OBTAINING SUPPORT FOR A TURNAROUND

If your business gets into difficulty, there is an increasing amount of support and assistance available to you to help you turn your business around.

Government policy

Current UK government policy is to promote a culture of entrepreneurism. Entrepreneurism is seen as being key to the development of new businesses and to future wealth creation in an environment of rapid change and innovation. To this end insolvency legislation has been modified by the Enterprise Act so that rescues of businesses in difficulty are easier.

The banks

Banks’ approach to businesses in difficulty has become more sophisticated in recent years for a variety of reasons:

• They are keen to avoid bad publicity, having learnt their lesson from the amount of bad media coverage they received as a result of the volume of receivership appointments that were made during the recession of the early 1990s.
• They are now able to use the skills they acquired at that time when dealing with companies in difficulty.
• They are under pressure from the Bank of England to support businesses.
• Banks are in business too. Banks need live, ongoing customers because new ones are difficult to find and because it makes sense, wherever possible, to help preserve existing customers who are getting into difficulty. The banks have therefore set up specialist units, which are dedicated to getting customers in difficulty back into the ‘good’ books.

Insolvency practitioners

The insolvency profession (which has always been heavily involved in forms of turnaround work) is currently developing this area of its services, driven by the changes in the banks’ attitudes and approaches towards insolvency. Its trade association has recently rechristened itself the Association of Business Recovery Professionals and has supported the establishment of the Society of Turnaround Professionals.

The turnaround profession

The turnaround profession in the UK has traditionally been very much a cottage industry of specialist consultants, company doctors and interim managers. They are generally self-employed and often have a financial background. Unlike insolvency this is an unregulated area so there is presently no form of examined qualification or licensing.

In the UK, however, the Society of Turnaround Professionals acts to accredit members through a stringent process of professional referencing, case studies and interviews (see box below).

There is also an American qualification (Certified Turnaround Professional) which the Turnaround Management Association is looking to adapt into a UK qualification.

UNDERSTANDING YOUR OPTIONS

If your business is in difficulty, the options (usually in decreasing order of attractiveness) are as follows:

• Fix the business so it becomes a successful growing business (even if you do want to sell it – you will get more for it that way).
• Sell the business, generally to someone who can fix it, either by coming in to change what it does or how it does it or by absorbing it into something else. As a business in difficulty, you will get less for it (although you will generally achieve a better price if you sell it prior to a formal insolvency, than afterwards). In order to try to improve recoveries for creditors, where possible Insolvency Practitioners are now taking this approach further in attempting to arrange sales to complete in a short period prior to their appointment (‘accelerated corporate finance transactions’) or immediately upon appointment (a ‘pre-packaged insolvency’ or ‘pre-pack’).
• Shut the business down, disposing of the assets to settle the liabilities.

Here, the ‘fixing it’ option is referred to as turnaround.

It is important to realise that Insolvency Act 1986 procedures can be used not only for shutting a business down but also in attempts to rescue a business by way of turnaround or sale. The key Insolvency Act procedures are set out in Figure 1. You need to be aware, however, that the survival of a business through an insolvency procedure does not always mean achieving the survival of the company that originally ran the business.

Example

An administrative receiver is appointed to A Ltd. The insolvency practitioner (IP) might have the following options. To:

• Sell the business as a going concern.
• Sell the business to the company’s directors and/or shareholders so they can restart the business (a ‘phoenix’).

• Sell the business on the basis of a deal that has been negotiated and agreed in advance (a ‘pre-packaged receivership’). However, the IP will need to be confident such a deal will obtain the best possible commercial return.

In theory, once the administrative receiver has finished realising sufficient assets to repay his or her appointor and the preferential creditors (see Chapter 5), he or she will hand the remaining assets back into the control of the directors. However, in practice, A Ltd is unlikely to survive as the cash generated from the sale of the assets will be used to settle the company’s creditors, in strict order of their priority.

THE CONDITIONS NECESSARY FOR A SUCCESSFUL TURNAROUND

To achieve a successful turnaround, the following are usually required:

• Some form of viable business Some core business that has the potential for future growth and profitability and around which the business can be rebuilt.
• Time Turnarounds are not instantaneous and, if started too late, will either fail or will require protection through an insolvency procedure.
• Cash Turnarounds need money. Costs will often be incurred during the initial restructuring phase (e.g. redundancy costs) and to finance the future regrowth of the business. This money must be found either from within the business (‘bootstrapping’) or from outside.
• Vision A clear goal to which the business is to be directed, to provide both a target and motivation.
• Management Management must have not only the will to achieve the turnaround (it’s your plan and vision) but also the skills (functional and situational) to make it happen. Alternatively, management must have access to external resources who can provide these skills when required.
• Commitment You have to decide realistically whether you have the determination, energy and enthusiasm to fight to save your business; or are you too tired, exhausted and depressed to face what needs to be done?
• Stakeholder support Management cannot achieve a turnaround on their own – they need to take suppliers, customers, staff, bankers, shareholders and others with them.
• Confidence in the process The stakeholders need to understand how the management (who will be regarded as having got the stakeholders into this mess) are going to get them out of it. This must entail a structured approach to deal with the problem and, when appropriate, the hiring of expert assistance in which the stakeholders can have confidence.

THE PHASES OF A TURNAROUND

Turnarounds have three key phases: crisis management, stabilisation, and regrowth (see Figure 2). As the turnaround moves through these phases, the focus shifts from managing finance to marketing (see Figure 3).

THE TURNAROUND PROCESS

The key stages of any turnaround can be summarised as follows:

1. Recognising the need for a turnaround

The first and, in some ways, most important step towards solving a problem is realising you have one, how urgent it is, what is causing it and then facing up to it.

2. Surviving in the short term

To survive in the short term you must be able to weather any immediate cash crisis and take a strong grip on your business’s finances. You must be alert to what this crisis is telling you about your business’s performance and to the reasons for these problems, as well as to possible solutions.

3.Deciding what to do

This involves taking an objective look at what you want to do with your business, as well as at the industry you are in, markets, products, competitive strengths and weaknesses, etc. You then need to come up with a broad picture of the key issues and your proposed strategy and priorities, both long- and short-term.

This information then needs to be used to generate the detailed action plans that will set out who is going to do what, when and with what projected results. Often you will need to do diagnostic work in certain areas, examining your performance to obtain a better understanding of the causes of the under-performance and to identify a possible remedy. You need to prepare marketing plans and forecasts and you need to organise (or perhaps reorganise) your management team so as to achieve the planned milestones, budgets and objectives.

4.Doing it

You must obtain whatever essential support you need from your suppliers, customers, employees and the bank (the ‘stakeholders’) to ensure the plan can happen and that the required financial resources are in place.

Then manage, manage, manage:

• Manage the people: not only yourself and your team but also the stakeholders. Keep them involved and informed as the process unfolds and develops.
• Manage the process: identify and capture the value of every ‘quick win’ so that the plan shows positive results all the way through. Monitor progress and take steps to identify and deal with slippages. Also keep an eye on the plan. Circumstances will change over time and, if they do, your plan has to change. If it does, ensure you communicate this change and the reasons for it to the stakeholders.
• Manage the business: keep an eye on the finances and ensure that the process of change does not distract you from the need to continue to manage day-to-day business as well as, if not better than, before.
• Manage the turnaround risks: keep an eye on the risks you may be running whilst operating a business in difficulty, and ensure you cover yourself against potential problems (such as directors’ personal liability, under a wrongful trading action, for the company’s trading losses).

5. Keeping on succeeding

Once your business is heading back in the right direction, don’t stop there. Continue to use the skills and approaches you have applied to returning your business to being a success so it continues to prosper. Keep on using your business’s finances to assess performance and keep the strategy and business development plan under regular review.

HOW THIS BOOK IS STRUCTURED

Chapters 3–11 are structured around these key stages of the turnaround process (see Figure 4). The emphasis, however, is firmly on the first two stages because:

• an initial diagnosis of the causes of the difficulty is critical to setting out formal objectives, strategy and action plans; and because
• surviving the initial financial crisis is the critical period that determines whether the business will survive and is also the time when the absence of situational skills and experience is most acute.