Thank you to Carol Baker for including us in her article ‘Business Recovery Part 2: Turnaround Options – Can the Business be Saved?‘ for AccountingWeb.co.uk.
Business Recovery part 2: Turnaround options – can the business be saved?
By Carol Baker
In our first article in this business recovery series, we looked at how you can spot the warning signs that a business may be struggling and offered practical advice on how to support clients at risk of failing. In this second article, we’ll look at how a turnaround specialist can offer an alternative to insolvency.
Many accountants make the mistake of thinking that to turn around a struggling business you must enter a formal insolvency process. This is not always the case as Mark Blayney, turnaround specialist at K2 Partners explains, “Turning around a business is more than just restructuring the balance sheet – it is about strategy and reorganising the whole business to make it into something that is viable going forward.”
“The danger happens when directors say, ‘Let’s go into a Company Voluntary Arrangement (CVA) and write-off 75% of the value of our creditors’ believing they have turned the business around. No, you haven’t turned your business around, because you have failed to address the fundamental underlying problems which got you there in the first place.”
It is important to distinguish between the ‘company’ and the ‘business’. Often a business can be saved, but not always the company’s legal entity, especially when there are conflicting interests amongst the directors which have brought the company close to insolvency.
At this point, the question becomes ‘Can the business be saved?’
A turnaround specialist is like a polymathic crisis manager who has a deep and complex knowledge that they can call upon to solve specific problems, and to do so – fast!
They have a unique ability to come into a business and take hands-on responsibility for delivering the actions required. This means in the early crisis management stages they have to quickly analyse the situation – often having to work with inaccurate and incomplete data – and use their intuition to make decisions.
These decisions need to be made without emotion or influence from shareholders, directors or management. The highly analytical mind of turnaround specialists gives them unique behavioural skills and a management style which oozes creditability and trust. They bring calm to what is often regarded as chaos, but this stabilisation is only the first step. Real turnarounds then require rebuilding and reorganising the business for secure growth.
A two-step process for business turnaround
Whilst some turnarounds can be done with the company name and the business intact, at other times, the ‘business’ may need to be put into a new vehicle – simply because there is too much baggage associated with the company. But ultimately, turnaround is all about transforming the business including its strategic focus and operations.
First, there is the stabilisation phase – getting more cash into the business to pay staff wages and provide immediate working capital. A turnaround specialist’s first priority is to quickly get control of cash and cashflow such as finding non-essential costs to see where cash is being diverted unnecessarily, and produce a comprehensive (and tested) cash management forecast that identifies the areas which are fundamental for the business’s survival and growth.
“As independent advisers, turnaround specialists don’t have the emotional attachments that directors have, so it is easier for us to go to a lender or creditor and negotiate a repayment plan,” says Tony Groom, turnaround investor at K2 Partners.
“Not only is this preferable to the director giving a personal guarantee – but suppliers are normally paid on a proforma basis, while a payment plan for old debt reduces the exposure, and secured lenders receive ongoing reports about the business and the turnaround initiatives as to reassure them about continuing with their support.”
A greater awareness of the funding tools available
“We work with a range of funding solutions and have a deep knowledge of the market and where to source finance,” continues Groom. “As such, we are well placed to advise directors how to facilitate restructuring of the debt by selecting the right financing option that will free up cash, reduce costs, and set the business back on the path of profit – often to the delight of all stakeholders.”
It is during this phase that the turnaround specialist will produce a ‘three-way forecast’ consisting of cashflow, profit & loss and balance sheet. From this, the turnaround specialist can see the predictions unfolding and how the core business can be strengthened.
Returning a business to growth
The second phase of turnaround is the growth phase, and this still requires a real hands-on approach by the turnaround specialist. “You have to get into the real nitty-gritty of the business to find those parts which really work and do more of the same; but more importantly, stop doing those parts of the business which don’t work,” says Blayney. “This trial and error approach becomes the basis of ongoing restructuring while at the same time growing the business.”
During the transformation, every aspect of the business needs to be addressed. This involves looking deeply into the operating procedures and systems across the whole of the business, such as looking at whether the marketing strategy and promotion initiatives are right for the business; and whether it has in place the right IT infrastructure and software to handle the growth.
As Jeremy Blain, CEO and author of ‘The Inner CEO – unleashing leaders at all levels’ says, “Many businesses are crying out for a new business model to help them successfully transform and propel them into a prosperous and exciting future. With many organisations restructuring, especially around digital, it is even more important that executive leaders’ have a more collective approach to leadership and business health.”
Successful turnarounds require collaboration
After the impact of Covid-19 turnarounds are becoming an all-too-familiar part of business life, the key is to devise a structure that will keep the reviving business nimble enough to compete.
Implementing a turnaround relies on the clients’ existing accountants working with the turnaround specialists to look after the long-term interests of their clients, and as the adviser being the sounding board for their clients while turnaround specialists perform their magic.
It also requires the cooperation and support of all parties – the board, management team, staff, customers, suppliers, lenders, and the turnaround specialists working together. It must be a team effort, and there must be a commitment to follow through on the actions necessary from all parties if the turnaround is to be successful. But when that doesn’t happen, and the business can’t be saved, then the only option is formal insolvency – which will be the subject of our next article.