Business Turnaround PDF

Management

Analysis

Case study

Finance

Only human

The mighty had fallen

Home and dry

Insolvency 101

Turnaround specialists aren’t just number-crunching job-cutters – they have a heart, too | Page 6

How did McDonalds, Starbucks and Apple turn their misfortune into a multibillion fortune? | Page 8

An incontinence firm brought in outsiders to aid the flailing business – and is reaping the rewards | Page 11

If the financial dogs are baying at your door, calling for help may be your chance for survival | Page 12

October 2012 | business-reporter.co.uk

BUSINESS TURNAROUND

UK recovery is being bled dry by failing businesses that refuse to die Distributed within the daily Telegraph, produced and published

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Business turnaround… in 60 seconds It sounds like a traffic sign…

Well, it’s not. Business turnaround is the discipline of taking failing businesses and making them work.

This can be done in a number of ways, and the subsequent restructuring may or may not include insolvency proceedings.

Turnaround specialists also come in different forms: some act as paid consultants, while some while buy a business or a part of a business, and take a stake in its future success.

Is it a painful process?

Well, corporate restructuring by its very nature requires tough decisions. But turnaround specialist Nick Winks, cofounder of Waypoint Change, believes this doesn’t have to come at the expense of finer feelings.

He says: “When a company has some huge problems, you have to make pretty dramatic and radical decisions to effect the turnaround… when doing this, if you can harness the employees and the management team, you actually have a better chance of a long lasting viability for

Fresh taste: McDonalds turned things around

Publisher Bradley Scheffer info@lyonsdown.co.uk

the company.” See page 6 for more.

So how do I know if I should call in the specialists?

There are numerous warning signs of a business on the verge of failure. They include: ongoing losses over a period of time; an overdraft at or near its limit; tax arrears; supplier disruption; fall stocks and/or sales; low morale; and management upsets.

But isn’t a turnaround an admission of failure?

Not at all. In fact, some of the biggest and

most respected companies have had to change course at certain points in their history. They include Apple, Starbucks and McDonalds – see page 8 for more details.

What if I’m still reluctant?

Then you could be at risk of becoming one of the UK’s estimated 146,000 “zombie” businesses. These are businesses that survive by servicing their debt, without paying any capital or seeing any growth.

As low interest rates act as life support for these businesses, experts are worried they are dragging the economy. See page 4.

www.rutlandpartners.com

We help UK companies turn over a new leaf.

Equity investments of up to £50m (enterprise value £20m - £200m).

For more information on our investment criteria, call us on +44 (0)20 7451 0700 or visit our website at www.rutlandpartners.com

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What’s inside Turnaround [turn-uh-round] noun: a complete reversal of a situation or set of circumstances

Full of beans Businesses seeking inspiration could do worse than look to Starbucks. Chief executive Howard Schultz turned the business around in 2008 following a period of plummeting shares. See p8

What are zombie businesses doing to our economy?

Page 4

How the mighty had fallen...and then picked itself up again Page 8

Best of the blogs

Incontinence firm not embarrased about its turnaround Page 11

“As the 2012 Broadway season kicks off, Playbill lists 30 new shows that will vie for audience attention — and dollars — this year. All are no doubt aiming to match the success of a musical once predicted to be a total flop: Spider-Man: Turn Off the Dark. Although the show has now grossed more than $160 million (a blockbuster by Broadway standards), it was widely ridiculed before its opening in 2011 for out-of-control costs, production delays, cast departures, rehearsal injuries and a preview debacle. The media likened SpiderMan to the Titanic. So how did co-lead producers Jere Harris and Michael Cohl stop the ship from sinking?”

Blogs.hbr.org “A business that doesn’t make money won’t be around for very long. Profits, after all, are the engine that drives the world of commerce. Any idiot knows that.

“Unfortunately, idiots who do know that go out of business all the time. The US auto industry, integrated steel giants and many others who failed were extremely profit driven and, in fact, it was their quest for profits that was their undoing. That’s because making money means nothing without competitive advantage. Companies who chase opportunities in the name of profitability often find they can’t compete, while others, like Wal-Mart, Southwest Airlines and Nucor are able to be consistently profitable in tough industries with thin margins.

Profits aren’t always what they seem.”

Bx.businessweek.com/tuarnounds “The local Blockbuster shut down last week. Online rental, video streaming, and movie on demand dominate the brick and mortar video industry. And, although I’m sure all of these in-home options played a part in the demise of our local Blockbuster, there was another factor involved here. In our little central Texas town “going out to rent a movie” is considered “Entertainment.” So I think what really took this big boy down was the little kiosk called Redbox. It’s convenient, it’s cheap, and you still get to leave the house to choose your movie. Never mind the fact that browsing takes place on a video screen. Hey, I told you it’s a small town. We’re easily entertained.

“Did Blockbuster see Redbox coming? Or were they scanning the horizon for a bigger predator competitor? What about your business?

It’s not always the big-boxes and the mega-retailers you have to worry about. Sometimes competition comes in a small package.”

Businessturnaround.blogs.com

VS

Why MBA students don’t know how to work for small companies Page 16

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Beware the businesses that just won’t die...

A new breed of companies that are too unhealthy to thrive, yet continue to survive are stifling the growth of our reborn economy. Are these firms better off dead?

by Ellen Bennett Welcome to the night of the living dead. For the UK economy, Halloween has come early this year, with hordes of zombie businesses set to suck the blood from their surviving, thriving cousins. According to the latest research from R3, the Association of Business Recovery Professionals, the UK has some 146,000 zombie businesses, teetering on the edge of bankruptcy.

In previous recessions, unhealthy businesses have gone bust. This time round, low interest rates and a politically motivated fear of failure have meant that many unprofitable businesses survive – barely. These heavily indebted organisations stagger on, just about able to afford to pay the interest on their debt, but none of the capital itself. Why are these businesses surviving – and what impact does the march of the zombies have on the rest of the economy?

Banks fuelling epidemic The rate of insolvencies since the economic crash in 2007 has been far lower than in any previous recession. Around 180,000 businesses have failed so far – but if insolvencies were happening at the same rate as the 1992-3 recession, that number would look more like 280,000.

There are a number of reasons behind this.

First and most important is the low interest rate environment. With the base rate at 0.5 per cent, debt is cheaper than at practically any other time in history, so heavily indebted companies can pay their interest even when their debts far outweigh their assets and profits.

Second, the banks are happy to support zombie businesses. Because of the way in which international accounting standards operate, it is better for a bank’s balance

Moulton: We ought to realise tha t failure is healthy

sheet for a company with an operating profit of £4m and debts of £100m to stagger on, paying the interest on its debt, than it is for that company to default. In the worst-case scenario, banks looking to protect their balance sheet might even help struggling companies to meet their interest payments in the short term, to prevent default.

Third, the negative PR generated by business failures has generated an environment in which insolvency is avoided at all costs. “We’re not letting Darwin operate,” says Jon Moulton, venture capitalist and chairman of Better Capital. “Evolution is not being allowed to take place.”

Who’s at risk?

Moulton points out that some of the lowest corporate failure rates are seen i n t he st r ic ken economies of Italy and Spain, while more businesses are going bust in the economically healthy nation of Norway. “We ought to realise that failure is healthy,” he says.

“Clinging on to bad business models that contain good people and good business assets is a foolish thing. While your initial human instinct is that it’s a good thing to stop firms going bust, that’s not always the case. It slows down lots of things that would be healthy – a little more churn in corporations would be good for the economy.”

Not only do z o m b i e economies tie up good

% of liquidations (England & wales as % of active firms

0.5 %

Is the base rate of interest – the lowest it’s been - means even the most zombiefied businesses can pay

finance to do so, are forced to substitute labour for capital.” Together, that can help explain the weakness of output and the relative strength of employment.

Broadbent went on to argue that this state of affairs will have to change: “It’s hard to imagine this dispersion in returns can persist indefinitely. Assuming the underlying shifts in relative demand are permanent, the economy must adapt to them in the end.”

Retail hit the hardest Certain sectors will be hit harder by an increase in insolvencies, namely retail and construction.

Retail has the highest proportion of businesses that would be unable to pay their debts in the event of an interest rate rise – 18 per cent, equivalent to 31,000 businesses. Meanwhile, the construction sector sector has the largest proportion of businesses that are only able to pay the interest on their debts – 16 per cent, or 37,000 businesses. R3 president Lee Manning says: “Devastation on the high street is well recorded. Since the start of 2011, over 21,000 jobs have been lost from the failures of major high street names, but we are yet to set the volume of construction failures that we would expect.

“With many capital expenditure projects coming to an end, cuts in public sector budgets and work from the Olympics having recently dried up, we can expect to see some of these businesses fail. Construction may well be the next big casualty from this recession.”

For the rest of the economy, it’s high time the living dead were finally laid to rest.

The UK has some

liquidations from 1980-2012

2.6

1990’s average failure rate

2.3 2.1

1: 1980 recession GDP down 2.1%

1.8

146,000

zombie businesses

Some of the lowest failure rates are seen in the stricken economies of Italy and Spain

2: 1991 recession GDP down 1.4%

1.6 1.3

Since the 2007 crash

1.1

180,000

0.8

businesses have failed

0.6 0.3

people and good assets in failing companies, they also act as a drag on overall economic growth.

As Moulton says, “If you’ve got 10 per centt of your workforce plugging away in no-hope companies that are going backwards, the others have to do a lot better.”

The UK would do well to take heed of the Japanese economy, where near-zero interest rates have created a veritable stampede of zombies. Two-thirds of Japanese firms do not earn a profit and more than a quarter of companies on the Tokyo Stock Exchange had operating margins below 2 per cent over the past decade. The oncegreat Japanese economy is stagnating in consequence.

So, what’s to be done? The experts agree – it’s time for businesses to star t failing naturally. The Bank of England’s Monetar y Polic y Commit tee, for example, has been looking at zombie businesses. In a recent speech to Durham Business School, Ben Broadbent, external member of the Bank of England’s Monetary Policy Committee, argued that the UK’s slowdown in productivity growth was due to a failure to allocate resources to sectors where they are most productive.

He said: “Some firms, it seems, are kept in business (and retain employees) despite making relatively low returns. Others, able to expand but unable to obtain the

1980

1990

2000

2010

2012

Source: Jon Moulton

Retail has been hit hard - causing 21,000 job losses since the start of 2011

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Bringing business back to life There’s a zombie attack in the UK, as the cash-eating syndrome gnaws away economic recovery. The only chance for survival is expert support INDUSTRY VIEW

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usinesses don’t stand still, they either go forwards or backwards. That is why the thousands of companies trundling along as ‘zombies’ are in the danger zone. They cannot repay the principal on their debt and tick over by using cash and selling assets to meet interest repayments. When HMRC decides to be less benign, or interest rates eventually creep up, or order books start filling up causing working-capital pressure, ill prepared businesses will reach a tipping point.

A crucial part of the UK’s economic recovery depends on the Cinderella economy – too big to be ‘sexy’; too small to be powerhouses, companies in the middle economy are beyond squeezed – they are remorselessly being drained of cash and capability. Yet these are the very businesses that, turned around, could provide the jobs and growth that the flat-lining UK craves.

The Institute for Turnaround’s (IFT) research earlier this year suggests that SME’s are most at risk of turning zombie – but not exclusively.

There are several large companies in the South East with an annual turnover of more than £500m that fall into the zombie category.

The problem is that company business plans drawn up before 2008 were based on top-level growth forecasts, in which a

significant amount of debt would have been paid off by now. In reality the economy is in such poor shape that this has not happened.

Fortunately, this recession has taught many business owners to be better at cash management and this is one of the core survival skills.

What tactics can you use to get ahead in the survival stakes?

Step 1: Brutal honesty How can you fix something without knowing how big the problem is? Moving numbers around on a balance sheet will paper over the cracks, but it won’t hide more fundamental problems, such as a lack of cash.

Step 2: Survive Every business needs to understand

A crucial part of the UK’s economic recovery depends on the Cinderella economy its cashflow.

The best way to do so is to have an accurate, 13 week rolling cashflow forecast, as over that time overheads and sales should be relatively easy to predict.

Step 3: Raise cash you need Renegotiating contract terms or becoming efficient at tracking and chasing debtors can generate cash. Invoice discounting is a solution in some cases but failing to pay HMRC is a no-no.

Step 4: Write a simple plan Usually people working in the business will know when something is wrong,

and have a good idea on how to fix it. So the first priority is listening to what everyone on the team has to say.

Step 5: Sort out leadership Employing the best people at the right time, for the right job, is vital.

Identify a few quick wins that start to make people feel better about the company and its prospects. Keep the meetings short and focused. Action is a great antidote for hopelessness.

It’s encouraging that business support teams in banks seem to be backing turnaround as a means to helping zombies return to good health. This autumn, Lloyds launched a business transformation service with the IFT that offers affordable, reputable assistance to all its SME customers facing tough challenges.

For most companies there are times in the business cycle where unfamiliar challenges arise.. It’s the smart business that looks for help – and if you communicate well with your lenders, creditors and customers, they will want to keep the relationship and if possible, support the business.

Christine Elliott is chief executive of IFT 020 7324 6216 www.instituteforturnaround.com

Surviving the storm Bringing the walking dead back to life can be a challenge, but with expert help ailing companies can emerge leaner, fitter and healthier than ever profitability or value, unless more fundamental operational and strategic restructuring is undertaken. usiness, like nature, is popularly According to analysis, almost one in 12 of presumed to be “red in tooth and claw”, all UK businesses is in this parlous state. This based on the law of the jungle and the is bad for the companies, their stakeholders survival of the fittest. and the economy, according to Alan Hudson, In previous recessions, we have seen head of restructuring in the UK and Ireland at market forces drive a sharp correction business recovery specialist Ernst & Young.

– weaker businesses being restructured, sold “As companies and management go into off/broken up or often disappearing survival mode, equity value declines or is altogether, while those able to weather the wiped out. Lenders want to avoid crystallising storm can go on to prosper. losses and managing the need for any new However the scale of the 2008 financial money, so more medium-term strategic collapse has meant that while many issues such as addressing changes in a overleveraged businesses have restructured market, technological evolution, competitor debt, they are still facing a prolonged lowactivity, are not easily dealt with,” he says. growth environment and continuing “You have to accept that in business there economic uncertainty, with a reluctance/ will be failures: not everyone in a inability from stakeholders to invest competitive market can be a further cash in the future, or to allow winner. a sale to new investors that may “But many of these unlock potential but crystallise UK businesses are companies – or at least further loss. in a state known parts of them – should As a result many are as that of a be capable of being effectively limping along, just rescued or turned managing to service their around.” restructured debts in the hope of To succeed in this, it a market recovery, but with limited is necessary for prospect of increasing their

INDUSTRY VIEW

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1 in12

zombie company

management and stakeholders to look beyond the way the business is financed and fixing its balance sheet, according to Hudson.

“You need to think beyond restructuring the debt, and more about how the business operates, fits together and how it stays relevant in its market,” he says. “If you’re going to rebuild value in a business you need to roll up your sleeves, lift the bonnet and fix the engine. In many respects it’s very similar to the processes you’d go through if you had just bought a healthier business based on a plan to then grow value further.”

The focus is on earnings, cash generation and cost. For example, does the company still have the right operating platform or product range, or has R&D been shelved for short-term cash savings? Is it sourcing materials effectively and getting value from its supply chain? Should it outsource or insource operations? Could it take out costs, redesign processes to release working capital, and critically does the team have the right mix of skills for turning the company around?

The emphasis should be on profitability, says Hudson. “You need to focus, not just on the balance sheet, but on the P&L account. You can’t just cut costs forever and you can’t rely on the market picking you up anymore.”

Restructuring a failing company in this way requires a blend of skills, perseverance and speed.

“It needs a team that combines outside experience with a detailed understanding of the business, with the authority to make the necessary interventions and make them quickly,” says Hudson. “That is why, when we work with clients we will blend operational and commercial experience of running and restructuring businesses – making them healthy and more challenged – alongside our financial capability.

“Transforming a business can take years, but focused operational restructuring can make an impact in less than six months.

When a business is failing, time is seldom on your side.” www.ey.com

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No more Mr Nasty guy

The cold, calculating image of turnaround specialists has had a makeover - communication and engagement are key new looks

by Bonnie Gardiner The UK economy has become a breeding ground for poor management and wasted resources. The widening productivity gap has forced many business leaders to seek outside help or risk insolvency – but even then, businesses continue to fail. In many cases, this is because leaders are leaving it too late before they seek help. Others, however, are simply being let down by a system that is proving too impersonal.

In business turnaround, an alternative to the insolvency process, specialists are called upon to help distressed businesses achieve their potential where profound and radical change is required. But contrary to common belief, it’s not just about crunching numbers and modifying business, but also the people within that business – an approach that experts are referring to as ‘the human side’ of turnaround.

What does it mean?

While for some there is a propensity to think about businesses as purely technical,

mechanical things, Nick Winks, cofounder of Waypoint Change, sees firms as complex human social networks.

“When a company has some huge problems, you have to make pretty dramatic and radical decisions to effect the turnaround… when doing this, if you can harness the employees and the management team, you actually have a better chance of long lasting viability for the company.”

Winks describes himself as an evangelist of the human approach to turnaround; in an industry that he believes is often too technical. He explains that, when restructuring a business, it’s important to have the management on your side, acting with you on a clear vision for the future.

What’s also important, he claims, is to be aware that a distressed business will often be made up of many distressed people. “If you heard that the viability of your organisation was in question, your whole life would change – your thoughts about your career, thoughts about your income, you’d be a very worried person,” Winks says.

Winks: evangelist to human approach

This people-oriented approach to turnaround can be carried out in many ways, but according to Peter Alderslade, director of AA Abet, it is summed up in two words – communication and engagement. “It’s all about involving everybody in knowing where we are going, how we’re going to do it, and what their part is in delivering the results of that turnaround.”

In a turnaround situation, Alderslade emphasises the importance of asking the big questions of individuals within the business – ‘What problems do you face?’ ‘What can we do to make things better?’ Their input, he explains, is what fuels confidence from employees, as well from those external stakeholders – bankers, credit insurers, suppliers, and customers – that the business is on the road to a recovery.

Why it’s important While many specialists avoid the problems confronting people, others believe the emotional element of turnaround is something that can be harnessed as a means of enlisting more support. Christine de Largy, managing director of Impact Executives, says that “the really smart turnaround folk” understand this emotional element.”

A solution to insolvency Meeting the demands of your creditors is tough, so a voluntary agreement procedure could be the best way forward INDUSTRY VIEW

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ut for many directors the prospect of looking their creditors in the eye is too awful to contemplate, which perhaps helps to explain why the UK sees so few company voluntary arrangements, or CVAs. These are similar to Chapter 11 bankruptcy in the USA, but while most British businesspeople are familiar with the latter, few understand or are even aware of CVAs. “A CVA is essentially a deal between an insolvent company and its creditors,” says Keith Steven, managing director of corporate recovery specialist KSA Group.

“The CVA places a legal ringfence around the company and stops creditors attacking it.

This allows a viable but struggling company to repay some, or all, of its historic debts out of future profits, over a period of time to be agreed – usually three to five years.”

Crucially the directors remain in control – unlike putting the company into administration – giving them the chance to turn the company around and return it to

She says: “I think some of the more senior people get a bit caught up in the corporate objective and forget that what everyone in the room is thinking: ‘how’s it going to impact upon me?’”

According to Christine, engaging with individuals is critical, as losing someone’s trust may mean losing them altogether. Indeed, if employees feel like just another cog in the wheel, they are more likely to jump ship and seek better career prospects or a secure income, leaving a struggling business without a valuable driver of success.

Of course there is a reason this approach is not adopted as often as is necessary, for like most things it comes with a set of challenges. Simply the time and effort it takes to carry out a more inclusive strategy, particularly if you have a large number of people to engage with, could serve as temptation enough to stick to the technical aspect of turnaround. At first, this does appears to be a quicker, simpler solution, but the extra effort, Alderslade says, is worth it.

“In my view it is time well spent. It takes far longer if the turnaround gets into deep trouble or fails - then you have much longer, much more difficult conversations to have.”

profit. Indeed a good turnaround plan is essential in securing the consent of major creditors such as HMRC, says Steven. Change must be part of the restructuring plan.

“Agreement must be reached with a 75 per cent majority of the creditors who vote, so CVA is seen as an equitable arrangement,” says Steven. “We find that more than nine times out of 10 they do agree, because we can convince them that this is the best deal available and management will be making changes.

“It’s important to involve all stakeholders from an early stage, including shareholders, staff, pensioners and customers as well as creditors, so we talk to them all. Banks will generally consider CVAs, too, because they offer the prospect of seeing the debt serviced and ultimately repaid, rather than the bank having to write off assets it may not be able to sell.”

Winks of Waypoint Change adds how other challenges may surface, which can only be handled with communication and engagement, such as hostility and poor performance from management and employees as a result of the stresses involved. “ Make the most of it While negotiating a loan from the bank or restructuring a balance sheet may require technical skill, communicating with people is as easy as holding a meeting – a rendezvous with your department at the pub, or simply stopping for a chat by the water cooler.

For every business turnaround, there is a corporate objective – but this objective means something different for every one of the people involved.

From paying the mortgage to pursuing a career, there will always be individual motivations.

But acknowledging these individual needs doesn’t have to be a chore. Peter’s advice? “Use them.”

pound now rather than 50p in 3 years time’” says Steven.

Early termination helps mitigate one of the drawbacks of CVAs, the fact that the company cannot obtain a credit rating, adds Steven.

Other benefits include enabling the company to terminate contracts without penalty, such as unwanted leases, and having the cost of any redundancies met by government, so it becomes easier to drive CHANGE ,streamline the business and return it to profit.

Cheaper alternative

CVAs are much less prescriptive than administration, and cheaper, too, since the company is run by its directors and not expensive staff from the administrator.

The CVA model can be suitable for any business of at least £200,000 turnover and generating regular cash flow, including manufacturing, services and professional firms, says Steven.

Successful CVAs have included Safety net Oddbins, Blacks Leisure, A CVA clears the balance sheet of Portsmouth FC and even the £6bn unsecured debt, in return for paying power giant TXU Europe. unsecured creditors an agreed Yet CVAs are woefully underused. percentage. Cases vary, but his Last year there were fewer than 750 in average is around 40p in the pound, says Keith Steven the UK, compared with c20,000 Steven. “A common misconception is insolvencies. that you have to agree to repay 100 per cent, “There could easily be 5,000 successful but you don’t.”

Most CVAs include a profit ratchet enabling CVAs in the UK every year,” says Steven.

“That’s 5,000 extra companies that could be creditors to claw back more if the company contributing to the economy by providing performs better than expected – an example employment, generating revenue and of the flexibility of CVAs compared with benefiting their creditors. All you need is the insolvency or administration, says Steven. will to do it and the support of a flexibly Further flexibility allows the CVA to be minded insolvency practitioner.” wound up early by mutual consent if the company can raise the cash. “We can say to www.companyrescue.co.uk creditors, ‘Why don’t we pay you 35p in the

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Ask for feedback from all the workers. Their input can lead to smart, swifter change and show they are respected

Publicise every bit of progress to assure all stakeholders that success is in sight

Listen to advice

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A tailored solution not a formulaic fix

Be sensitive to individuals

When a business is in distress, so are its people. Be prepared to deal with emotion and stress.

Hiring a skilled professional with direct operational experience can be the most effective way to put your business back on track

Good communicator

People want a leader with a very clear vision about where they are going so they can understand the process

INDUSTRY VIEW

W

hen it comes to restructuring, calling in a team from a big business services firm is not the only option.

There is another way. Specialists experienced in helping companies devise a bespoke turnaround solution can be brought in to work not just on, but in the business, for as long as it takes to get back on track.

“Skilled professionals with the restructuring experience that most company executives do not have, can help plan the restructure, aid in facilitating it, and explain the process to the employees throughout,” says Ian Gray of transformation and turnaround specialist Baronsmead Consulting, which supports clients through periods of change, uncertainty or crisis.

Calling in a team like this need not be an admission of failure. In fact it is a positive move.

“Few executives have the experience or time to tackle very difficult situations,” says Gray’s colleague Jane Warner, “and attempting to go the do-it-yourself route is exhausting and less likely to be successful.”

Gray explains that, unlike some consultants sent in by big business services firms, all Baronsmead consultants have a wealth of direct operational experience in senior corporate roles, so they can empathise with the issues faced by directors.

Rather than simply offering advice or a formulaic solution, they can work directly alongside company managers, helping to devise solutions that fit the individual client’s situation.

“They have experience of facing breach of covenants or preparing reports to present the company in the right way to bankers,” says Warner.

Action plan

Take your time

Don’t give in to the temptation of a simple approach. Extra time and effort ensures a better professional relationship and a more sustainable turnaround

Jane: “Few executives have the experience or time to tackle very difficult situations”

In cases where the company and consultant consider it advisable, Baronsmead consultants may temporarily join the board.

Gray, for instance, joined the board at retail chain Robert Dyas, to aid in refinancing and a management buyout. “I helped prepare the restructuring plan, talked to the company bankers to arrange a

supportable level of debt, and helped with the operational restructure,” he says. The successfully restructured company was sold in July.

Regardless of whether Baronsmead consultants join the board, once the company is back on a sustainable path to growth, the service can be turned off.

Turnaround need not take long or be overly expensive. At one retailer, the process was completed in three days.

“In those three days our small team showed the directors what was required,” says Gray. “They put the plan into practice and it saved them £500,000.”

The service is not limited to any one sector or culture, but is flexible enough to take into account cultural differences.

“While the turnaround process varies little according to sector, it varies according to culture,” says Warner. “In France, for instance, the turnaround process must include consultation with the workers’ council, which is not an issue in the UK. In China, the business culture means there are significant differences.”

But however good a company’s consultants, they cannot work successfully without full backing from their client.

Gray advises: “Do not be ashamed to bring in consultants. It’s a solution rather than a problem, and should be sold to stakeholders as a chance for transformation.”

He points out that organisations such as Marks & Spencer and Morrisons have brought in restructuring experts, and this has been perceived as sign of strength rather than weakness.

And he advises not leaving it too late to get help. Early intervention is likely to make the task faster and more successful. As soon as the board thinks the company could be making better headway, a company health check can help.

Gray also suggests, when choosing a partner to help with restructuring, that you look for individuals who are members of the Institute for Turnaround, which ensures that they have the experience required. www.baronsmeadconsulting.com

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an independent report from lyonsdown, distributed with the daily telegraph

Business turnaround

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Essential factors for business success

Eight focus points to ensure that your business is ahead of the game INDUSTRY VIEW

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here is no room for complacency in today’s competitive times. Startups as well as existing businesses need to implement key basics throughout the life cycle of the business.

Effective leaders look to continually improve their businesses to ensure continued success.

The essential factors: Analyse if there is a market for the product or service you wish to provide. What price will the market realistically pay? Be creative and have a unique selling point (USP).

Position your product effectively within the market by building a strong brand. A brand is a promise, an image or perception, which consumers connect with when they see the company logo.

Aim to have your business running like a well-oiled machine. Pick the right teams, ensure they are managed and motivated well with effective communication. Use the right technology.

Nurture the right culture for your business. It directly affects the creation and direction of your brand.

Improve cash flow by increasing turnover and reducing costs. Adopt the right marketing strategy.

Engage with your customers and clients so that you can build a strong positive following.

Consider a blog, social media, email.

Partner with like-minded organisations or individuals to help position your business more definitively.

Be forward thinking.

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2 3

Even the most successful companies go through rough patches.

Without business turnaround, these global icons wouldn’t exist...

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SS Business Consultants has partnered with John Warrillow best selling author of Built to Sell and SME expert to give clients their Sellability Score. This can be accessed via our website.The online tool provides a free 26-page report on the current position of your business and ways of improving its value to ensure a successful future.

Selchouk Sami is founder and managing director at SS Business Consultants Limited Twitter @selchouksami www.ssbusinessconsultants. co.uk

The shock quarterly loss McDonald’s posted in 2003, which prompted a major rethink

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$343.8m

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by Dave Baxter Successful as they are today, some of the biggest companies around have been pulled back from the verge of collapse. We look at some of t he big na me s f rom turnaround history and what can be learned from them.

With iPads and iPhones flying off the shelves, Apple could be regarded as a great business success – but it wasn’t always that way. Products like the Mac computers were seen as high quality, and in the 1980s they managed to sell well at high-end prices because of that image. But in the following decade sales hit the floor – one reason for this was that rivals like IBM were undercutting Apple on prices.

At the same time, the company had a large number of products in development, many of which were loss- making, and was leaking money. The company’s fortunes picked up after the return of CEO Steve Jobs in 1997, who made the most of Apple’s stylish brand.

He cut the number of products in development from 50 to 10 so they could focus on what worked – and launched an aggressive marketing

campaign. The Think Different campaign – which involved television and print adverts –targeted a wider audience than people involved in IT. Apple adverts – usually found in specialist computing magazines – now featured in places like fashion magazines as well as billboards, and were aimed at young professionals. A nd t he company’s focus on a small number of products had more distinctive results – allowing it to wow consumers again with original products.

A star turn Turnarounds can make for quiet work – but coffee giant Starbucks had such a strong comeback that it inspired the CEO to write a book. In 2008, Howard Schultz returned to the helm of a company that had seen its shares plummet from a peak of nearly $40 in 2006 to less than $8 the following year.

Starbucks had been aggressively expanding for several years: the number of company-owned stores jumped from 10,241 at the end of 2005 to 15,011 at the end of 2007. But this led to what Schultz described as a “dilution of the experience” – a lack of focus on the

Business Reporter · October 2012

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Business turnaround

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can lead to other aspects of the business – such as the product or customer service – being allowed to worsen.

Now we’re lovin’ it If we can learn anything from staring at those iconic golden arches, it is that McDonald’s has an impressive global presence.

The fast food chain has been around for more than half a century and its outlets have flourished across the world. But heads of the company were brought crashing to earth in early 2003 when it posted its first quarterly loss – $343.8 million – since going public in 1965.

The announcement saw the company’s share price slump, but also prompted a dramatic turnaround plan that highlighted its previous mistakes. A major part of its so-called “Plan to win” was a revamp of the restaurant menus and what the chain offered, as well as redesigning thousands of its outlets.

Before its stumble in 2003, McDonald’s was known for food including salty chips and large burgers such as the Big Mac. This business model needed changing – a number of competitors had entered the fast food market and were offering food such as salad and sandwiches, with a bigger emphasis on “healthy” living.

The inherent problem was that McDonald’s was still selling a traditional fast food product, at a time when consumers were moving away from it. The only answer was to diversify its product range to target changing customer behaviour.

Starbucks brand and customer experience – and a glut of underperforming stores. Drastic changes were made – around 600 underperforming stores were shut in 2008 followed by 300 more in 2009.

There was also a big push to up quality – espresso machines were upgraded and staff re-trained

on making a good coffee – as well as efforts to boost the company’s image. This included a website for coffee-lovers to make suggestions about the Starbucks experience and moves to promote the brand on Facebook and Twitter.

The turnaround shows how rapid expansion

Safe escape In 2004, Morrisons was a Bradford-based supermarket looking to expand beyond the north of England – and thought it had the perfect opportunity.

At the time rival chain Safeway was a struggling business – and winning the bid to acquire Safeway gave Morrisons a bigger slice of the southern England pie, and an opportunity to reach swathes of new customers.

But what seemed like a clever deal soon turned sour when it came

Guiding principles A for a successful restructure

INDUSTRY VIEW

Taking the initiative in a restructuring is likely to boost stakeholder confidence and increase the likelihood of success

successful restructuring should deliver financial benefits well in excess of the cost – 10 times would be a sensible benchmark. But we see many cases where the costs of restructuring actually outweigh the benefits. So how should a board approach a restructuring when their lender starts to force the pace? There are five key points to bear in mind: 1 Restructure the whole business , avoiding a purely financial fix 2 Appoint a restructuring professional who will be able to work with all key stakeholders 3 Aim for a consensual outcome 4 Over-communicate with your key stakeholders during the process 5 Aim to recognise the input of your own people as key milestones are achieved.

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to business operations.

Besides poor sales figures and a 14-month competition inquiry into the takeover, Morrisons and Safeway found it tough to work as a single entity. Accounting departments failed to line up their operations, and the supply depots were not aligned with the locations of the newly bought stores.This led to a series of profit warnings and Morrisons being unable to publish any financial information, followed by a turnaround which lasted from 2005 to 2008.

The business needed to be made more efficient by bringing together the dual management teams to ensure they had the same aims so that the two former rivals could work as one group.

OK computer IBM’s 1990s turnaround shows that Apple was not the only computing giant to have problems in the past. In 1993, IBM looked to be deeply troubled after reporting a net loss of $8.1 billion.

The company’s main problem was its failure to respond to the rapid changes taking place in the IT industry.

Competition in the industry had increased and consumers were now snapping up small, desktop computers – a new demand IBM had failed to react to.

The arrival of a new CEO in 1993 saw extensive cost cutting: it sold off its Federal Systems Division and slashed its number of staff.

By 1995 the number of employees was down to around 225,000, compared with more than 370,000 in 1990.

But a bigger change was needed - realigning the company’s business model by investing in software development and adapting to respond to customer needs. CEO Louis Gerstner also resisted an initial plan for the company to be split into 11 different entities, because he felt it would damage customer service if people had to choose parts for a computer system from several different companies. He also had to force departments within the company – which were often competing – to work together, so that IBM could operate more efficiently as a unit.

Directors are rarely prepared for the and capital structure. Together day when a team of advisers turns up you will gain more breathing space to review the business, often initiated and a greater chance of by a stakeholder other than stakeholders accepting your themselves. Even for the plans. hardened professional it will be The alternative is a failure a nerve-racking experience. to act, which will most likely Sleep patterns change and lead to other stakeholders confidence levels dip. concluding that they have Uncertainty drives to act, potentially on a uncertain behaviours. If you non-consensual basis, accept this, then the five points Adrian Doble making any restructuring above should become very clear. even more of a challenge.

The costs of a restructuring professional can be linked to Grasp the nettle success, with a retainer and a Let’s put these points into context. success fee on completion. This Your lenders will react positively if ensures that you and your adviser you originate the proposals for are at all times working to a change. No lender wants to dictate common objective. to its customer, but doing nothing is not an option. So grasp the Adrian Doble is a partner at FRP nettle and appoint a recognised Advisory LLP and a fellow of the restructuring professional. He or Institute for Turnaround she will lift stakeholder confidence 07767 205680 and create a restructuring plan www.frpadvisory.com that deals with the profit pressures

Business Reporter · October 2012

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an independent report from lyonsdown, distributed with the daily telegraph

Industry view

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The best medicine Ailing businesses needn’t feel that their condition is critical turnaround practitioners are on hand to deal with the symptoms and resolve underlying corporate health matters

INDUSTRY VIEW

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hen directors are forced to confront the possibility that their company faces more than a temporary liquidity problem, there can be a genuine fear that by seeking professional advice they risk actually bringing about the demise of their business. It can feel like a momentous decision, particularly if the business is one they have nurtured and developed over many years.

Sometimes, like booking to see a GP about

The “other” turnaround challenge: Execution Turning around a company is about more than refinancing. With the right leadership, some key changes can have remarkable results INDUSTRY VIEW

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hen it comes to turnaround, success depends on more than money. It is the business levers that are very often overlooked that can make all the difference in creating real and sustainable enterprise value.

“Money is only part of the solution.

Execution of the turnaround plan is as important as refinancing,” according to John R Childress, managing partner at the Principia Group.

Problems in turnarounds often stem from poor strategy execution.

The statistics on that score are

dismal: in a recent survey of 200 FTSE 100 companies, 80 per cent of directors said they had the right strategies but only 14 per cent thought they were implementing them well.

Moreover, in a recent McKinsey & Company study of 197 companies, 97 per cent of directors believed they had the right strategic vision but only 33 per cent reported achieving the expected results.

According to Childress, one of the biggest barriers to success is the inability to successfully execute on the turnaround strategy.

“Most companies have a poor record of strategy execution in

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a persistent problem, it’s easier to avoid required. Similarly, the directors may be thinking about it and just keep on working. nervous about speaking to the bank or But by holding back directors run an providing financial information in compliance alternative risk - failing to consider with the terms of the bank facility. The advisers interventions that could lead to a cure. will be able to explain, by drawing on past experience, that keeping the bank in the dark is Like a health problem, a troubled business is not likely to be a winning strategy. much more capable of being saved if the symptoms are identified and addressed early – before the cash has all gone, the assets hocked Key is analysis to the hilt and the creditors pressing for payment. Dealing with the symptoms is a short-term fix Even when the pressures have become more though - the key to rescuing a business is acute there are sometimes steps that can be through the analysis and resolution of the taken, provided the need is recognised underlying problems. Turnaround and the resolve is there. experts will be objective, drawing on the experience of many years.

What measures are practical will depend on the particular Very often the fundamental issue is circumstances of the case. Far too often, one of management - either in one of the for instance, a key stakeholder will inject Peter Whalley key functions or right across the board. much-needed cash into the business, Experienced firms such as James Cowper replenishing capital that has been depleted by will help the business recognise this and work losses, without any clear idea how those losses with them to fix the problem swiftly - whether will be stemmed. Instead of the medicine through training, recruitment or working saving the day, the business is all too often back alongside the existing team for a defined period. in the same - or possibly a worse - position.

No sector is immune from needing turnaround assistance and the James Cowper team has worked with a range of businesses Effective strategies from professional partnerships to engineering So what can an external perspective bring? It’s like the moment when the respected consultant and manufacturing businesses, from media companies to food producers and the leisure arrives at the patient’s bedside - the right industry. The success stories are usually untold specialist insolvency advice should provide a as companies rarely wish to publicise their own proper arm’s-length assessment of the nature problems, but turnaround specialists can help and extent of the problem, and which strategies nurse struggling businesses back to health and are more likely to be effective. They will then restore their fortunes in ways that never reach deal with the symptoms and then look to the headlines. address the underlying problems.

Take the example of an injection of new cash. While the advisers will view this Peter Whalley is head of James Cowper’s positively, they will press the directors to be business restructuring and insolvency team. quite clear about what the funding will be used pwhalley@jamescowper.co.uk. for and as precise as possible about the sum www.jamescowper.co.uk

general, but turnaround plans are even harder to execute because the management team and employees are often demoralised and the changes required are enormous,” he says.

The Principia Group has identified three critical drivers of successful turnarounds: leadership, culture and a disciplined businessexecution process.

Good leadership keeps the management team working together. “They must support each other if they are to have any chance of delivering a sustainable turnaround,” says Childress.

He cites the example of Ford of Europe in 2006-07, where management team members had historically worked in separate “silos” rather than pulling together, resulting in a $1.5 billion (£950m) loss. A new chief executive focused on teamwork, shared goals, a simple “strategy on a page”, clear individual accountabilities and weekly review meetings with the entire team. Within two years the company posted a $1 billion (£633m) profit.

A healthy culture is vital in sustaining the turnaround. Senior leaders must create a culture of transparency, shared accountability, rapid problem solving, honest communications and management discipline.

“Too often a negative culture of

Directors views on strategy of 200 FTSE 100 companies

14% 80% said they had the right strategies

thought they were implemented well Source: The Economist

Directors views on strategy for McKinsey & Company study

33% 97% believed they had the right strategic vision

achieved the expected results

Source: McKinsey & Company

poor teamwork, hidden agendas and badmouthing, reduces the likelihood of a successful turnaround,” says Childress.

Changing a culture is possible and Principia offers a proven road map to do just that. However, if all else fails, according to Childress: “The only solution may be to change those managers who are impediments to the required culture.”

To be effective, the turnaround

plan must be tightly linked to actions.

Too often turnaround plans contain a set of objectives but lack clearly defined action plans with clear metrics and accountabilities.

“Managing a business is like being a pilot. It is quite easy until things go wrong. Then mistakes can be disastrous. This is where ‘navigational aids’ can help,” says Childress.

Principia’s equivalent of “navigational aids” is a structured strategy-execution process called the Strategy-on-a-Page™ Execution Roadmap.

The roadmap sets out the entire turnaround plan on one sheet of paper, including accountabilities, metrics, objectives and key performance indicators, and it has been used by businesses such as Ford, Lycoming Engines, BSkyB, BT and General Dynamics.

Using a set of templates for metrics and accountabilities, the Roadmap helps the management team stick to the key elements of the turnaround process: clear metrics, accountabilities, governance involving regular updates and frequent reviews, and ensuring the turnaround actions are clearly communicated to all employees.

“Real turnaround is getting out of debt, and staying out of debt,” says Childress. www.theprincipiagroup.com

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11

On file: success story Incontinence product manufacturer Attends Healthcare Group was taken over by Rutland Partners, a turnaround and restructuring investor, in 2007. Though not in financial distress, the company needed to revamp its manufacturing operations and diversify its product range.

Rutland Partners sold the company to Domtar Corporation for €180 million (£144m) in January. Nick Morrill of Rutland Partners and Attends Healthcare Group CEO James Steele share their insights.

James Steele, CEO at Attends Healthcare Group

in g il l, m a n a g N ic k M o rr s er n rt a and P partner, Rutl

t th is tr ig ui ng abou W hat was in h ig h ad w as we h op port u n it y as a w it e us tr y, beca barriers to en ked li e w d an uct, technica l prod ed rv e markets it se the fact that th an of ic demog raph were a core tion. uch more high ageing popula to be a growing pharmacies, it ’s m as w e ce en in nt Inco chur n, and th was lume and fast so the market vo e if su is an th re r ca te th heal d was pressures are far grea But what we ha NHS. It took going to grow. eing ag an supplying the e ith ar w u d yo pe ap tr s to reposition a business as a profile that us about two year w It . u ile of pr t produc ng facilit y – yo ore e manufacturi addressed a m th ly al ic or t. st rs fi hi e had um, the lin had to design d of the spectr say . severe user en es exaggeration to m an t ho no re s ca it’ of So ck ba in e g th in f uct sitt c driven of , w ith the prod en an h is tori at h th w re e t m ti an a ic At ying to B oo ts , th er e’s si gn if t e NHS - was tr uc th od – pr er at th om g st cu ey didn’t engineering in buildin th n, w do g in am agement te squeeze pric higher The senior man er growth and d, but because a ge have any high an as ch largely un . So, if 10 w as ts w uc as od pr n margi ri ng sy stem w or e e w an te d m the manufac tu w ce r, du se re u d di vy e w h ea tegory. ore efficient ca m e 4 0ad e m th in customers to t a third. m it ment was labour by abou T he real com d already been h ig h ny The compa ha ly be spoke re ti nt en an d bu il e low prof itable and mak ing dece tion line at th uc as w od m pr le d ob ee sp pany the pr margins, but trum. The com re end of the spec line with health ca e ng m ri co tu to ac g uf in an go m a s. st ve co reduce didn’t ha lume and high systems tr ying to vo gh ve hi e ha th ld to do you wou I th in k what is demanded. , d speed that th ancial distress an s fin t ie no ac as ar m seen w ed ilt w d Su pply in g ph ha or at ls th but a business erent to hospita retailers is diff ing to on the vine. ll se e ar e w If ca re homes.

Over the past 12 or 13 years we have been owned by a number of different companies, and Rutland was the third out of four.

The ongoing challenge for the Attends Healthcare business in Europe has been that we are essentially a capital-intensive industry who work in a niche healthcare segment. The product concept is relatively easy to understand, but there can be complexity with the machines – that’s the nub of this business.

Our struggle has always been to punch above our weight. We are not a billion or trillion turnover firm, and we compete with larger companies.

Our stretch has always been to invest and diversify our product portfolio, and we have always wanted to be a leading provider of products, bringing innovation to the marketplace.

With Rutland, we did very well to stay the course for five years, because we did do a lot of challenging things. Where Nick referred to the “0-4s”, we made a machine that made 0-4 products with more complexity than anyone else has thought of doing. We made it work, and the machine had never existed before. The machine

provides around 35 new products.

It wasn’t always easy – we did reduce our overall headcount by 60 out of 400. But we keep on growing, so at the end of the day the net effect is we are back to where we started.

We are a growing and more profitable business.I think the key lesson for us would be to stick to strategy and be bold enough and brave enough, rather than doing things for the benefit of next week.

We need to think, ‘what are we trying to do for the medium and longer term?’

That’s what we have always tried to do.

We have been owned by companies which have been bankrupt and we have been in situations where we are struggling to make down payments, but we have stuck to our plans and tried to be as competitive as possible, and are now part of a public company.

Giving stakeholders a voice Get all stakeholders working together to turn a company around and you have the best chance of success.

We really are in this together...

INDUSTRY VIEW

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uccessful implementation of a new company strategy relies on the staff buying into that plan.

But in a business turnaround situation, it is not just the staff within the company who are affected. What about the creditors, suppliers or customers who each support and rely on that business?

A good turnaround specialist will be able to effectively communicate with all the stakeholders throughout the renewal process, but there is an

alternative solution - rather than just reporting to the external stakeholders, you involve them.

Organisations such as the Turnaround Management Association UK work to achieve an all-inclusive strategy without convolution and crossed wires. The TMA is a non-profit organisation for professionals in corporate renewal which is representative of all the stakeholders in the turnaround and corporate recovery markets.

Working as a collective of different skills and different interests, in

addition to interim managers they include bankers, trade and credit insurers, asset-based lenders, insolvency practitioners, lawyers, recruitment agencies and even the Trades Union Congress.

“People want to be part of the solution,” says TMA president Bryan Green, right, who is also an investor and managing director of TNUI Capital.

“I’m an investor and I’m trained as a lawyer. The president for next year is a banker; the previous president was

an insolvency practitioner.”

“It’s quite a broad spectrum of members. Everyone should have a voice in the turnaround and that’s what’s needed in the crisis that UK plcs are currently facing.”

The TMA works to inform and interact with its members.

Its members are able to offer strategic advice hands on advice and skills, alternative funding options for those businesses that cannot locate funds from traditional sources nor meet

the expense of a restructure, often forcing them into insolvency.

At a time of economic distress when all stakeholders are facing their own challenges, each has a vested interest in whether a business will succeed. Harnessing support from all avenues of turnaround is a great way to get people into the team spirit, gather creative ideas from various perspectives and professions, and better encourage a stable and positive frame of mind. www.tma-uk.org

Business Reporter · October 2012

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an independent report from lyonsdown, distributed with the daily telegraph

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Burying your head in the sand won’t solve all of your financial woes. Insolvency may be the only viable option of survival you have...

by Bonnie Gardiner

Keep your business hanging on

The ‘Big I’ is something so greatly feared by company leaders that often they would rather bury their heads in the sand over substantial issues than admit their business needs help.

In this economic climate, noticing problems as and when they appear means it’s possible to save your sinking ship. However, if you’re in too deep and you have a real cash flow problem – you can’t pay your staff, an investor hasn’t paid, the bank won’t give you another loan – then sudden ly you’re up insolvency creek without any paddles. At this point, it’s time to call for help.

Insolvency 101 Put simply, insolvency means the inability to pay ones’ debts. When insolvency occurs, your options vary from company rescue schemes to forcible liquidation or, in other words, selling your assets.

Whatever your triggers, you need to seek professional help – the sooner the better. Consult with your business accountant and solicitor, and meet with

a registered Insolvency Practitioner (IP) who can let you know your legal obligations and the various options available to you. For now, here’s a brief run down of what may be to come…

What to avoid As a struggling business, there are plenty of things you need to avoid to risk further deterioration. Stephen Moon, managing director of Venturn, lists some of the biggest no-nos of businesses facing insolvency.

“They shouldn’t be drawing funds out of the business themselves, they shouldn’t be preferring one creditor over another, and if they’re at the point of realising they don’t know the answers to their questions, they must seek professional advice,” Moon says.

Some business leaders even put their own money into the business, but according to Eric Walls, director of insolvency at KSA Group, this is a hopeless cause. The biggest thing a director should be aware of, insists Walls, is that they have a duty under law not to worsen the position of creditors, and depending on how bad their difficulties are, they may be

Using assets to restructure a business CABL is growing in popularity as a debt instrument used to finance a business turnaround

INDUSTRY VIEW

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usiness turnarounds often require the refinancing of an existing, possibly fatigued, lender and/or new money to fund the restructuring of the company.

Comprehensive asset-based lending (CABL) is a debt instrument that, while mainstream in the US for many years, has been somewhat slower to gain traction in Europe.

This has been partly because of a lack of understanding of the product (corporates have enjoyed the availability of liquid term debt and revolving credits and overdrafts in the European debt arena, at least until recently) and also because

CABL requires careful structuring owing to the complexity of varying security laws across the different European jurisdictions.

CABL is a form of senior debt financing that is secured against all the assets of a business in a single funding package. CABL lenders are known for structuring innovative transactions to meet the financing needs of their borrowers. The way an asset-based loan is structured and monitored maximises the funding amount for a company and affords it with excellent flexibility.

The loan is predominantly revolving credit in nature, and dependant on the underlying quantum and quality of the

company’s collateral base rather than struggle to generate sufficient cash corporate financial performance and flow to repay aggressive senior debt amortisation, and potentially fail cash generation. As such, lending is strict performance covenants leading monitored on this basis rather than to a default. in comparison to financial At its simplest, a turnaround CABL performance covenants as is the lender will assess the company’s case for traditional leverage. This turnaround plan and judge makes this type of lending whether there is sufficient particularly suited to A notable side debt capacity in the supporting businesses benefit is a deeper business to both refinance through turnarounds and understanding by the the existing debt on day restructurings when cash company of its own working capital cycle one and to fund the “cash flow may be tight and burn” during the performance may be turnaround until positive weak. While the company trading cashflow is achieved. will need to provide more The ABL product is best suited for information on a timely basis than it may have previously, this is balanced asset-heavy, cash-flow-poor situations: turnarounds, buy-outs by potentially lighter covenant where the leverage required exceeds restrictions and lower pricing. satisfactory cash flow multiples, and A notable side benefit is a deeper certain sectors –notably, distribution, understanding by the company of its manufacturing and retail. CABL own working capital cycle. It also provides funding against stock means that CABL is not affected by (among other assets), which many the debt markets’ fears surrounding traditional funders find default rates and over-leverage. As uncomfortable, especially in a such, it is ideally suited to tough turnaround situation. economic climates where businesses

For more than two decades, Burdale, a Wells Fargo company, has been a major provider of CABL to support UK corporate acquisitions, restructurings, turnarounds and refinancings. It has also worked with the financial advisory community to promote a better understanding of the product and its powerful applications. As a result, there is a growing appreciation among UK private equity investors and professional advisers that this niche lending product has an increasing role to play in the debt market.

In addition, much effort has been made to explore and develop CABL’s penetration into the European markets and there is an everexpanding knowledge base from which to draw upon when structuring pan-European transactions.

Steven Chait, managing director, head of Burdale 0845 641 8888 www.burdale.co.uk

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required to cease trading, especially if only continuing in the vague hope that things will improve.

“If you know for a fact that a large debtor is about to pay in twenty days – if there’s a guarantee that the money will be in their bank account by that time and then they will be able to pay creditors – well then that’s fine, that’s a valid reason to continue to trade,” he explains. “If they are simply saying ‘well, next week we are going to double turnover,’ that’s not a valid reason.”

Insolvent trading or ‘wrongful trading’ is illegal under the Insolvency Act.

Business turnaround

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management and the company shareholders, rather than creditors.

According to Moon, these specialists must be good leaders who are multiskilled as they deal with the company as a whole. You have to be willing to make a few difficult decisions – such as making redundancies, organising a premises move, and chasing down debtors – but a good turnaround practitioner will provide a clear strategy and communicate it to you so that you can make sense of any changes.

Turnaround can be implemented on its own, or in conjunction with a company voluntary arrangement.

Insolvency checklist Signs of distress? Act now! Look internally, make changes – if necessary seek the help of a turnaround specialist. Stephen Moon recommends avoiding rookies by ensuring they’re fully accredited– don’t be afraid to ask for references.

Struggling with cash flow? You still have options. Speak with your accountant, your lawyer, and seek advice from a registered IP ASAP – first consultations are usually free

Sunk… or still sinking?

When choosing the right course of action for your business, you need to first consider how far into the chasm you have fallen. There are services that help to bury a dead company, but also services that aim to deliver endangered companies back to safer ground.

If you’re getting in early, and you think the issues lie in the running of the company, often the best solution is to recruit a business turnaround practitioner who work s in the interest of

What is a CVA? A company voluntary arrangement (CVA) is a formal private arrangement with your creditors where you pay off debts within a certain timeframe – usually within five years. For some, CVA is a “great saviour”.

Walls explains: “This is an insolvency procedure, but it is not a terminal insolvency, so it allows the company to restructure the debts, and continue to trade under the control of its directors with a view to a better return for creditors.

As a CVA must be agreed upon by 75 per cent of creditors... If Walls: putting you can’t get that vote then you your own money have to pursue your other into a failing options. If CVA and restructure business is a doesn’t work, then you’re left hopeless cause w it h ad m i n i s t r at ion or liquidation.”

Benefits for all Private equity firms are leading the way in rescuing and reviving great British businesses from paints to plumbing

Discuss the issues and decide what the best option will be for your company – can you survive trading within a CVA? Or do you need to liquidate?

If there’s nothing left to fix, I’m afraid your business is, according to Halls, a “dead duck” - it’s time to liquidate. Creditors need payment or you could face legal action If the business cannot be sold, the final alternative is to shut it down, and sell off remaining assets – but your IP will see you through until the end.

Administration and liquidation Administration procedures also try and rescue the business, which can be done in a number of ways.

A c c o r d i n g t o Wa l l s , a n

administrator is sometimes appointed to a struggling business with a duty to “protect the interest of creditors in the best way possible”… that could be restructuring the business via a

lost their jobs. Banks secure best value for their “bad” loans and the vast majority of employees remain in rivate equity has taken one employment. heck of a beating from the Private-equity solutions such as press and politicians recently those provided by Endless can - greedy, tax-dodging, quickprovide a lifeline for businesses in flipping mavericks who borrow too need of support for much from banks and add nothing transformational activity. This to the economy. Harsh if you ask matters to the biggest of companies me, but then again I work for a as well as the smallest, as larger turnaround fund. businesses’ issues can be far more So who provides the money in complex and difficult to solve this secretive world? If you have a without outside involvement. pension or any form of Crown Paints, which long-term savings plan, Endless saw a Endless bought and it’s you. turnaround in turned around, Pension funds and profitability of represents a great insurance companies example of the role that are some of the biggest private equity can have investors in private in supporting large UK equity and for several businesses. Endless was years they have increasingly prepared to invest in a heavily been allocating money to loss-making UK manufacturer at turnaround funds such as the one I the peak of the financial crisis in work for, Endless.

2008 when other buyers were Every time a turnaround fund nowhere to be seen. invests in a company we create a The business had lost significant huge number of winners who gain market share since the 1980s but the long before we generate our own three years following Crown’s investment return. Our win is acquisition by Endless saw a dependent upon transforming a turnaround in profitability of £35m, loss-making, cash-absorbent securing 1,450 jobs in Blackburn, business into a profitable, growing Hull and elsewhere across the UK. concern again.

All this was achieved through At the point of our investment, investment in a new management suppliers avoid bad debts. The tax team, capital expenditure on the man collects his arrears and obtains shop floor and a new marketing monthly PAYE, National Insurance campaign, along with an awesome and VAT receipts rather than having effort from the entire team at Crown. to fund benefits of employees who

INDUSTRY VIEW

P

£35m

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C VA, selling the business, or if these options aren’t possible, closing it down and selling the assets to maximise the return for creditors, a process called a creditors voluntary liquidation (CVL).

“Liquidation means, for all intents and purposes, that the business has ceased” explains Walls. He cautions that administration can be quite expensive, as you have to trade under the administrators, which is a fairly risky process.

Admit you need help The journey through insolvency is a tough one, but it’s important to remember there are services and specialists available to get you through it. Often it can be difficult to adhere to the suggestions given by these specialists, but at the end of the day, this advice is given to help you.

The most important thing, however, is that you look out for signs of distress, and be prepared to admit from the outset– ‘I need help’ – something Moon thinks is far too rare.

“I’ve helped over 100 businesses, and every single one of them in hindsight say ‘if I had acted earlier I would have had more options and maybe I could have ended up with a more favourable outcome.”

Leaders are usually in denial that there is some sort of distress because it happens over a gradual period and they ignore the signs.

“It’s a slow decline into oblivion.”

Most recently Endless has invested in Bathstore, the UK’s leading specialist retailer of bathroom products. Seen as a non-core asset by its parent company, our acquisition was achieved in an accelerated timescale that could never have been matched by a trade buyer. That secured a swift and decisive transition to a standalone business.

Driven by the strength of its brand and renewed investment, the company will be able to sharpen its focus on identifying exciting opportunities for growth, particularly in e-commerce.

These examples show why private equity can be a key solution to companies which employ tens of thousands of people across the UK. Flexibility and speed of funding, access to knowledge and resources and an ability to look more widely at a business and its issues all help to deliver effective transformation in larger companies supported by private equity.

In a period of low UK growth and continuing risk within the eurozone area, turnaround funds will continue to be a source of support for those businesses aiming to revive their fortunes. Remember, next time you hear about a turnaround fund such as Endless saving a business and rescuing jobs, your monthly savings may well have played a part. www.endlessllp.com

Business Reporter · October 2012

14

an independent report from lyonsdown, distributed with the daily telegraph

Industry view

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A winning combination Struggling companies needn’t go on alonewith the perfect partner, even the most most challenged of businesses can be successfully turned around

INDUSTRY VIEW

W

ith the success of a fantastic summer of sport and national celebration lingering in our minds, it is hard to recall that in the spring, media reports were of doom, gloom and a double-dip recession.

As our athletes know, the key to success is to recognise problems or competitive advantages early and address them as soon as possible, with the support of experienced specialists.

From a business perspective, recognising issues is made more challenging for underperformers by difficult conditions and so the sooner companies seek advice and support, the greater their opportunity for success. That’s where business turnaround experts come in.

The Russell Partnership has more than 20

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years’ experience in supporting organisations particularly in the hospitality and leisure sector, including London 2012. It was engaged to create and deliver the food strategy for the Olympics - the largest peacetime operation in the world - and will be doing the same for the Sochi Winter Olympics in 2014.

Unrivalled experience The Partnership’s experience of identifying problems and solutions, advising management teams and supporting boards and investors to plan and implement financial, operational and sales and marketing strategies is unrivalled, and endorsed by prestigious committee and accredited associations.

Business turnaround goes under many names, including corporate turnaround, rescue or restructure, but it is the Partnership’s innovative approach to the development of commercially viable solutions and its experience in coaching and motivating individuals and businesses to achieve major

turnarounds that sets it apart.

The Russell Partnership’s head of turnaround, Mike James, most recently worked with a private investor to turn a £7m lossmaking operation into a break-even situation.

With specialist skills, in-depth operational experience and collection of support tools including business plan templates, commercial models, and benchmarking indices, the Russell Partnership team ensures that a business has every opportunity to return to operating at an optimum level.

0207 665 1888 www.russellpartnership.com

Destined to fail?

Companies must take active financial responsibility to give management a more accurate business understanding INDUSTRY VIEW

We witness the same pattern time and again in the distressed businesses we work with. The common thread is a lack of understanding of t’s common knowledge that a large their financial position, no reliable accounting percentage of the population are poor at and financial information, and perhaps most managing their personal finances, so why importantly, no appreciation that the lack of this do we expect anything different when those has contributed significantly to their failure. people go into business?

From the outset, ‘doing the books’ is viewed Their primary objective is to make money, as a burdensome task that must be done to yet many choose to ignore financial satisfy the bank manager or to get the VAT management because quite simply they return done rather than as a means to don’t understand it. Something in their ‘Doing the books’ is create useful information to aid subconscious tells them that if they viewed as a decision making. Accounting pay attention to the money; where it burdensome records are invariably way out of is; how it’s flowing; where it’s task that must be done to satisfy date, incomplete and of highly produced; and where it’s consumed; the bank questionable quality. then they would have to act on it manager Often a low-paid bookkeeper is – and they really would rather not.

I

Pension W pitfalls

INDUSTRY VIEW

Uncertainty surrounds the treatment of pension liabilities in restructuring situations

hen rescuing the value of a business an underfunded defined benefit pension scheme must be carefully considered.

The first consideration is the Pensions Regulator and its approach to Financial Support Directions (FSDs). An FSD requires a company to give financial support for an underfunded pension scheme.

If the rescue plan involves buying the business through an administration sale the impact of a FSD can be great.

An administration and therefore any sale could be jeopardised if there is a prospect of a FSD being issued.

The reason is as a result of a 2011 Court of Appeal decision where the administrators of companies in the Lehman and Nortel groups challenged the effect of FSDs issued after the companies had entered into administration.

The judgment (which is subject to further appeal) gave FSDs ‘super priority’ over the remuneration of administrators and amounts

tasked to keep on top of the accounts but given no support. An external accountant makes an occasional appearance, but never really has an understanding of the business, and produces historical score-keeping information, which is of no help to management.

If a business is to be successful it must think like a big, successful business. It is necessary to engage with competent professionals, perhaps through outsourcing, to ensure relevant, timely and high quality management information is available.

Armed with accurate information specifically tailored for the business, the

due to secured creditors with floating charges.

While the regulator has stressed its intention to ensure FSDs do not “frustrate legitimate insolvency and restructuring practice”, the prospect of an FSD may thwart a rescue plan by way of administration The second consideration is the approach taken by the Pension Protection Fund (PPF), particularly, in the light of reports of its dealings with luxury textiles firm Dawson International this summer.

The PPF compensates employees when a defined benefit pension

Reaching a viable agreement with the Pensions Regulator and/ or the PPF is fundamental

management team will have a better understanding of their financial position and the ability to make informed decisions.

Surely that sounds like a better solution than ignoring problems until the business fails and the only option is a turnaround (for the lucky ones)?

Garry Mumford is managing director of Insight Associates 0800 180 4265 www.insightassociates.co.uk

scheme is underfunded.

Dawson had been a profitable company but had a large pension deficit. Dawson offered the PPF a large cash payment, a loan note and a significant equity stake in the company in return for the PPF taking responsibility for its pension scheme deficit.

Dawson argued this was the best possible deal, and was more than the PPF would get if Dawson went into administration.

The PPF rejected the offer on the Jordan: think grounds it was insufficient compared about pension to the size of the pension deficit. liabilities The rejection was reported as having forced Dawson into administration and put 200 jobs at risk.

Sonia Jordan is a partner and head of the London Reorganisation, Restructuring and Insolvency Group at Salans 020 7429 6000 www.salans.com

Business Reporter · October 2012

an independent report from lyonsdown, distributed with the daily telegraph

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UK retail is in the midst of an extended period of restructuring but administration is by no means the end of the road

per cent increase throughout 2011.

Crucially though, most retailers that have been through administration have emerged as slimmer businesses with optimised store portfolios and more appropriate funding structures and cost bases.

Restructuring retail for tomorrow’s growth

Shoon restructuring

INDUSTRY VIEW

T

he UK consumer economy has been bumping along the bottom of the trough for some time, with little near-term prospect of sustained improvement. British Retail Consortium figures show that we’ve seen negative like-for-like sales across the retail sector as a whole in 11 of the last 18 months, with an even bleaker margin picture driven by the vicious cycle of constant discounting.

Alongside the weak macro-economic climate, the retail sector is also undergoing significant structural change, as the shift to omni-channel retailing reduces the need for physical space. And in an already difficult financing climate, some lenders are taking an increasingly tough stance to the retail sector – as seen in the banks’ apparent unwillingness to extend facilities in recent high-profile distressed situations such as Peacocks, Game and Clintons.

The net result is an extended period of UK retail restructuring, characterised by high levels of distressed deal activity and extensive space reduction.

entertainment, where the internet has completely changed the rules, may well see even bigger reductions - we are almost down to “last man standing” in sub-sectors such as music, electricals and books. The subdued housing market will continue to take its toll on weaker players in related sectors, particularly furniture/ home furnishings. But the largest withdrawal of space is likely to come from the highly competitive clothing sector, characterised by a very long tail of small and mid-sized retailers and aggressive online migration.

While much of this restructuring will come from healthy retailers right-sizing their portfolios, we will continue to see a number of failing retailers (often those with unsustainable debt levels) encountering high levels of distress and requiring some form of formal insolvency process. It’s not surprising that ONS figures show retail administrations and CVAs up 35 per cent in the first half of 2012, on the back of a 9

“Strategically and operationally, GA is bringing a new level of commercial rigour to the business,”

This certainly tallies with the experience of Also on the agenda is leveraging the existing retail restructuring firm GA Europe, which base to develop extra revenue streams through has been active in the UK market since 2010. new channels including web partners and In May, GA Europe supported a management concessions. Sanders is also confident that the buyout of footwear retailer Shoon, from business is scalable once again, having been administration. Shoon’s passage through slimmed down to 11 stores from 23. administration was not the white flag waving exercise, often associated with insolvency.

Time critical “We went into administration with a clear The administration process bought Shoon’s plan to work closely with all our key management sufficient time and space to find stakeholders in order to give the continuing the right restructuring solution – it traded in business the best possible chance, post administration for three months. By their administration,” explains Shoon’s managing nature though, most insolvency situations are director Stephen Sanders. “While we found the highly complex and incredibly time critical. administration process a blunt instrument, it For example, the 56-strong value department did serve to keep the business alive, protect the store chain TJ Hughes suffered against the tough profitable core, maintain jobs and give us time trading climate, and in July 2011 reached the to attract new investment.” point where administration was the only That investment, from GA Europe, option. Despite a complex situation with In the first half provided funding for working multiple debt holders, GA Europe of 2012 retail capital. The firm also took a acquired the £10.2m second-lien debt administrations minority equity stake. This met in TJ Hughes within a matter of days. and CVAs were up the management team’s Immediately post transaction,

35%

requirement for a supportive investor prepared to roll up its sleeves, and played to GA’s core retail operational expertise.

“Strategically and operationally, GA is bringing a new level of commercial rigour to the business,” enthuses Sanders. “Their role extends way beyond that of a lender.”

the restructuring specialist was able to deploy its operational expertise, taking full control of all TJ Hughes stores, while supporting administrator Ernst & Young in some key commercial aspects of the administration.

A swift pricing review and targeted programme of markdowns, backed by a comprehensive advertising campaign and aggressive stock augmentation, increased like-for-like sales by 60 per cent. Ultimately this improvement in trading performance enabled Ernst & Young to fully explore all options for the business, resulting in the brand and six stores being sold as a going concern to Benross Group.

Zombies beware

Space cull The sector is probably two years into a five-year period of rebalancing which will result in a 15-20 per cent decline in non-food physical space.

Structurally challenged sectors including

15

Turned around: Shoon retail

Looking ahead, GA Europe chief executive Gavin George expects UK restructuring activity to remain high in the medium term.

“Consumer confidence will remain fragile for the foreseeable future,” he says. “The space shake-out still has two to three years to run, and the lack of liquidity in traditional lending channels looks set to continue.”

There is also likely to be a further mini-wave of restructuring when interest rates eventually start to rise. “Although we are unlikely to see rising interest rates before consumer sentiment improves, highly geared zombie retailers will then struggle to service their debts, while banks will be better placed to crystallise their losses, says George. “At this point we would expect further bank-led insolvencies.” However, he does predict healthier days further ahead once the sector has fundamentally rebalanced.

And if there was some short advice for George to offer stressed and distressed retailers?

“Actively manage all your key stakeholders, get a clear view of key working capital pinch points such as quarter dates and supplier payments, trade for cash rather than margin, and make sure you have options – look at other financing routes and engage early with potential investors or restructuring specialists.”

Gavin George, CEO GAEurope 0207 318 0577 www.gaeurope.com

Business Reporter · October 2012

16

an independent report from lyonsdown, distributed with the DAILY telegraph

Business turnaround

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If I could design an MBA program...

MBA graduates must learn to adapt their training and knowledge to be able to work successfully in a small company I often whine about MBAs and their lack of ability to work well in small businesses. I’m not diametrically opposed to the MBA degree.

I am often disappointed by the lack of knowledge on the difference between smaller privately held businesses and the larger organisations and the way most MBA programs train their students.

MBA programs do a good job training people to work in the largest companies in the world.

When it comes to smaller businesses (those with less than 200 employees) they miss the mark.

The first thing I would do is help MBA students learn the difference in resources that different sized companies have. MBAs are often behind private equity groups. Too often private equity groups run by MBAs load up their portfolio companies with too many costs.

A successful private business knows all about making do with less. MBA graduates seem to think lots of “C” suite people are needed in every company. Smaller businesses that are successful have managers who can wear many hats.

Smaller companies can’t afford specialists.

I would teach MBA students that profits are not the key for private businesses. Large businesses usually don’t have

an issue with cash. They have plenty of cash. If you’re working with a publicly held company you are likely more interested in managing profits than cash.

In a private company it’s all about managing

When it comes to training for work in smaller businesses, MBA programmes miss the mark cash. In fact, if you look at the actions of many private business owners they will do everything they can to limit profits at the end of the year.

This is one of the ways they save on taxes which means they are saving cash.

Cash is king in a private business. MBA students need to learn this if they’re to be successful in this world. Many private business owners have the motto, “happiness is positive cash flow.”

I would have MBA students stop looking at discounted cash flow and other complicated financial tools.

Smaller businesses don’t obsess about the value of their business. I know very few private business owners who have any interest in

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Josh Patrick is a wealth manager specialising in working with private business owners. He writes at www.stage2planning. com/blog

maximising the value of their business.

One of the largest disconnects I see between MBAs and private business owners is on this issue. The only time a private business owner is interested in profits is when their company doesn’t have any. The rest of the time private business owners will have a different reason for running and owning their company.

I would teach MBAs there are three basic drivers for private businesses that create value.

Private business owners and MBAs would do well to pay attention to three basic drivers that create enterprise value in a business. The key to these four drivers is to make them operationally doable. When you develop an operationally doable strategy it is always simple, doesn’t take much time and can be easily implemented.

There are many things that MBAs know that can be useful to private business owners.

The problem comes in the use of jargon and language. If you have an MBA and want to communicate with a private business owner you have to realise the business owner usually doesn’t think about business in the classical manner you’ve been taught.

If you learn to speak to the business owner using normal arithmetic and language concepts they’ll get it and you’ll add value to the relationship.

Three drivers are: Develop a niche business. Many larger companies can try to be all things to all people. Successful privately held know who their customers are and have the ability to say no to those who don’t fit the niche they serve.

Develop one or two key performance indicators. MBAs often want to measure several things in a business. In most privately held businesses there are one or two key numbers that tell the story of how well the business is doing. Having drivers for your key numbers and having everyone having a number helps people stay focused on the one thing that drives business success.

Understand that cash is king.

We’ve already had a conversation about profits not being as important as cash. I would ask that you think about doing more than having positive cash flow, but also looking at developing a cash cushion. All businesses have good years and bad ones. Having dry powder helps private businesses make it through those down times.

The industry speaks The economic downturn continues to impact the pace and volume of financial restructurings in the UK and Europe. The extent and nature of the impact remains a source of much debate amongst restructuring professionals. Deloitte’s Restructuring Services team have captured the key themes from these debates in our latest report ‘The Industry Speaks’, a survey of lenders and investors discussing the outlook for the restructuring market. www.deloitte.co.uk/theindustryspeaks

© 2012 Deloitte LLP. All rights reserved

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