25 April 2017

Is your business ready for a turnaround?

If Brexit is the national equivalent of a corporate turnaround, as has been suggested, how ready are UK business to be turned around before forced into it by the formal process of administration or insolvency begins, and does the process have to be as fraught as Brexit is proving?

Sam Payne, partner and head of insolvency at Harrison Clark Rickerbys, looks here at the issues facing businesses when problems mount up – the signs of a business in trouble, how well turnarounds work in practice and when management needs to act.

He said: “ In my experience, over 75 per cent of businesses considering a turnaround are forced into it, possibly by a secured lender, a parent company or a key supplier telling them to get their house in order.

“It can be hard for directors to realise for themselves that something needs to be done, but if they take advice early on, they buy time to explore their options.

“After all, there is no shame in calling in a professional – good turnaround professionals bring the management team together, offer a fresh perspective and have no political agenda; their job is to look for the best solutions for the business. They’ll bring a range of experience and skills to the table which the business doesn’t have internally and their objectivity is invaluable.

“It’s hard to say how many turnarounds work, because there is such a range of outcomes, but the sooner the problems are acknowledged, the more likely it is that a solution can be found. In the best case scenario, non-public company turnarounds often take place without anyone outside the firm being aware of the process.”

There is a wide range of warning signs that companies, their suppliers, financial backers and customers should look for in order to spot trouble coming over the horizon, but Sam highlights the major issues.

“I think a really significant factor is simply changes in the market place, leaving a business behind – their services, products or technology simply become obsolete. This is happening more frequently now, as technology moves increasingly fast and leaves the less agile behind.”

Alarm bells should also start ringing if any of the following occur:

  • Loss of a key customer
  • Difficulties with banking support, which covers a multitude of issues
  • Creditors/debtors days extending
  • Any non-payment to HMRC or time-to-pay arrangement
  • Balance sheet and cashflow problems
  • Late production of management accounts and/or poor reconciliation to balance sheets/cash, or inaccurate forecasting

The key alarm bells for creditors are:

  • Requests for credit/extended credit terms;
  • Failing to pay invoices on time;
  • Reduction in orders;
  • Avoiding phone calls.

So why, with any or all of these signs evident, do management not call for help?

Sam said: “They may simply not know that there is a problem, or how it can be addressed. But pride, denial, fear and embarrassment are all common reasons, as well as the existence of personal agendas and the view that external input is somehow a threat.”

Calling in an expert not only opens up new possibilities but also keeps management minds focused on their legal obligations – while many think their shareholders come first, in fact, as soon as insolvency is on the cards, their creditors take precedence.

Sam said: “The legal obligations are considerable – for example, businesses are obliged to stop trading if they cannot reasonably expect to avoid an insolvent liquidation or administration, unless they take every step to minimise the potential loss to creditors. They must not intentionally defraud creditors or dissipate company assets, for instance, but an insolvency expert can steer them safely through a complex area.”

He also recommends honesty and openness whenever possible with financiers, customers, supplier and key stakeholders, so that no one is left to make their own decisions without reference to the company.

So if you want to turn your firm around, without the political backbiting which Brexit has spawned, the message is to call in the experts, work with them as a team and then move forward.

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About the Author
Sam Payne, Partner, Head of Restructuring & Insolvency Team
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