An estimated 3000 businesses will fail in October following the post-holiday period, according to Tenon Recovery, showing an increase of 43% on the same time last year.

The turnaround, restructuring and insolvency specialists have identified entrepreneurs allowing problems to escalate over the holiday period as the main reason for this post-summer surge in insolvencies.

Sectors most at risk are property development, retail, leisure, printing and manufacturing.

Carl Jackson, National Head of Tenon Recovery, said:

“Owners neglecting key issues combined with the difficult economic climate could send the number of business failures spiralling to unprecedented levels this autumn.

“Entrepreneurs who fail to deal with crucial business issues before they go on holiday could return to a nasty surprise.  Ignored, these issues can escalate posing a serious threat to the viability of that business.”

Tenon’s factor eight checklist addresses key issues that entrepreneurs are likely to face during the summer months and highlights actions that could be taken to minimise any threats to the business.

SME’s factor eight checklist:

1. Forecasting is vital
   Confirm that there will be no unexpected cashflow peaks that will not be covered by bank or ABL facilities during the holiday period.  Ensure that there is sufficient contingency headroom to avoid any significant problems.
2. Authorise key payments in advance
   Ensure that any key payments that will need to be made during the holiday period are authorised prior to departure to retain the goodwill of creditors.
3. Liaise with debtors to improve cashflow
   Improve cashflow by informing any large or key customers of planned holidays and negotiate early settlement of large invoices.
4. Speak to key stakeholders
   Make key stakeholders – creditors, bank managers, advisors – aware of any absence so that negotiations and decisions can be postponed.
5. Review continuity planning
   Ensure that appropriate staffing levels are in place and those in charge are empowered to run the business effectively for a protracted period in the event of unforeseen circumstances.
6. Consider recent events
   Review recent performance and business actions to assess whether a holiday (a) is realistic at the present time and will not have a negative impact on the business; (b) will not be considered inappropriate by employees, customers and suppliers in light of poor business performance
7. Check all contact details
   Provide emergency contact details to key staff; agree best times and means of communicating to keep in touch with any important issues that may need to be addressed.
8. Clear the diary
   Clear time before and after a holiday in order to address any potential problems and catch-up on business performance.

Carl Jackson added:

“The next few months may well define how long the downturn will last.  There are some 4.5 million SMEs in the UK, making up a significant proportion of the UK economy – a considerable increase in the number of small business insolvencies would be hugely detrimental and could prolong what has already been a very painful recession.

“By developing a pre-holiday checklist, we hope to impress on entrepreneurs the need to plan – a proactive approach is vital in this climate.  It could be the difference between survival and collapse.”

About Tenon Recovery
Tenon Recovery is the second largest corporate appointment taker in the UK.  Specialising in turnaround, recovery, restructuring and insolvency in both the corporate and personal sectors, Tenon Recovery is led by 43 directors supported by 350 staff operating from a network of 30 offices across the UK.  Tenon Recovery has strong relationships with secured lenders, both banks and asset-based lenders.  Tenon Debt Solutions assists over 3,000 individuals suffering from sever debt problems – see www.tenondebtsolutions.co.uk

And, if so, when?
Ask any seasoned Interim or Turnaround Manager why distress is painful:  simply put, there’s a huge amount to do, inadequate and/or insufficient resources and time available, and frequently people are focused on doing things that are not top priority.  Early challenges include:  getting a clear understanding of the situation;  managing customer and supplier expectations;  understanding how long things have been deteriorating;  discovering what has prompted action now;  and gently challenging assumptions in the brief!

Probe deeper and ask why things don’t always go smoothly once the agenda is set.  Even then, denial, prevarication or obstruction by or between the stakeholders can easily constrain the speed with which the turnaround can be started, let alone executed … … and that assumes that taking modest risks is not restricted by an urgent need to operate within tight banking covenants and closely-monitored headroom. 

This results in more pain
Given a situation with many of these factors, the number of issues compounds; and, unless they have had prior experience of a distressed situation, few stakeholders understand how rapidly deterioration can accelerate with the passage of time.

As a company’s fortunes begin to decline, so do performance drivers: typically morale worsens, staff and management turnover increases, customer service levels decrease, operational issues emerge, levels of profitability become unacceptable, cash becomes scarce and working capital requirements increase.  In severe cases, products may become uncompetitive or obsolete due to lack of investment, key customers and contracts may be lost, and key suppliers may withhold supplies, or move swiftly from standard payment terms to cash-with-order.  Cash flow starts to run the business, confidence levels are shaken and relationships with creditors and backers alike can become adversarial.

Unless assertive, operational action is taken very quickly, reinforced by solid financial backing, control of the business may well be wrested away from the directors and the value of returns to the stakeholders will decline rapidly. 

…and here’s an example:

A private-equity-backed national wholesaler had failed to deliver the expected synergies from a recent merger.  A new CEO was appointed to stabilise and regenerate the business and an Interim CFO was recruited, initially for a 3-6 month period.

• First priorities:  close the accounts for the previous year, introduce cash forecasting and management disciplines, and provide support to accountants performing an Independent Business Review.
• During the first 3 months, the CFO uncovered a £2.7m black hole in net current assets, an undisclosed long-term liability of about £20m and significant record integrity issues.  Furthermore, his assessment of the break-up value of the business showed that the positions of the stakeholders were under water.
• A new business plan was prepared which won an injection of fresh equity, and the backing of the lenders conditional upon improved cash forecasting and strict adherence to facility headroom limits. 
• A second refinancing round further strengthened the balance sheet.  However, this was insufficient to prevent credit insurers withdrawing cover from the group.  The CFO subsequently negotiated self-insured trade terms with leading suppliers in order to ensure orderly trading continued.

The final outcome was highly successful, but the Interim CFO’s assignment, along with a return to profitable trading, had taken 25 months.

A less painful approach to distress
If you think you’re doing everything right, but the numbers don’t reflect that, go back to basics.  Double-check all operational and financial statistics and their interdependence.

If the numbers are still not right, or if things are starting to go badly wrong, why not bring in a Turnaround Manager or an Interim to help stabilise the situation?  As with any walk of life, there are times when it pays to seek out specialist help from someone whose training and experience equips them to work well in a specific field: they will almost always outperform those for whom this is uncharted territory.

…which is helped by…
Interims and Turnaround Managers have the added advantage of not being wed to any of the historical mental frames that inhabit most businesses.  Their focus is on a successful outcome for the company or the stakeholders, so they are not necessarily bound to existing strategies or emotional ties.  They are often able to ask pertinent questions based on their experience which may help to identify disconnects between the activity and the reported data.

…and here’s an example:
The MD of an online retailer saw a significant reduction in sales volumes.  He identified threats to profitability and liquidity.  Had the trend continued the business would have been at risk, so he approached a Turnaround Practitioner.

Together, their analysis of the business showed the product range had been extended too far, contributing to cash flow difficulties and depressing profit margins. 

Product lines were rationalised in order to remove unprofitable or slow-moving items.  More realistic assessments of future business were made and headcount was adjusted.  Only one round of redundancies was necessary, helping the company get into recovery mode more quickly and reducing uncertainty amongst employees.  A more responsive and cost-effective automated web platform was introduced and advertising agreements were improved.  Improved planning reduced inventory and eased the cash situation, whilst further strategic and tactical improvements were also implemented.

This allowed the business to trade profitably and positioned it well to capture market share when the economy rebounds.

Spot the difference!
In both cases above, difficulties were successfully overcome.  However in the second example, management took proactive steps to deal with a situation before it started losing control, and the turnaround in performance was more structured and far-reaching.  Because the business was proactive in its attitude all effort was spent on improvement, rather than on overcoming inertia or denial.

Lessons to remember
What you see in the numbers may not always reflect reality.   There is merit in having an experienced eye look over the financial reporting process, and in particular marrying short-term cash forecasts with medium-term sales and margin ambitions.

Turnaround specialists tend to have well-honed antennae which help them identify the true root-causes of a firm’s difficulties, and they bring broad experience, objectivity, lateral thinking, common sense, the courage to speak their mind and a willingness to act on their own initiative.  Their skill is knowing what is going to make the most impact . . . then getting on with it.

It takes courage for an executive board to call for help from an external source – - sometimes they need to be prompted to do so by other stakeholders – - but the earlier that operational and financial difficulties are recognised and an Interim or Turnaround Manager is engaged, the better are the chances of survival.

David Graham is a Partner in RiVO Partners LLP, which specialises in turnaround & performance improvement for mid-market companies. 
Mobile: +44 (0)7887 757178

www.rivopartners.com

The JCB Tough Phone made headlines last year as gadget reviewers lined up to put its “indestructible” tag to the test. In the name of science the phones were dropped, pummelled, battered and crushed – and emerged still working. What many people reading those reviews didn’t realise is that the Silicon Valley-based company behind the phones, Sonim, had been through a similar ordeal. 

‘We became the pariah of the industry,’ says Bob Plaschke, Sonim’s CEO. ‘We spent millions of dollars [of investors’ money] chasing a grand vision that wasn’t grounded in solving real people’s problems.’ 

The vision was internet telephony (VoIP) over mobile phones; a prospect that excited Sonim’s venture capital (VC) investors so much they invested $47 million (£34 million) before the company had made a sale. Sonim won awards and contracts, but critically, failed to deliver working software on time to the mobile operators it had signed up. The hype quickly turned to derision, and with a burn rate of $1.8 million a month, it was only a matter of time before Sonim ran out of cash with ‘no chance of any viable funding after that’. 

It’s a position many entrepreneurs will be familiar with, though Sonim’s journey from stardom to near-bankruptcy will be faster than most. Jamie Constable, CEO of turnaround investment firm RCapital (which now owns Little Chef) says there’s ‘a very steady flow of companies getting themselves into serious financial trouble’. Survival in this environment depends ‘not on how well run you are, but on how you’re structured financially’.

Limited options 

The Art Group, which supplies touch screen kiosks enabling visitors to art galleries to print off their favourite works, is a case in point. RCapital got involved with the business last year after its VC backer decided not to invest further.

There was an added irony as the backer had already replaced the old management team and agreed in principle to a fresh injection of funds.

‘The company’s only choice was to go to the bank for the money, and of course, if the VCs won’t do it, the bank won’t do it,’ says Constable. ‘The business had already put in place the operational changes it needed to return to profitability; it was just a case of [repairing] the balance sheet.’ RCapital bought the company for £2.5 million and made the changes needed to get it back on track. 

Deeper cuts

For investors like Constable, it’s essential to distinguish between good businesses that are simply running out of cash, such as The Art Group, and those with more fundamental issues. When Rob Woodward took over Scotland’s ITV franchise STV in 2007, he knew it was in serious financial difficulties: its market cap had shrunk from £2.1 billion in 2001 to less than £200 million that year, partly the result of an unsuccessful expansion strategy. Now he admits that he underestimated the scale of the problem.

‘We informed the City upfront of the reality of the situation, and it was far worse than anyone had expected,’ says the CEO. ‘All the good news had been drained from the company: the plans were far too optimistic. So the starting point was very different to what we had anticipated, though the endgame remained the same.’

When Woodward took over, STV’s board resigned en masse, leaving him free to pursue his threefold strategy of rectifying the ‘challenged’ balance sheet, reducing costs by 
refocusing on STV’s core business, and investing in new areas he believes have growth potential.

Though the company’s share price is still in the doldrums, Woodward has transformed losses of £23 million in 2007 to pre-tax profits of £14 million, reduced net debt from £47 million to £36 million, and returned £30 million to shareholders (after a rights issue raising £92 million in December 2007).

The most difficult aspect of the process, he says, was ‘delivering the message of huge cost reductions and at the same time investment in future growth opportunities’. Some 120 staff were made redundant, while a ‘new team’ was brought in to grow STV’s online presence. 

Strategic thinking

Woodward’s point is instructive. Few turnarounds can be achieved without an injection of cash, and cutting costs is another common theme. But simply paring a business down and pumping it with money could be flogging a dead horse unless there is a fresh approach to go with it.

For Plaschke, whose role at Sonim changed from CFO to CEO after the company went into crisis mode, the first priority was survival. By cutting the company’s head count from 180 to 15, its monthly burn rate was reduced from $1.8 million to $500,000. But Sonim still had no way of making money.

Plaschke began in-depth research into potential markets, leading him away from the idea of selling generic software to mobile operators towards producing a ‘ruggedised cell phone’ aimed at blue-collar workers. It’s a fascinating story with its own ups and downs: Plaschke secured another $10 million from his investors, but battled long and hard to find a distribution channel for the phones, eventually striking lucky in Sweden. But the essential point is that Plaschke had completely changed tack.

‘The board found a presentation I’d given to them before, and there was one slide that listed “12 reasons we’ll never become a cell phone company”,’ Plaschke relates. ‘Well I still believe in six of the 12, but I’ve disproved the other six. It was a choice between shutting the company down and firing all the employees, or selling more phones.’

The decision to sell more phones resulted in sales of $31 million last year (which Plaschke expects to increase to more than $40 million this year). With just three salespeople, Sonim distributes its phones in 42 countries and is now at break-even.

Out with the old

Sometimes turnarounds are more about a fresh approach than a complete change of direction. Richard Brighton, MD of electronics manufacturer Exception EMS, was hired to turn round a company that was ‘going through a degree of stagnation, always making around £17 million, always chasing sales to make up for the customers it had lost, always at a break-even level’.

When Brighton first walked into the company, he saw a sea of green printed circuit boards covering every available surface. Looking into how it was run, he found it ‘chaotic and disorganised’: the manufacturing process was ‘a collection of fiefdoms’ and there was ‘a lot of work in progress’ with no one taking responsibility for it. Underlying these problems was the autocratic management style of the previous MD, who had been ‘asked to leave’.

‘One of the first meetings I had with management, I asked people for their thoughts and it was like tumbleweed. It was so obvious they had never been asked that kind of question before,’ Brighton reveals.

The changes were radical, but they were operational rather than strategic. Brighton created five ‘mini-MDs’, each of whom was given responsibility for a number of customers. Work for each customer was to be managed in a separate, U-shaped area, so that progress was clearly visible. There were management changes too, and a reduction in head count, from 250 to 210, achieved mainly without redundancies.

The result was that turnover increased from £17.5 million in 2007 to £20 million 
in 2008, with an operating loss of £500,000 transformed to a profit of £1.1 million. Most notably, that was achieved by gaining only one major new customer and simply serving the others better so the company won more work and, in some cases, could justify raising prices which had not been adjusted in years.

In a similar vein, RCapital’s Constable states that Little Chef’s problems boiled down to the fact that outlet managers had no sense of accountability, and staff were demoralised. ‘It was about giving ownership back to the people running the restaurants; we improved the food but kept prices the same, and told managers that if they made excess 
profits they’d be rewarded.’

Deep breath

Viewed with hindsight, the solutions to a company’s problems may look obvious. But when you’re at your lowest ebb, those troubles can seem insurmountable. Plaschke, an ex-employee of consultancy firm McKinsey, says that if he had applied the principles he learned there to Sonim, there would have been no option but to liquidate the company as quickly as possible.

‘There are lots of folks who told me to shut [Sonim] down and get another job,’ he recalls. ‘And if you looked at the business in any rational way, I should have done just that. But entrepreneurs defy logic. At times like these, you’ve got to trust your gut conviction and follow it, even if it leads to failure.’

Business Recovery Terms 

DIY turnarounds

Cutting costs, accepting low profitability and focusing on retention of customers may work in the short term, but often you’ll need to look further ahead and consider more radical changes to your business, writes Malcolm Prowle, a professor at Nottingham Business School. 

Restructuring

Think big, like a revision of product specification, a change of location or a different distribution method. Or withdraw from your current line of business entirely and invest in an alternative more suited to the times.

Working partnerships

Economies of scale can be achieved as businesses pool resources such as buildings, equipment, specialist staff and back office functions. New products can be developed on the back of the companies’ combined expertise.

Mergers

A business may not constitute a viable independent entity in the long term. If other companies are in the same position, a merger may be the most feasible option, minimising competition and increasing market share. 

Contributed by Growth Business:   

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Ten European buyouts have come from businesses in administration, up from six during the same period last year, according to data provider Mergermarket

This week RCapital, a UK turnround specialist and private equity group, bought door-to-door lending business Morses Club from London Scottish Finance.

And private equity is also being creative to prevent their portfolio companies falling into administration in the first place – Change Capital Partners bit just this bullet when passing over control of hardware store operator Robert Dyas to management.

But the speed they have to work out a potential investment is catching the more institutional private equity firms out. One said a two-week turnround to get the investment committee to decide on a prospective deal on limited due diligence and other uncertainties was too difficult.

One buyout professional said his initial approach to the downturn had been to approach bankers with the uncomplicated scenario that it would make an offer substantially above some of its sophisticated peers, such as Swedish buyout firm EQT, when it was seeking control of a struggling business.

However, this tactic has struggled as the investment committee still needs sign off in a short period of time. In addition, the bankers deciding on a restructuring and change of control were often different – as they were in workout teams or structured finance departments – to the ones assiduously courted by private equity firms during bull markets – the sponsor coverage bankers.

This fleet of footedness of specialist turnround and restructuring buyout firms has helped a handful of players, including Endless and RCapital, gain greater traction in the market. And their experience over decades in many cases also provides a degree of comfort when taking a calculated bet on a potential deal.

However, this is a high-risk/high-return area. Just in some of the recent deals there is a potential huge risk, for example in shop rent or staff discontent, advisers say.

And investors should beware the statistical truism that high positive and negative return volatility over a number of years leaves them worse off than a marketable investment showing low volatility.

Therefore don’t expect too many restructuring deals from the classic buyout firms until, if ever, they’ve had time to adjust their processes. 

Contributed by: James Mawson, editor Private Equity News:  www.penews.com

The Eternitas Fund will deliver a fast and flexible source of finance and management expertise to struggling businesses across the UK, during a time of unprecedented economic upheaval.

The fund has been established and will be managed by leading North West figures Andrew Redmond, Andrew Duckworth, Neil Duckworth, Alec Craig and David Shaw – all respected names from the region’s top financial and legal institutions. 

An investment commitment of up to £20m is being sought from investors over a five year period (2009-2014).  

Well-known North West entrepreneur Andrew Redmond – the founder of leading debt advice company Debt Free Direct –  said: “We have entered a year of unprecedented change for UK plc, a time when innovative new approaches will be needed if we are to prevent solid businesses going to the wall.

“Business turnaround and restructure are at the top of our list of investment priorities; 
our structure will enable us to move quickly to deliver management strategy and flexible funding to ailing businesses, and to safeguard jobs wherever possible.

 “We will also be looking at acquisition opportunities – in particular, distressed property, asset and debt portfolios – in order to maximise returns for our investors.“

Andrew Duckworth – partner in specialist distressed asset investor Winterhill Asset Management – added “Our unique combination of expertise and contacts will enable us to generate a flow of immediate opportunities for the Eternitas Fund.  We are anticipating an extremely busy 12 months.”

http://www.eternitas.co.uk/

TMA (UK) in association with Minerva Training Associates has announced a series of four seminars entitled Fundamentals in Turnaround Management to be held throughout March at leading business school venues in London, Manchester, Leeds, and Birmingham.

The seminars are aimed at professionals in corporate roles or private equity, accountants and lawyers either in practice or industry, bank workout and support teams, owner managers and interim managers at CEO, CFO and COO level, and workforce recruitment and planning specialists. Sessions on diagnosing core performance issues, planning a turnaround strategy and identifying corporate value, and applying the essential components of a successful turnaround will be led by senior TMA personnel including Conference Director Dominic Reimbold and Membership Director David Hole.

“This recession is going to be long and deep, and if the country is to come out of it with its economic base intact then the sort of skills businesses need to defend and recover their core corporate value urgently need to be disseminated as widely as possible,” said Mr Hole.

“Turnaround professionals today face two major challenges: more and more businesses will need their services, while the shortage of business credit will make individual turnarounds ahead of insolvency even more demanding. Our seminars can imbue both professionals and businesses with the practical, hard-headed skills they will need to make and implement the right decisions to enable them to go forward with confidence even in the toughest of times.”

* The price of attendance at the seminars includes a year’s membership of TMA (UK). Full details of dates, venues, sessions, speakers and making a booking online are available at:

www.tma-uk.org

Further information:

David Hole, Alexander Business Consulting – 07976 758246 – davidhole@alexanderbc.com

Dominic Reimbold, Global Talent Implementation – 07881 750467 – dreimbold@googlemail.com