Turnaround & Transformation

TURNAROUND & TRANSFORMATION

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OVERVIEW

SPRING 14

Turnaround professionals assist business growth There are signs the economy is beginning to get back on its feet. As companies acclimatise to the changing business environment, Mark Orton, Midlands regional chairman of the Institute for Turnaround (IFT), believes turnaround professionals are best placed to help businesses realise their growth ambitions As a professional, I was an early convert to the use of turnaround executives. I have seen them add value massively through their skills and experience in guiding boards and stakeholders through the challenges of a turnaround situation.

I have also watched the IFT develop over the past 10 years, to where it is now seen as the leading organisation for turnaround and transformation.

Recently there has been a marked shift in the type of work turnaround executives are seeing, with a move way from crisis and bank introductions to transformation and profit improvement. As a result, members are increasingly likely to source their work from much more diverse sources, which requires a change in approach and greater focus on value creation.

The majority of members have significant experience in industry, often having been involved in running their own businesses and learning from difficult situations. They have not just learned these skills from a textbook or as an adviser, but have hands on experience.

It is this experience that will serve many struggling businesses well as they continue to face challenges in what remains a difficult economic environment, albeit an improving one.

These challenges include: • Raising finance with a damaged balance sheet and chequered trading history • Gearing up to increase productivity without taking the risk of additional fixed cost • Understanding the working capital

SPECIAL FEATURE | SPRING 14

Mark Orton, Midlands regional chairman of the Institute for Turnaround (IFT) implications of new contracts and increased business • Identifying the right footprint/size for you’re business – is it growth your seeking per se or a focus on higher margin business for which you need a smaller cost base?

• Does your existing management team have the right skills to manage change and make the most of opportunities?

The simple fact is that there has been a drive and acclimatisation over recent years to

reduce costs as a way of preserving profit.

Now there is a change in mindset at most boardroom tables to think about how to make the most of any upturn. Growth is unlikely to be dramatic, so there is time to plan and make considered changes. Now is a good time to be re-examining your strategy to identify where changes should be made to give a competitive advantage.

IFT members are ideally placed to assist management and business owners in times of change, and the same turnaround skills of clear strategic thinking and objective and rapid but considered decision making, are just as relevant in times of transformation.

Many members who have assisted in turnaround are retained by boards as nonexecutive directors or consultants to help them way beyond any turnaround phase for just those reasons.

My ambition as regional chairman is to promote the use of IFT members in support of the growth ambitions of Midlands business.

We are building links with the Institute of Directors, CBI, Business Growth Fund and Private Equity in order to ensure that we are ideally placed to achieve this aim. n

Growth is unlikely to be dramatic – now is a good time to be re-examining your strategy to identify where changes should be made to give an advantage

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TURNAROUND & TRANSFORMATION

SPRING 14

OVERVIEW

Achieving dramatic results IFT is Europe’s leading professional body for accredited practitioners who lead, support and implement step change in organisations across the full spectrum of public, private and social enterprise. Christine Elliott, chief executive of the IFT, believes the organisation’s members are best placed to help companies as they emerge from recession.

We can’t alter the past but IFT approaches the next decade with an experienced conviction that each and every individual can help create his or her company’s future by driving change.

New channels for communication increase our ability to do so at speed. Coming out of recession, many companies will have to manage the dilemma of securing growth and managing the cash flow pressures associated

with over trading. IFT members have been focussing their skills on driving growth on a stable financial basis.

Busy owner-managers may have a ‘glass half full’ attitude when it comes to growth opportunities and external investment. It’s natural to focus on how the company is now or in the past, rather than taking a considered look at what it has the potential to become.

The number one determinant of how much your business is appreciated, is attitude.

Strategic position at the outset of a journey through change counts for much less than actually making things happen.

At IFT, we know from experience about the importance of culture to delivering superior economic returns. When a business hits hard

Christine Elliott, chief executive of the IFT

times, it is the human factor that decides whether a turnaround will work. And, as the following case studies show, IFT members have been helping companies turnaround their fortunes with some dramatic results. n

Fast tRaCK LocaL experts

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Accelerating success.

03/02/2014 11:59

SPECIAL FEATURE | SPRING 14

CASE STUDY

SPRING 14

How I got a struggling firm back on track The loss of the management team and merger with another company sent a subsidiary of a Northern Ireland packaging company off its previously profitable track. IFT member Allan Booth explains how he was sent in to troubleshoot.

In January 2008, I was engaged by a Northern Ireland packaging group to execute a turnaround of its UK subsidiary ‘Quality Label Co’, which it had acquired the previous year with funds provided by Bank of Ireland.

The Bank engaged PwC to advise. PwC recommended me to take a turnaround role in the company and restore its previously healthy balance sheet. Quality Label Co is a supplier of labels to a blue chip customer base in the cosmetics, toiletries and food markets. It had an excellent reputation and was consistently profitable prior to acquisition. Post acquisition, the managing director retired and the business merged with another group label company, Utility Label Ltd. Utility was loss making and had been purchased out of administration a few years before. The combined business had 200 employees and turnover of £16m.

Sales were falling at 15 per cent, with little or no new business pipeline, overtime was

Alan Booth

running at 22 per cent and downtime doubled. The business could not service its debt or interest and was in a cash flow crisis.

In the week following my appointment, credit insurance was withdrawn on the £0.75m stock line facility, worsening the position.

As MD, I instigated the following: • Senior team reorganised, replacing the

financial and operations directors • Introduced daily white board meetings, quality measures and root causes identified, and consistent measurement of KPIs • The production plan was stabilised and schedule compliance measured daily • Customer profitability was analysed and prices increased by up to 30 per cent • The workforce was downsized, with 45 people made redundant • The business processes were simplified • Middle management was trained and production space reorganised By late 2008 the following had been achieved: • Break even down by £2m and 15 per cent • EBITDA, four per cent net profit and able to service debt • Cash and working capital improved • Service levels above 95 per cent, with quality costs halved and on a downward trend • A healthy and rapidly growing new business pipeline • Debt rescheduled and business was on plan This was achieved despite the crash instigated

by Lehmans in September 2008. n Allan Booth runs his own consultancy firm – Active Strategic Management.

Scaffolding contractor needed support Bob Frost of Arca Group describes how he helped prop up a specialist scaffolding contractor and provided them with a platform for growth. The business was a long established contractor with an £11m turnover and 150 staff. It had bank debt of £2.3million.

The company operated from three sites around the M25 but as the construction industry contracted, the business lacked the flexibility to manage a reduction in margins.

The management was no longer able to exercise sufficient control over project profitability, cash collection and inventory and there had been a loss of control following the sudden death of the financial controller.

The business was unable to manage its shortterm cash position, produce regular and

SPECIAL FEATURE | SPRING 14

reliable financial information and was unable to determine which sites and which contracts were profitable. HMRC arrears were climbing and pressure from suppliers was increasing.

Arca Group initially took control of the cash position and managed all payment commitments to ensure the business was making the maximum use of its working capital and bought time to develop a plan.

In parallel, a programme of final account agreements and retention releases was established to improve cash collections in the short-term. We prepared weekly cash forecasts, which highlighted funding gaps and began to educate both management and lenders on the major cash flows. It also helped to formulate a plan for payment of the HMRC

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arrears. A formal ‘Time-to-Pay’ agreement was negotiated and this re-assured the lender.

Step three was to prepare management information to show the trading performance of the business, highlighting the margin and overhead issues.

The three sites were reduced to two and duplications in the vehicle fleet and staffing were eliminated, saving £1.6million per annum. These savings were overlaid onto the ‘base case’ forecast to demonstrate that the business could service its existing debts and pay off overdue liabilities within a reasonable timescale. This process, when added to the agreement with HMRC and the forecast cash generation, persuaded the lender to support the business through its recovery. n

TURNAROUND & TRANSFORMATION

SPRING 14

CASE STUDY

Ailing care home group needed some TLC IFT member Philip Smith, partner at The Red Clover Partnership, took control of an ailing care home group. He explains how he tackled its problems head-on in order to nurse the business back to health Avon is a care home group with around 2,000 employees and circa 40 plus sites across the UK. It offers a mix of residential and nursing care, including dementia, to around 1,600 vulnerable adults.

The group had been financed during the last economic boom when property values and care home multiples were at an all-time high.

The homes were leased to Southern Cross for a number of years, but then following its collapse were rapidly moved to a new operator.

The homes had been badly maintained and the new operator was poorly resourced and unable to cope with issues that were emerging, including: • Increasing demands from the regulator and local authorities to see investment and change to the estate • Sub-optimal levels of occupancy across some of the portfolio, leading to financial pressures • A management team that lacked the right processes and skills to keep on top of the issues and to identify the right priorities • A deteriorating cash position and no financial information.

I was invited to join the board to lead a process to reinvigorate the business and provide some clear strategic direction for

Philip Smith, The Red Clover Partnership the future. I implemented a new, short-term cash flow forecasting process to understand the cash flow pressures in the business, which was used to obtain additional funding from the company’s bank and allow the team to develop its plans to recover value.

I was quickly able to identify the key issues, which were: • The way the management team worked needed to be radically changed to meet the demands of the business. The change was required from the “shop floor” to the board • Investment in the homes was needed to address the health & safety issues and the

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Kate Collyer has for the last 15 years specialised in business recovery and turnaround.

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Her friendly and down to earth approach has enabled her to work with a wide spectrum of businesses, from small local farming enterprises to multi-million turnover companies.

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In 2013 she was a finalist in the Turnaround Practitioner of the Year.

SPECIALISTS IN CHANGE MANAGEMENT AND BUSINESS TURNAROUND KATE COLLYER

TURNAROUND & TRANSFORMATION

general fabric of the buildings • The company’s long-term health was at risk from a swap contract, which was going to have to be restructured and changed fundamentally • A new name and brand was needed to shake off its previous corporate identity New processes and ways of working were implemented to bring better structure, information, governance and control. This substantially improved the management information available to board which, when coupled with new governance arrangements, gave better board insight and confidence to all stakeholders that right decisions were being made.

A plan was presented to the bank to support an investment programme in the estate which would create both improved quality and amenity for residents, which in turn would drive revenue growth. As part of this plan the SWAP contract was broken and the business was refinanced on terms which gave the business “breathing space” whilst it transformed itself.

The business was rebranded in late 2012 and has just completed its first year with its new identity, culture, improving levels of quality and financial sustainability. n

To discuss how Kate can help you and your business please call 07971 192126 or email enquiries@riverhorseadvisory.co.uk

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SPECIAL FEATURE | SPRING 14

VIEWPOINT

SPRING 14

what the ift means to me Private equity providers are increasingly looking to turnaround professionals to bolster under-performing portfolios. Mike Collis, from Maven, and former chairman of the IFT in the Midlands, explains Mike Collis, of Maven

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SPECIAL FEATURE | SPRING 14

Private equity continues to raise its profile as a significant source of finance and growth capital in the Midlands economy.

Since the banking crisis of 2008 we have seen the introduction of a number of intervention funds to satisfy a perceived market failure in the provision of capital to growing businesses. Perhaps the most significant development has been the establishment of the Business Growth Fund, with the assembly of a strong regional investment team with challenging targets to deploy capital in the larger SME and lower mid-market.

In addition there has been a growth in funds dedicated to financing growth in smaller companies with Finance Birmingham joining established players such as Catapult/Opus and Midven.

Venture Capital Trusts are also raising record amounts of capital to be deployed. We are also seeing a growth in equity only deals, where managers are displacing the traditional provision of senior debt in funding buyouts and growth in order to deploy more capital and retain more control over their investments. Whether or not this reflects a more cautious approach by senior lenders to the provision of debt to smaller businesses, there is no doubt the importance of private equity, as a stakeholder in our local economy, is likely to increase over the foreseeable future.

Like all private equity fund managers, Maven has to deal with issues of under-performance or distress within its portfolio. When we look for external help to address these issues, we often turn to the IFT. There are a number of reasons for this: • The membership of the IFT is diverse in terms of the experience and skills of its members • The IFT is the only organisation that requires turnaround members to be accredited and to put the claims of past success through a verification process • Membership of the IFT has allowed me to get to know and network effectively with the turnaround community and meet some great people • I am impressed with the IFT’s commitment to continuous improvement and its programme of briefings and technical seminars This adds to the stamp of quality associated with the brand and is something the IFT is committed to in its objective of securing chartered status. Finding relevant and useful content to support my own professional development can be difficult and I value the IFT’s commitment to this area. In summary, my message to non-members is to seriously consider getting involved. Likewise, portfolio managers within the private equity community might be missing an important string to their bow if they are not actively engaging with the IFT. n

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TURNAROUND & TRANSFORMATION

SPRING 14

COMPANY PROFILE

Going for growth: The new battle for business Phil Emmerson, business restructuring partner at accountancy and business advisory firm BDO LLP in Birmingham, takes a look at the new set of challenges facing growing businesses in a recovering market The past six years have been busy for restructuring advisers, whose behindthe-scenes expertise in rescuing and reviving businesses has been in constant demand since the financial crisis.

But as we start to witness an upturn in the economy, our role is far from redundant.

Formal insolvencies may be the type of work that dominates the headlines, but genuine restructuring creates more success stories for our regional landscape than many realise.

In January, business confidence rose for the eleventh consecutive month to its highest level in seven years according to our own Business Trends report.

We’ve seen the property market bolstered by the Government’s Help to Buy scheme, which has helped almost 13,000 homebuyers since its launch. Manufacturers in the region have also experienced a surge in activity, with output and order balances at +47% and +27% respectively during the final quarter of 2013.

There are undoubtedly grounds for optimism and there’s a buzz in the market that’s been missing for some time. But many businesses still face significant challenges.

Businesses have transformed themselves into lean, mean, surviving machines having streamlined over the last few years to stay afloat.

However it is easy to forget that one of the most dangerous times for a business is immediately after a recession, when a lack of investment and the impact of servicing growing demand can take its toll.

When the orders start flowing and companies expand at speed, working capital requirements can change dramatically. For example, when businesses commit to new orders - for which payment for the finished product can be many months away – they often struggle to cover the

TURNAROUND & TRANSFORMATION

There are undoubtedly grounds for optimism and there’s a buzz in the market that’s been missing for some time

Phil Emmerson, business restructuring partner at BDO LLP in Birmingham

upfront costs of raw materials and production or meet the 30-60 day payment terms from suppliers.

Overtrading can very quickly set in, and in many cases will put serious strain on the financial and operational systems that are now manned by much smaller teams.

Resourcing this increase in demand from customers and supply chains also puts pressure on management teams that may not have the experience of dealing with a ‘positive’ crisis or managing the stakeholders in their business.

Burying your head in the sand is not an option; without adequate working capital and operating efficiencies in place, a large number of businesses are at risk of overtrading and falling at the first growth hurdle.

Often the linchpins to success or failure, relationships with stakeholders are key, particularly a company’s relationship with its

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bank or lender. Banks and lenders rarely cause problems - they react to them - so recognising the importance of their position is crucial. They’re not keen on surprises even in the best of times.

For some it may be that existing funding arrangements are not appropriate or the banking relationship has run its course and alternative financing options need to be considered. But often, working hard to avoid ‘lender fatigue’ and presenting your business case to a bank or lender in the strongest light can have a swift and positive effect by itself.

Every business needs to plan for its future, anticipate new trends and prepare for the good and bad times. In my opinion, they must structure and restructure to meet the demands of time, as part and parcel of a business’s life cycle.

Restructuring should not be seen as a last resort but as a leap of faith that can put businesses in the strongest position to maximise the growth opportunities a recovering market presents.

Phil Emmerson, Business Restructuring Partner BDO LLP. T: 0121 352 6290 E: phil.emmerson@bdo.co.uk

SPECIAL FEATURE | SPRING 14

SPRING 14

COMPANY PROFILE

Your supply chain is only as strong as the weakest link Dominic Wong lead partner at Deloitte LLP’s Midlands restructuring team takes a look at how to manage supply chain risk In these difficult economic times, the potential damage to your business caused by the failure of a key customer is no doubt something you have considered. But what about the failure of a supplier? You can insure against the failure of a customer, but have you fully considered the implications of losing a key supplier?

At Deloitte, we have extensive experience of working with businesses across a range of sectors and have helped our clients with a huge range of business issues caused by problems within the supply chain. And it’s not just a matter for the automotive business that can’t supply cars with a satnav or a DAB radio, it’s also relevant to the broadcaster that loses advertising revenue because of a primetime outage or the supermarket that has no sprouts at Christmas.

Here we explain some of the key areas to consider to reduce your supply chain risk.

The cost of cutting costs In the pursuit of cash savings and economies of scale, it is easy to focus on the best deal when sourcing products and raw materials. However, this short term focus can mean exposure to significant business risks. The insolvency of a supplier can bring costs from production stoppages or delays, stock outs, revenue loss and the cost of adjusting your own production cycles to different materials with no warning. It is vital to think about how you can monitor supplier risk and implement strategies to mitigate the effects.

Consider: • Which suppliers are critical to business continuity?

• Are any of them at risk of failure?

• What can you do to identify and protect yourself from the ones at risk?

TURNAROUND & TRANSFORMATION

sources can provide insight into your supplier risk and weaknesses in your current supply chain.

If the level of information you have is insufficient, consider requesting additional data from existing or future suppliers. This can often be added relatively painlessly to the tendering process or terms of trade. Once you have established your current position, make sure a process is in place to regularly update information.

Dominic Wong Partner Deloitte LLP Information is power Who are your most vital suppliers? They may not simply be those with whom you spend the most.

Give thought to order lead times or shipping times – could you source replacement goods quickly? Are there product specifications that currently source materials from a very limited range of suppliers (or even just one supplier)? What do customers need?

Include information from financial, operational and sales channels in reviewing what internal data you hold. Give additional thought as to whether you rely on sub contracted labour. Failure of these suppliers can have huge implications for business continuity, especially within the construction sector. Outsourced functions within your business should also be reviewed: the sudden loss of an IT or payroll provider could cause major disruption.

Once you have identified key suppliers, information on their operational and financial performance is important. But it can also be important to identify tiers and inter-relationships between suppliers. Do you have visibility of further up the chain to your suppliers’ suppliers? How reliant are they upon you or any other single customer? A system of risk profiling and ranking suppliers based on these various information

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Mitigate the risks What mitigations could be implemented to diversify your risk and reduce the implications of damage from failure of a key supplier? Can you adjust production specifications without significant cost or disruption? Can you implement purchasing controls to restrict the quantity of product on order from any one location? Consider devising a response plan in the event of the potential failure of your essential suppliers.

You can’t always foresee the failure of a supplier or fully mitigate against the risks of such failure.

But having as much information as possible in your hands, increasing your flexibility and giving advance thought to risk management and response may mean you can avoid major cost, disruption and damage to your business.

Deloitte has a highly skilled and experienced team specialising in Supplier Risk Mitigation.

We have a proven track record of working with our clients and their suppliers to assess and mitigate supplier risk. We would be happy to discuss any aspect of concern you might have in your supplier base. Please contact Dominic Wong on 0121 696 8585 E: domwong@deloitte.co.uk

SPECIAL FEATURE | SPRING 14

CASE STUDY

SPRING 14

lighting firm can shine again Orbis Partners LLP returned Abacus Lighting to profit just one month after taking control of the niche engineering and lighting company.

James Grenfell, a senior partner at Orbis, explains how they did it key supplier • Working capital gap in both the UK and Chinese operations • No clear leadership from management

Completion Process

James Grenfell, of Orbis

In May 2013 we acted as principal to acquire Abacus through our investment vehicle, Intrinsic Equity. Abacus is a global leader in the design, manufacture, installation and maintenance of specialist masts and lighting solutions across a wide range of industries – they installed the new floodlights at Edgbaston Cricket Ground. The business has been established for more than 50 years and employed 250 at its UK head office and four international subsidiaries. A number of factors contrived to put the business under cash pressure, including an £8million underfunded defined benefit pension scheme and an over ambitious international expansion programme that was loss making. Orbis Partners was introduced to Abacus while an accelerated M&A process was undertaken

by Deloitte. There was interest from trade and distressed private equity but none of the solutions involved the management team or recognised any value for shareholders.

We worked with management to establish if their financial and operational plan would allow a solvent solution. Our review highlighted a number of issues, including: • Deteriorating trading performance • Order intake trend did not support forecasts • Production and delivery issues with the

SPECIAL FEATURE | SPRING 14

We concluded Abacus would only survive if restructured, and after several weeks of discussions with Deloitte and HSBC, we agreed to acquire the group’s trade and assets through a pre-packed administration. The deal included: • Transferring all employees under TUPE • Taking options over shares in overseas subsidiaries • Undertaking to pay no less than £2 million of old company unsecured creditors • Fulfilling part completed customer contracts where they had paid deposits • Indemnifying HSBC for old company performance bonds guaranteed by the bank • Introducing a £5 million funding package comprising a £3.5 million ABL facility from Centric and a guarantee and equity injection of £1.5 million We introduced two of our operating partners to help refine our turnaround strategy and execute the plan, as CEO and finance director.

Post Completion • Post completion a number of key actions were set into motion.

• Negotiating terms with suppliers so that

production could be re-started • Informing customers with open orders of revised delivery times and re-assuring them • Contacting the international customer base and agent network, restoring their trust in the Abacus brand and setting deliverables that we would expect to be measured against Working with the union representatives and employee groups, within three weeks we agreed a redundancy programme and changes to employment contracts. This was an important step towards reducing the cost base to reflect current activity and a conservative forecast. These actions helped generate a sustainable underlying profit of £150k in the first full month on a turnover of £1.7m.

Our focus then shifted to realigning the organisational structure to deliver the strategic vision. We defined roles and responsibilities and provided clarity of thought, communication and leadership.

Further investigations found that the Dubai office and China facility were not viable.

We also re-focussed Abacus on its core areas of sport and rail lighting, where its products and services enjoyed better margins.

After six months, the profit and cash performance remain strong and above plan with more than £1million of headroom on our bank facilities. We remain committed to the promises we made to customers, suppliers and employees – promises that we need to keep. n

A number of factors put the business under cash pressure, including an £8 million underfunded defined benefit pension scheme and an over ambitious international expansion programme

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COMPANY PROFILE

A national law firm at the heart of Birmingham Proud of its Birmingham roots, Gateley is a growing, top 50 UK law firm with 150 partners and 300 further lawyers.

It offers commercial legal advice based on an integrated, partner-led service, operating from offices in Birmingham, Edinburgh, Glasgow, Leeds, Leicester, London, Manchester, Nottingham, and Dubai. Our specialist teams cover all aspects of legal services, including corporate, banking, real estate, technology, social housing, construction, employment, pensions, dispute resolution and shipping.

The firm has won over 40 awards since 2010 including Best Regional Law Firm at the Legal Business Awards and was voted 2012 Corporate Law Firm of the Year at the Midlands Insider Dealmakers Awards. 99 of our lawyers are ranked as ‘Leading Individuals’ in the 2014 edition of Chambers.

Our Birmingham team continues to lead in the local deal market and has advised on some of the city’s highest profile mergers and acquisitions including AIM-listed Network Group on its merger with recruitment group, Pertemps, the acquisition of public transport infrastructure group, Trueform Engineering by Grove Industries and the refinancing by Lloyds Banking Group of the Belfry Golf Club.

At the end of 2013, Gateley had moved from thirteenth to second place in the national Experian Corpfin M&A Advisor league table based on Corporate deal volumes - achieving first place in the Midlands region’s rankings. The Corporate team helped clients deliver on more than 250 deals with a combined value in excess of £1.4 billion over the course of the year. Of these, 55 were private equity based transactions with an aggregate deal value in excess of £400 million.

We are most proud of our continued growth

Key contacts Corporate: Michael Ward (senior partner) Banking: Andrew Madden Real Estate: Rebecca Sherwin Corporate Recovery: Mark Wilson Commercial: Simon Pigden Dispute Resolution: Stephen Goodrham Employment: Victoria Garrad Tax: James Gopsill Construction: David Lloyd Jones Pensions: Michael Collins Private Client: Jane Halton

Mike Ward Senior Partner

despite a tough trading climate. In 2013 we reported positive financial figures which saw the firm increase its overall fee income by 10%, with fees for the Birmingham office growing by 14%. Over the year we were also able to employ an additional 30 people and maintain levels of investment in our training programmes for fee earners and support staff.

Our people have raised over £1.5 million for a variety of charities over the past decade and take a leading role in a wide range of community organisations – several Birmingham partners hold positions of responsibility within charitable organisations including Walsall New Art Gallery Development Trust, Birmingham Centre for Arts Therapies, Sound it Out Community Music and Argosy Musical Theatre Company. Some of the local charities we are supporting for the 2013/14 financial year include Anthony Nolan, Birmingham St Mary’s Hospice and Acorns.

Gateley is backing the Birmingham Metropolitan

Our Birmingham team continues to lead in the local deal market and has advised on some of the city’s highest profile mergers and acquisitions

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College in its creation of the country’s first specialist professional services academy. With a curriculum focused on qualifications in law, finance, accounting, banking and insurance, this initiative will satisfy Birmingham’s professional services skills needs long into the 21st century.

Since September, the Academy has delivered 34 ‘guru lectures’ and site visits to around 60 students. As well as a co-founder, Gateley is the exclusive legal partner providing high-level support for the students, including mentoring, workshops and lectures which involve 25 of our fee earners. Through the Academy, we hope to open up careers into professional services for young people who might not otherwise have had the opportunity.

Gateley LLP, One Eleven, Edmund Street, Birmingham, B3 2HJ T: 0121 234 0000 E: info@gateleyuk.com LinkedIn: www.linkedin.com/company/gateley-llp Twitter: @GateleyLLP We operate several blogs across our practice specialisms. Visit them here: http://www. gateleyuk.com/news-and-events/social-media/

SPECIAL FEATURE | SPRING 14

CASE STUDY

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Recovery plan bolstered by Chinese venture Bill Reeves, of Taiga Partners, explains how he pulled a £30m turnover manufacturer of capital equipment, with an international customer base, back from the brink.

The company is a long established and well-respected designer and manufacturer of capital equipment, the majority of which is exported.

I was introduced to the company in September 2008 by its bank, on the recommendation of an advisory firm, which had been instructed to carry out a full independent business review (IBR) following a period of losses and resulting pressure on the company’s banking facilities.

I worked closely with the board, initially with the financial director, to review financial

information and produce an analysis that could be used as a basis for board review, and then, in a series of workshops with the board, built an understanding of the causes of the deterioration in financial performance.

Product rectification costs and rapidly rising raw material costs, which squeezed margins, were the main causes. It could have recovered but the global financial downturn was already impacting the business through a dramatic reduction in its order book and sales pipeline.

The plan that we built included site closures, substantial redundancies, the rationalisation of the company’s materials requirements planning systems (two systems into one), senior management reorganisation, improvements to key business processes and controls and the introduction of industry

leading CRM software to help professionalise the sales force. These actions resulted in a reduction in the cost base of £1.8m, improved stock control, and more effective management of sales prospects and the tendering process.

A new manufacturing facility was established in China to service the Far East market. Albeit a bold move, it was supported by the bank on the basis that it was an essential part of the total recovery plan.

Although the company made a loss in the first year, since then it has increased its profit year on year. The new manufacturing facility in China has played a key role in the recovery of the company’s fortunes and the focus is now on developing the company’s products and markets in order to build on the success to date. n

Peter bridges the gap to rescue fashion firm In 2009, a Midlands-based ‘fast fashion’ business was employing 29 people and incurring losses on sales of £9m. Today, it employs more than 70 people and generates strong profitability on sales of £23m.

Peter Bridge, chairman of Adex Bridge & Associates Ltd, explains how he helped restore the business to profitability and growth.

In June 2009, I was invited to meet Keith, the owner-manager of a ‘fast fashion’ business that designs tops for women and children. These were made in Egypt, for UK fashion retailers. Although overheads had been reduced, the business continued making losses and was running out of cash. Annualised sales were £9m, down 25 per cent on the previous year. We spent several hours discussing his business and the following day he asked me to help him turn the business around. Firstly, we introduced a cash monitoring and control system, followed by a turnaround plan to focus our resources over the coming months, communicate to employees and present to the bank. Both the

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employees and the bank agreed to support the plan. We visited his supplier in Egypt, who was continually failing to deliver on time.

Although the supplier agreed to change some of his processes, it was too risky to be entirely dependent on one supplier, so we found and began using garment manufacturers in Lithuania, Turkey and Morocco.

Twelve months later our delivery performance and customer confidence had improved, sales had grown to £10m, but more importantly margins were two per cent higher and profitability and cash generation were restored. Since then we have expanded our customer base and now supply all the value fashion retailers, as well as many of the fast fashion retailers in the UK. Last year we reported sales of £21m and profits before tax of £1.2m. This year we have formed a joint venture whereby we manufacture garments in the UK and deliver to retailers within 3-4 weeks from date of order. This should enable us to increase sales to £23m this year and £25m next year. n

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Peter Bridge

TURNAROUND & TRANSFORMATION

SPRING 14

COMPANY PROFILE

Supporting your business Helping you make the right financial choices Many experts in the recovery sector talk about the turnaround of small businesses being a challenge in the current marketplace – where does the support come from? These are issues that we see on an almost daily basis.

Many see the attitude of the clearing banks as being the major obstruction to achieving any form of growth in the current market place – the rhetoric of the banks is that they are here to support businesses, but when it comes down to it, it is clear that there are many hurdles in the way of small businesses borrowing sufficient funds to enable turnaround or growth to take place. That is not to say that all businesses should be turned around, there are undoubtedly those which have struggled and for whom there is no clear profitable future and these businesses as ever fall by the wayside, but that does not detract from the view that many businesses that have a future if only they were able to access the finance required to enable them to deliver growth.

It is interesting that in opposition, Vince Cable was almost a lone voice in saying that the banks had got it wrong in terms of what they were doing and yet now that he is in power seems to have changed his tune. Banks talk of funding recovery – the uptake of various government schemes is always questionable, and one does wonder whether the banks are merely converting existing facilities to new debt with the addition of a small

Richard Mason,

amount of funding for the business concerned.

However, there is light at the end of the tunnel.

Whilst banks are not lending they are also not providing great returns for savers either and with inflation running in excess of 2%, many savers are not seeing a rate of return on the capital that they have invested. Hence the emergence

Whilst banks are not lending they are also not providing great returns for savers either and with inflation running in excess of 2%, many savers are not seeing a rate of return on the capital that they have invested. Hence the emergence of the peer to peer lending market. This is a dynamic market place where people with money lend directly to people or businesses wanting to borrow money with a margin in the middle made by the platform that arranges the loans TURNAROUND & TRANSFORMATION

13

of the peer to peer lending market. This is a dynamic market place where people with money lend directly to people or businesses wanting to borrow money with a margin in the middle made by the platform that arranges the loans.

Some may view this as a risky investment, and there is no doubt that risk does come with the interest rates being achieved, generally between 7-11% per annum, but it is fuelling growth, and providing a real return for the people with money who are not otherwise achieving it within a banking environment.

Ludgate Finance has been at the fore front of this turnaround and in the last 2 and a half years has raised over £20million for small businesses looking to grow, expand and turn themselves into profitable businesses creating jobs and helping build the economy. Most scenarios have been when banks have not supported growth. Business advisors, have been conditioned to the fact that no funds are available and therefore have passed the same message on to their clients, resulting in little innovation or growth plans. We know that there is now finance out there, the key is how the marketplace accesses it and this is where Ludgate is able to help as experts in the peer to peer lending sector.

As the message spreads, so it will be easier for the businesses seeking finance to access it and be able to enhance their growth opportunities, employ more people and bring this country out of recession.

For more information please contact Richard Mason on 07894 621 190 E: richardm@ludgatefinance.co.uk

SPECIAL FEATURE | SPRING 14

VIEWPOINT

SPRING 14

THE ZOMBIE ECONOMY Brendan McGeever, the immediate past chairman of the IFT in the Midlands, and a partner at Gateley LLP, explains how ‘zombie’ businesses can be brought back to life The current economic forecasts paint a picture of optimism but we are experiencing something not seen after previous recessions, a rise in the number of companies struggling to generate sufficient cash to do anything other than service existing debt.

For several years these so-called ‘zombie’ companies have only just managed to survive because of historically low interest rates.

The banks are effectively in control, but are not risk lenders. A number of government sponsored initiatives have tried to deal with the problem, but very few have actually managed to reach these companies.

So how big is the problem and what is the solution? Research suggests that as many as 150,000 companies can be categorised in this way. Suggestions for dealing with the problem are polarised. At one end there are those who espouse the Darwinian theory that these companies should be cut adrift and left to wither. This arguably ensures that those left have a better opportunity of surviving.

At the other end of the scale are those who think that, with help, many of these companies can pull through but they recognise that urgent attention is needed to avoid the catastrophic effect of multi corporate failures and the ensuing job losses, which affect not only the workforce itself but the families around them.

The IFT is very much in the latter camp.

Being a zombie company does not mean that insolvency should happen or is inevitable.

The IFT recently carried out its own research into the size of the problem and the issues involved and some of its findings make for interesting reading. The research was conducted across some 250 companies, from those turning over less than £10million to those turning over £250million. However,

SPECIAL FEATURE | SPRING 14

Brendan McGeever, Partner, Gately LLP

It is only when an organisation sustainably grows, that turnaround is accomplished the core of the research (56%) was mediumsized enterprises. The survey covered total sales revenue of £18.6bn and 1.05m employees. Total debt represented was £12.5bn, of which £4.7bn (37.6%) was unlikely to be repaid.

The findings were not surprising:

14

The three key reasons for holding back UK recovery were: • Availability of credit (43%) • Procrastination/lack of leadership (42%) • Depressed consumer spending (41%) The size of UK enterprise hit hardest by recession was the SME/family business (61%).

The three most important reasons for returning zombies to viability were: • Assisting UK economic growth (89%) • Saving/creating jobs (81%) • Boosting production (49%) The IFT membership is committed to helping zombie businesses. In its Articles of Association, the IFT is clear that its sole purpose is “the rehabilitation and return to viability of under-performing organisations”.

This means creating something sustainable – it is not about financial engineering or short-term cost cutting. It is only when an organisation sustainably grows, that true turnaround is accomplished.

The IFT has a five-point plan to help zombie businesses return to viability: 1. Establish what the true enterprise value of the business is today; 2. Set a realistic but improving business plan with consensus; 3. Set an appropriate capital structure with headroom; 4. Build an experienced team with skills and track record; and 5. Run an open and transparent asset management process.

The road to recovery is not an easy one and with a low growth economy, which is likely to continue, we really need to help business transform. There will be challenges along the way but if management is up to the task then the IFT members are there to help and guide businesses back to sustainable growth. n

TURNAROUND & TRANSFORMATION

Membership Directory name

ORGANISATION

Adams, Celia

Celia Adams Associates Limited Worcester

Alderslade, Peter AA Abet Ltd

BASE

Telephone 01584 781244

Chester

07974 160527

Bacon, Nick Nick Bacon Associates Solihull

07710 322239

Benger, Steve Accelerus Ltd

Birmingham

07808 573 809

Black, Colin Albanagh Limited

Birmingham

07831 544442

Booth, Allan Active Strategic Management Limited

Gloucester

07771 987 570

Bridge, Peter Adex Bridge & Associates Limited

Birmingham

0781 221 7996

Briggs, Paul Paul Briggs Management Consultancy Northampton/Birmingham

07736 176754 (mob) / 01604 781334 (office)

Clark, Nigel

JWC Associates Nottingham

07836 642116

Collis, Mike Arc Portfolio Management Limited Nottingham

07786 126 657

Das, Smo

Change Driver c/o Mazars

07947 734350

Driscoll, Tom

TD Corporate Services Ltd Solihull

07957 433671

Emmerson, Phil

BDO

Birmingham

07970 809867

Frost, Bob Arca Group Limited Oxfordshire

07720 397499

Grenfell, James Orbis Partners LLP

0121 234 6070

Milton Keynes

Birmingham

Gresham, Clive

Gresham Considine LLP Northamptonshire

07772 435823

Griffiths, Robert

Red Clover

07932 008910

Halford, Jonathan

Forest Garden Group

HIGGERSON Kevin

Meadow House Consulting Limited

Birmingham

07799 438479

Hopper, Sid

Motorczar Ltd Staffordshire

07887 822348

Hovard, Martin

FD Plus Ltd

Deddington

07801 700340

Johns Ian

IMJ Associates Limited

Rugby, Warwickshire

01788 812945 (office) / 07776 297365 (mob)

Birmingham

King, Tony ACK Management Ltd

07973 117004

Leverett, Gavin

08432 894534

My Route to Finance Leeds

Lukic, Tom Ernst & Young LLP

Birmingham

07775 750 632 (mob) / 0121 535 2925 (office)

Lyon, Nigel Secantor Ltd

Birmingham

07730 955216

MacKay, Neil Lloyds Banking Group Matthew, Gordon

Trend Management Services Ltd Stratford-upon-Avon

07979 244847

McGeever, Brendan

Gateley LLP

Birmingham

0121 234 0090

Orton, Mark

KPMG LLP

Birmingham

07778 207493

Paul, Simon Longcourt Partners Limited Leicester

07785 241400

Pearson, Andy WayPoint Change LLP

07836 601931

Phillips, Peter

Masteragency Ltd

07710 350899

Pringle, Keith

Jakema Programme Management Ltd London

07977 246 449

Radford, Chris

Gateley LLP

0115 983 8208

Reeves, Bill

Taiga Partners Limited

Birmingham

Rothwell, Mike Assured Hotels Ltd Warwickshire Sopher, Jon

Docleaf Turnaround Management Limited

Stokes, Gary Stokes Management Consultants Limited

07767 274069 0845 835 4988

Cirencester Birmingham

Stout, Iain

Barclays Bank

Suddens, David

Dr Martens

07770 542 856

Walker, Robert Llloyds Banking Group Wetherall, Jeremy

Queensgate Management LLP

Wiggins, Bob Hertford Partners Limited

Birmingham

07850 672260

Wilson, Philip Aldridge Vale Associates Ltd (AVA Ltd)

Midlands

07967 991064

Winks, Nick WayPoint Change LLP Stourbridge Wright, Will

KPMG LLP

07973 316544

Birmingham

For more information on the Institute for Turnaround and for membership enquiries please visit www.instituteforturnaround.com

The Midlands Restructuring team comprises over 70 professionals who understand the challenges of operating in the current economic climate and are dedicated to supporting businesses and clients from £2 million turnover upwards, operating in all Sectors across the region.

Clients have found real value in our services that range from dealing with distress and turnaround, right through to preparing for growth as we emerge from recession. kpmg.co.uk

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