While internal run off is an option, another is the independently managed run off, which has many merits when compared to a discounted trade sale.
As a benchmark, it now seems to be generally recognised that PI claimant WIP can be traded in the open market for 40% of the total value where a selling firm is solvent and trading on a going concern basis.
This means that WIP valued at £250,000 can be sold for £100,000, with the buyer inheriting the £150,000 difference that’s been written off by the selling firm. Leaving aside whether such a write off could potentially destabilise what was otherwise a solvent balance sheet, it means the cost of capital is 150% even if it does generate £100,000 on day one.
Yet, that doesn’t take into account the cost of due diligence, which may or may not be incurred by the buyer. It certainly doesn’t take into account the cost of being ‘investor ready’. Being prepared for a sale will almost always result in a better price if a sale is achieved and the cost has therefore not been factored in.
Using again an example of £250,000 WIP value, our experience of running off thousands of cases across multiple firms is that generally a mature book placed into run off will realise 40% in year one (£100,000), 30% in year two (£75,000), 20% in year three (£50,000) and 10% (£25,000) tailing for a considerable period thereafter. These times frames are based on our historic experience but those live projects we are running are realising value even quicker because the books are more mature and a reduced number of new matters were taken on prior to our appointment.
Where the requirement for cash is not the single driver it is difficult to see the merit of a fully discounted sale
As a run off will produce a monthly flow of cash, it can dovetail with the restructuring strategy, without a write off required. By placing the book into an independently monitored run off, principles of the client firm have the same ability to focus solely on the future, and as revenues build from the new strategy, the dependence on run off cashflow lessens.
Where there is a cash requirement on day one, before fully discounting, it may reap rewards to consider alternative finance or a partial discounting.
Most high street banks now have sector specific knowledge and do not want their customers writing off large swathes of the value on or off the balance sheet. Here at PI-Solutions, we enjoy good relationship with the banks operating in the legal sector. We may therefore be able to negotiate facilities to bridge the early stages of a run off or for the continuation of existing facilities until cashflow allows those to be reduced.
We can offer advanced capital release of up to 20% of the WIP of solvent firms, which are either making a conscious decision to exit the market, consolidating activities or in the final stages of internal run-off, in order to provide cash for exit costs such as professional indemnity insurance run off cover, termination of leases, legal fees, redundancies and so on. This is advance is then deducted from the cash that flows as the book runs off leaving the balance of the value to flow to the exiting party.