorship and prize monies reduce. As a result there is lower investment and the position worsens.
Although in this case this is specific to Formula One, the principle is the same for all companies. Without the appropriate investment a company cannot compete and keep up to date.
So what is the future for Manor Racing? Unless new investment can be found it appears that there may be the loss of over 200 jobs. If it is possible to get an investment this will need to be done quickly before the first race in March and the investment will need to be enough to not only get the company back up and running, but also to be able to trade into the future.
So how could administration be used to get that investment?
Administration gives the company protection against creditors taking action against the company and ring fences the debts that are outstanding. Administration does not have to mean that the company is going to be wound up. It may be that a third party wishes to purchase the shares of the company. Taking the company into a new group could be just what is needed in some cases. Alternatively the administrator will try to find a buyer for the business. By taking out the best parts of the business and moving it into a new structure, it could be returned to profitability. This could be a buy back from the existing shareholders or directors, or a third party.
Alternatively, existing investors may wish to invest in the current company, but just have concerns with doing so whilst there are significant debts. If an investment is simply going to be used to settle old debts it will not be helping the future of the company. With the debts frozen, an investor could invest through a Company Voluntary Arrangement (CVA) to exit the administration.
The administrator is able to propose a CVA. In this case it may be that the investment is to go into the company itself and not into a specific pot for the creditors. From the investment the company moves forward and is able to generate income, this income is then used to make regular payments to the CVA and this is how creditors are paid.
Although administration may seem like the end it may not be. Through proper investment and/or a buyer the business should be able to continue to trade. The key is having the right investment and ensuring that this investment is used to generate a return for all stakeholders.