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Accounting & Bookkeeping Banks, Lenders & Investors Cash Flow & Forecasting Finance General

Has the Coronavirus lockdown exposed the weaknesses of many business models?

business models weaknesses exposedRobust business models should be based on a clear proposition with a plan for profitable activity.
Each model is essentially a road map of how money will flow from activity.
Business models are a financial expression of the company’s business plan in a way that summarises the strategy, funding, organisation and processes used to achieve objectives.
Given that unforeseen roadblocks and successes will occur, business models should be reviewed regularly and adapted depending on new circumstances and new information.
Tools for refining the model are also useful, such as a SWOT analysis to identify Strengths, and Opportunities to be exploited and Threats and Weaknesses to be avoided.
While arguably, few businesses and especially SMEs, will have had plans to cope with the coronavirus pandemic, it has affected most businesses in ways that were not foreseen. The lockdown has also exposed how little resilience they may have built into their business models to protect from such a crisis.
To a large extent, the situation has exposed a lack of financial resilience but it has also highlighted a lack of character among leaders. The behaviour of leaders in particular will be remembered by those who deal with them, whether employees or other stakeholders.
It is alarming how many directors have been paralysed by the situation and not taken calls or failed to answer with awkward questions, often hiding from the fact that their problems will not go away.
While leaders may not know the answers, they should be visible, they should be looking for the answers and telling everyone what they are doing to find them.
The government is a good example of leaders trying to communicate, I leave it you to decide whether or not their messages are believable or they are doing a good job of leading in a crisis.
James Ball, writing in the Guardian, provides an excellent illustration of two examples of flawed business models, Uber and Deliveroo. At a time when it might be expected that their services would be more in demand than ever as people are required to stay at home and preserve social distancing, he points out that they are not structured to make a profit, but instead rely heavily on growing rapidly, not growing sustainably.
“This is the entire venture capital model,” he says. “….This is a whole business model based on optimism. Without that optimism, and the accompanying free-flowing money to power through astronomical losses, the entire system breaks down.” Indeed, this reinforces my view that the Silicon Valley approach to venture capital has parallels with a giant Ponzi scheme by using new investors’ money to provide returns to early backers.
Will Hutton also looks at business models and considers how the economy might recover from the lockdown in a more sustainable way: “equity investment: the venture capital and private equity industries must transmute themselves from their default role as predators and asset-sweaters to long-term, patient investors”.
I believe the short-term, profit-driven motives of early investors looking for a return before their investment makes a profit is a flaw in most companies’ business models and has contributed to the weaknesses that have been exposed by the measures that have been needed to contain the pandemic.
Some might say ‘buyer beware’ in a world where animal spirits and greed drive behaviour but this argument exposes a lack of character among leaders who should show courage and moral fibre.
Perhaps it is time for a bit more moderation and longer-term thinking in the construction of business models for the future.

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Banks, Lenders & Investors Finance General Insolvency

Investors now putting environmental concerns first

environmental concernsThe UK’s largest investors put environmental concerns and corporate governance issues as top of their lists when considering companies in which to invest, according to research by EY.
However, the respondents awarded a “could do better” to such areas as audit, corporate reporting, trust, and reputation, according to a report on the research published by CityAM.
Clearly the activities of campaigners like Greta Thunberg and Extinction Rebellion have significantly raised awareness on environmental issues.
But the profile of environmental concerns is also being raised by the annual world summits on ethical finance, the most recent of which was held in Edinburgh in early September and was attended by senior representatives from more than 200 companies and organisations.
The summit is organised by the Global Ethical Finance Initiative, which oversees, organises and coordinates a series of programmes to promote finance for positive change.
In early October, Mark Carney, Governor of the BoE (Bank of England) warned that companies and industries that are not moving towards zero-carbon emissions will be punished by investors and go bankrupt.
But he also pointed out that “great fortunes could be made by those working to end greenhouse gas emissions with a big potential upside for the UK economy in particular”.
The Peer to Peer lending platform Lending Works says that Socially Responsible Lending (SRI) has risen up the investors’ agenda in the last five years and estimates that 79% of Generation Xers and 67% of Baby Boomers identify it as an issue of concern.
Identifying ethical investments depends on positive and negative screening by investment funds. Negative screening by fund managers excludes certain activities, such as fossil fuels, alcohol, intensive farming etc from investment, while in positive screening fund managers actively seek out opportunities that contribute positively to environmental concerns such as organic farming, green energy, and public housing.
This research can be tricky for investors to access independently and the advice is to use a financial adviser well versed in ethical funding, and also as ever, to remember that the value of shares and investments can go down as well as up.
But it is encouraging that environmental concerns have risen to the top of the investor agenda.
 

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Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency

‘Caveat Emptor’ Is peer to peer lending too risky for peers?

peer to peer lending house of cardsPeer to peer lending (P2P) enables individuals to obtain loans directly from other individuals, cutting out the financial institution as the middleman.
As such, the lack of trust in middlemen has seen the emergence of peer to peer lending platforms as an attractive proposition for retail investors in a climate of low interest rates because they can offer better rates thanks to the lower overheads associated with online businesses. The lower overheads are also related to not having to pay a middleman!
The platforms are generally a website or app that facilitates this alternate method of financing, where the first emerged in 2005 and was brought under FCA (Financial Conduct Authority) regulation in 2014.
However, the FCA has been criticised as being too “light touch” in its oversight following the collapse in May this year of UK property finance peer to peer firm Lendy with £160m in outstanding loans of which it has been calculated more than £90m are in default.
According to CityAM, Lendy was placed on a FCA watchlist last year amid concerns about its inability to meet the standards required of regulated firms. Its subsequent failure is believed likely to result in retail investors losing £millions.
The demise of Lendy came a year after the peer to peer platform Collateral UK went into administration, reportedly, according to the website crowd funder insider, after it was discovered that it had wrongly believed it was authorized and regulated by the FCA under interim permission.
FCA chief Andrew Bailey has been reported as saying that the decision to authorise Lendy had been taken to reduce consumer harm, as refusing authorisation may have risked greater damage.
However, Adam Bunch of the Lendy Action Group, which claims to represent about 900 investors, said: “FCA authorisation was seen by investors as a stamp of credibility. Only now, after the platform has failed, do we learn that the regulator in fact saw authorisation as a way to contain a badly run business”.
I would add that the reference to ‘investors’ worries me since there seems to be no distinction between shareholders, secured lenders and unsecured lenders nor any understanding of ‘caveat emptor’.
Indeed, Lendy was a lending platform and there is no mention of the peers as retail lenders who have a prior ranking claim over investors (shareholders) but I am sure it highlights the ignorance among retail investors and lenders who might be better off seeking advice from professionally qualified middlemen.
Not surprisingly, there have been growing calls for tighter FCA regulation of peer to peer lenders and in June, following consultations, the FCA launched new, tighter regulations, most of which will come into effect in December this year.
They include introducing more explicit requirements to clarify what governance arrangements, systems and controls platforms need to have in place to support the outcomes they advertise and a requirement that an appropriateness assessment (to assess an investor’s knowledge and experience of P2P investments) be undertaken, where no advice has been given to the investors and lenders.
In September the FCA also warned peer to peer lenders to clean up poor practices or face a “strong and rapid” crackdown.
Whether this will be enough to stem the reported exodus of investors’ money from peer to peer lending and to better protect them remains to be seen.
However, the warning to potential investors remains as it has always been to not invest any money you can’t afford to lose.

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Banks, Lenders & Investors Finance Insolvency Uncategorized

Are Internet unicorns another bubble destined to burst?

Reminiscent of the hubris leading up to the 2000 dot com crash, the start of this year there has seen a queue of internet unicorns lining up to launch on the stock market via Initial Public Offerings (IPOs).

A unicorn business is defined as a private, venture capital-backed firm worth over $1bn. Among those that have either launched IPOs or considering them are Lyft (launched in March), Uber (launched in early May), Pinterest, AirBnB and possibly We Work and Slack.

So far, the results have been distinctly underwhelming with Lyft’s shares valued at $72 each on debut, giving the seven year-old company and rival to Uber a market value of slightly more than $24bn.

Uber set its launch value at $90 billion (£70 billion) and listed share prices at $45 each. However, within hours on its first day of trading Uber’s share value had dropped by 7.6% down to $41.51.

Neither of the two ride-hailing businesses has so far ever made a profit.

Last year, despite boasting revenues of $11bn Uber made operating losses of $3bn and while its revenues grew from $343m to $2.1bn between 2016 and 2018, its losses also soared, from $682m to $911m.

The hubris might best be justified by the fact that We Work was valued at ~$20bn at last fundraising, despite last year losing ~$4bn. Contrast this with UK listed Regus that made ~€800m last year and is currently valued at ~$4bn.

There is no doubt that trading conditions in the last two years have been challenging, with a global economic downturn, trade wars and political populist movements all making markets more volatile.

This may be behind the incentive for unicorns to rush into IPOs before economies find themselves in recession. Again, readers might like to recall the market bubble ahead of the dot com crash in 2000 when Lastminute.com was the last of old “retail” internet firms to list before the crash with many of those who missed the boat subsequently falling by the wayside.

Are there more deep-seated problems with internet unicorns?

Ilya Strebulaev, professor of finance at Stanford University, has extensively researched private venture capital backed companies and come to the conclusion that unicorns are overvalued by about 50%.

Prof Strebulaev argues that typically venture capital-backed businesses make losses “because they basically sacrifice profits to achieve very high growth or scale” but the question is whether their business models will be sufficiently flexible to allow them to convert losses to profits over time.

The current crop of internet unicorns are significantly larger than the internet companies that were involved in the mid-1990s dot com bubble and 2000 crash but a lot depends on their plans for the future.

Lyft has plans for using the money generated from its IPO to invest in acquisitions and technology, including autonomous driving, for example.

Uber has already suffered from protests by its drivers over their treatment with stories rife of drivers earning so little that they have to sleep in their vehicles and with protests ongoing there are concerns that it would face significantly increased costs if forced by regulators to classify drivers as employees rather than contractors.

An item in its IPO prospectus is particularly telling “as we aim to reduce driver incentives to improve our financial performance, we expect driver dissatisfaction will generally increase.”

If these companies are pinning their hopes of future profitability on driverless cars and dispensing with drivers altogether they, and their investors may have a long wait.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance General Insolvency

Economic pressure is building for a storm in the coming years

stormy skyIt is a brave, or foolhardy, man or woman who would try to predict what will happen to the economy in 2017 especially in light of the various shocks that we experienced in the US and UK in 2016. But the trends as evidence of a building financial pressure are irrefutable.
An incoming, and potentially “protectionist” US president, who seems to favour diplomacy and policy announcement via Twitter, and the wholly avoidable but now irrevocable decision by the UK to leave the EU with the prospect of lengthy negotiations before the process is complete make for a cloudy and uncertain picture which adds more pressure and most likely brings forward the inevitable storm.
The trends and pressures that give clues have been covered for some time by Alasdair Macleod, Head of Research for Goldmoney, and are summarised in his nuanced and thoughtful Outlook for 2017 that actually looks further than the year ahead for the USA. And as the cliché goes “when the US sneezes, UK catches a cold” or worse “when US catches a cold, UK gets pneumonia”.
Investor over-confidence in expectation of a business-friendly pro-tax reducing regime, a shift from monetary to fiscal policy leading to a rise in budget deficits and rising inflation are among the signs he identifies.
At the same time, although all this is reminiscent of the 1970s when interest rates soared to as much as 13%, this time it is in a climate of massive debt leading to constraints on the Federal Reserve’s ability to increase interest rates for fear of precipitating a collapse in the economy.
“Next time, when a financial crisis occurs, the problems will be more widespread, encompassing bond markets, property, equities and governments themselves. It will be ebola compared with a flesh wound. There will be no option other than to rapidly expand the quantity of money on a global basis, with central banks buying up government debt, ultimately fuelling price inflation even further,” Macleod predicts, suggesting that tangible assets will be the only protection against devaluation of fiat currencies, although perhaps not as soon as 2017.

What is the position of the UK economy by comparison?

Given that for at least the last 20 years the management of the UK economy has been based on similar “neoliberal” principles to those in the US, in our view, the UK faces a similar cocktail of risks and there have already been some signs to reinforce this, though not yet at the level to indicate an established trend. Inflation and interest rates will eventually bite on the printing of ever more paper currency or more Quantitive Easing which both amount to the same devaluation of £Sterling incidentally to 1.55% of its value in 1969.
The Chancellor’s Autumn Statement included investment in digital and physical infrastructure – a shift to fiscal measures – and the Bank of England has continued to keep interest rates at their current low level.
On Wednesday, the British Bankers’ Association (BBA) revealed that in the 11 months from January to November 2016 the rate of saving had increased by 4.8%, climbing from £19.8 billion in 2015 to £32.4 billion in 2016 so far, suggesting that people are already anticipating predicted inflation and stagnating wages.
This week the FTSE 100 reached a new record high at 7,111.69, suggesting a level of investor confidence in equities, or is it more a lack of good quality stock available for safety?
We had already learned that inflation is expected to rise in 2017 and have also had a prediction from Nationwide that house prices are expected to stabilise rather than continue to climb ever upwards.
So, the likelihood is that the UK too is facing a “perfect storm” similar to Macleod’s analysis of the USA, with the same constraints on Government’s ability to act and a consequent devaluation of its fiat currency, bonds, equities and for home owners a decline in the value of their property by 20%.
The storm may not erupt in 2017 but the pressure is mounting so we advise businesses to be prepared and despite all this, we wish you a happy and prosperous New Year.
 

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Banks, Lenders & Investors Finance General Turnaround

What is the purpose of a company?

company purpose and directionSomething to reflect on over the festive period is a debate we have been hearing more and more about recently, challenging the purpose of a company as a corporate entity.
It may seem obvious at first sight but there are actually several questions to be considered.
The assumption that companies exist to make money may appear to be self-evident, but for whom and for what purpose?
Is it simply for the benefit of its shareholders? But what about its other stakeholders?
What about employees, many of whom may have worked for the company for far longer than shareholders have held shares? Indeed, many employees may also expect the company to be able to pay their pension in the future.
Where also do lenders and creditors stand especially in the UK where their interests are paramount in insolvency proceedings?
The local community and environment are also becoming important stakeholders with ever more focus on corporate social responsibility, health and sustainability related legislation.
In the EU there has been some effort to harmonise company behaviour across different countries, such as in the Directive, Solvency II, which aims to unify a single EU insurance market and protect the public from bail-outs.

Do cultural differences affect the purpose of a company?

Despite attempts to harmonise legislation, there are cultural differences that are likely to prevail. For example, in Southern Europe much legislation is primarily for the benefit of employees.
Most regulators seem to focus predominantly on trying to prevent risk-taking, particularly by banks, which are essentially companies that primarily make their money out of risking capital.
In the UK, there has been a growing culture of shareholders taking money out and leaving companies leveraged to the hilt risking jobs, pensions and creditors.
Another reason behind the large number of new companies being formed is as an employment vehicle for their shareholder/directors. This might be sensible given the personal liabilities of being a sole trader versus the protection of the corporate veil. But was this intended?
It is understandable that ever more regulation imposes ever more responsibility and increasing personal liability on directors to discharge their duty to the various stakeholders of a company.
So what exactly is, or should, a company be for? and for whose benefit?

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Banks, Lenders & Investors Cash Flow & Forecasting Finance General Rescue, Restructuring & Recovery Turnaround

After the budget hubris, what's in it for SMEs?

Chancellor's red boxThe drama of threatened backbench rebellions and a resignation following last week’s budget has rather overshadowed the elements of good news it included for small businesses.
The most significant of these was the increase in the threshold for business rates relief from £6,000 to £15,000. This is expected to benefit an estimated 600,000 small businesses, particularly the small High Street retailers, many of whom will no longer have to pay business rates.
Given that many small retailers have been under extreme pressure from the rise of online retail, this will hopefully level the playing field at least somewhat as will another budget measure, a crackdown on foreign firms selling products online in UK without paying VAT.
The Chancellor calculated that this measure would save them around £7 billion per year.
To offset this loss to the Treasury another crackdown on tax avoidance was announced. This was aimed at reducing the scope for larger business to reduce tax by treating debt interest as a cost or by rolling over historical losses.

Another potential boost for SMEs?

There was help, too, for entrepreneurs with an extension to Entrepreneur’s Relief by which all long term investors who hold onto shares in unquoted trading companies for at least three years will now be able to claim the 10% reduced rate of Capital Gains Tax (CGT) on the sale of their shares.
Time will tell whether this will encourage more investors to switch from property investment, which is subject to a CGT rate of 28% on sale, to put more of their money into private companies.  If so, again it will be small businesses that will benefit.
Other business-friendly measures included a reduction in the headline rate of corporation tax from 20% to 17% by 2020.
Dr Adam Marshall, Acting Director-General, British Chambers of Commerce, welcomed the support for small businesses and entrepreneurs: “He has finally taken real action to lessen the crushing burden of business rates, and sharpened incentives for entrepreneurship and investment.”

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Banks, Lenders & Investors Cash Flow & Forecasting Finance General

Why UK is struggling to fund new ideas

It could be argued that in the past investors had a more direct connection and interest in the businesses in which they invested.
They would therefore be willing to be more patient and to wait longer for a return on their investment. Equally they could justify a larger investment by using their knowledge and experience to reduce the risk of losing their investment.
However, as fewer businesses have been involved in making tangible goods for purchase so that the UK’s manufacturing sector has shrunk dramatically and the service sector has grown, so too, investors have become more dissociated from the organisations into which they put their money.
Alongside this, investors have become more impatient to see a profit and shift their money around much more quickly, as demonstrated by returns to hedge funds and justified by some high profile, rapid growth companies.
The high profile, rapid growth investment opportunities are mainly in the technology sector, which can be less predictable but which also requires fewer staff, particularly at middle-management level.
This explains why it is difficult to source finance for disruptive technology or to fund new ideas in UK to find large investors unless they move to California.
Outside friends and family, the main option for SMEs with rapid growth potential to find finance in UK is from crowd funding.

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Banks, Lenders & Investors Business Development & Marketing Finance General Rescue, Restructuring & Recovery Turnaround

The delusional fund raising pitch

We continue to hear that banks aren’t lending, but there may be a good reason for this.
There is a lot in the press about SMEs and Startups seeking to raise finance directly from alternative sources such as peer to peer and crowd funding platforms.
Furthermore private investors are often receiving pitches of the blue.
All too often the fund raising pitch doesn’t provide the information needed to make a decision, or worse it is simply delusional.
Sometimes we come across statements like “we have no competition”, “we only need to capture 2% of the market”, or even “everyone needs our product”.
The (printable) responses to these are likely to be “are you are so *** brilliant that no one has ever thought of this idea?” or “could that be because no-one actually needs what you’re offering?” to the first.
The response to the other two is likely to be a raised eyebrow and a request to see what research has been done.
It seems that businesses pitching for finance often fail to understand that the only thing that really interests funders is whether they will get an adequate return. The pitch needs to be backed by solid figures and research evidence, details of who the target customer is, why the product solves their need when others can’t, why you can deliver on this promise and how this is a good market opportunity.
Have you come across any delusional pitches?

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Business Development & Marketing Finance General Rescue, Restructuring & Recovery

No magic lantern, just commonsense

This week the successful online e-commerce company Alibaba will make a pitch to investors as it prepares to launch as a public company on the US stock market.
Jack Ma, the founder of the highly profitable 15 year-old company, issued a letter to investors along with the company’s prospectus. In it he described the company as an ecosystem with a long term vision.
The letter contained some striking points. One of them is that shareholders would effectively be third in order of importance in the company’s strategy.
In first place came customers, who for Alibaba are the small businesses using the platform to sell their products and the consumers who buy them. In second were employees. His reasoning is that to give customers what they need the company needs happy, diligent and satisfied employees. Without these two the company cannot fulfil its duty to create long-term value for its shareholders, which is why he put them in the third place.
In last weekend’s Sunday Telegraph Business Review I contributed an article on how small businesses need to prepare for growth and I believe there are lessons in Jack Ma’s letter from which SMEs can learn.
No business can grow unless it is providing what its customers need and, as Jack Ma says, that depends on committed employees. It ought to be commonsense.
These two aspects are central to demonstrating that a company is a viable prospect when it is seeking finance to grow as they will form a significant element for any pre-investment valuation.
If a company cannot demonstrate a demand for whatever it supplies how will it convince lenders that it will be able to repay the money it has borrowed or provide a sustainable return to investors?
I would welcome contributions from others who have similar stories that are aimed at reassuring investors before they part with their money.

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Banks, Lenders & Investors Business Development & Marketing General Rescue, Restructuring & Recovery Turnaround

Are investors continuing to think short term?

 

A week ago ASOS, one of the UK’s most successful online retailers, announced plans to increase its investment in its warehousing and its IT as part of a longer term growth strategy.

Capital expenditure would therefore increase from £55 million to around £68 million and the outcome in the longer term would be an increase in ASOS’ sales capacity by £1 billion. In the short term the company’s operating margin up to August this year would be reduced from 7% to 6.5%.

Almost immediately after the announcement was published ASOS’ share value dropped by 20%.

Surely this company was being sensible in planning for growth in the longer term.  Isn’t this kind of thinking exactly what the business community should be doing?

Here yet again, we would argue, is an example of the kind of short term thinking that is endemic among investors and other “rent” seekers.  Or are we missing something here?

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Banks, Lenders & Investors Business Development & Marketing General Rescue, Restructuring & Recovery Turnaround

Should Private Equity be involved in High Street retail?

 

2014 started with much media speculation that a variety of well-known retailers – or more correctly, their Private Equity(PE) owners were preparing to float on the Stock Market.

They included Fat Face (77% owned by PE firm Bridgepoint) Card Factory (owned by PE firm Charterhouse) and Poundland (76% owned by Warburg Pincus).

This resurgence of so-called “animal spirits” seems to be fuelled by a perceived improvement in consumer confidence, investor appetite driving the search for better returns than those available in a low interest rate debt market, the lack of debt available for refinancing businesses and the need for PE owners as investors to realise profits.

This may herald a resumption of the pre-2008 practice of PE buying out retailers, often as a public to private deal, repaying themselves by loading them with debt, and then flipping them back into public ownership.

The 2008 Global financial crisis put this practice on hold and indeed it has placed enormous financial pressure on some PE funds due to the lack of debt available for refinancing their acquisitions.

Indeed many PEs have ended up with burnt fingers, such as Guy Hands’ Terra Firma’s purchase of EMI,which defaulted on its debt to CitiGroup,  and US-based Bain Capital LLC (owned by Mitt Romney), which purchased the purchase of Toys “R” Us, which has seen a decline in revenue.

High Street retail casualties over the last five years have included Nicole Farhi, Comet, JJB Sports, Jessups, Blockbuster, Clinton Cards, Habitat, Focus DIY, Floors-2-Go, the Officers Club, Oddbins, Woolworths and MFI.  Some, such as Focus, JJB, Nicole Farhi, MFI and Comet were PE owned.

With banks having tightened up so significantly on lending in recent years PE sources of funding are inevitably more focused on investors such as pension funds and not surprisingly fund managers are generally risk averse being responsible for other people’s money.

Despite the economy picking up, the buy, refinance and flip PE model may not work in the way it did. The growth in online shopping, concentration of retail parks, intense competition and changing consumer habits may yet thwart many PE deals.

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Banks, Lenders & Investors General Insolvency Liquidation, Pre-Packs & Phoenix Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Zombie companies have a number of options for achieving growth

Zombie companies will at some time need to confront three fundamental problems before they can achieve growth: 1. how to fund growth; 2. how to repay debt; and 3. how to service interest when rates rise.
Provided that a zombie company can generate profits on an EBITDA basis (earnings before interest, taxes, depreciation, and amortization), it has a number of options for resolving these problems as a pre-requisite for growth.
Options include negotiating a partial debt write-off, a pre-pack sale via Administration or a Company Voluntary Arrangement (CVA).
From the suppliers’ viewpoint a growing business offers the prospect of increased profits from increased supplies. From the existing lenders’ viewpoint profitable growth means that non-performing debts can be repaid. From a new investor’s viewpoint, new money can be used to fund growth rather than replace existing debt. From the company’s viewpoint growth inspires confidence in the future prospects of the business. 
Given the benefits, it makes sense for zombie companies to get help from restructuring experts who are familiar with these options.

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Banks, Lenders & Investors General Rescue, Restructuring & Recovery

Politicians and Economists are failing SMEs

Investment in innovation has to be a long term strategy while the UK’s fixed term parliamentary system and the need to grab headlines encourage short term thinking.
The evidence is piling up for all to see.
Firstly, research by the Big Innovation Centre has emphasised, if it were needed, that there is a “systemic failure” holding back the economy shown in part by the worsening of access to finance to SMEs and in particular to those developing entirely new products and processes.
Yet these new innovative SMEs are the most likely to create new markets and achieve rapid growth, so have a disproportionate impact on employment and the national economy.
The point was reinforced by Tony Robinson OBE, a successful micro-business owner with more than 25 years’ experience and co-owner of Enterprise Rockers, which supports micro enterprises. In an article in the Daily Telegraph business pages, he says that despite the UK’s 4.5million micro businesses providing 32% of private sector employment and 20% of its turnover: “…95% of all government employment support and training funding goes to the largest 5% of UK businesses.”
Sir Hossein Yassaie, CEO of Imagination Technologies, has also weighed in, comparing planned support for innovation in S. Korea over the long term to what happens in the UK, where much of industry has been sold to overseas owners: “…The Government changes and everything is short term…. I think we really need to stop all that.”
In his view, also quoted in the Telegraph, instead questions need to be asked now about what we need to do today to be in markets in ten years’ time and imagination now is the key to future success.
Politicians need to put in place support that is genuinely aimed at SMEs that is more than rhetoric and not prone to change by a new Government, or they need to provide real short-term incentives to investors in innovation that will have the same effect over the longer term.
Examples of such incentives might be to provide soft loans, or offer matched funding alongside new share capital. We don’t want politicians trying to be clever as they have been with the flawed Enterprise Finance Guarantee Scheme which was never going to stimulate business.
It is a great pity that ‘highly regarded’ economists like the BBC’s Stephanie Flanders, who I understand also advises the Government, are unaware of the Small Firms Loan Guarantee Scheme that for approximately 15 years drove much of growth by SMEs in the 1980s and 90s. I asked her recently, and she had never heard of it.
This makes me think that economists like to operate at a theoretical and strategic level rather than try to understand what really makes SMEs tick so they can develop tactical stimuli that promote SME growth. Quantitative Easing is another example of theory not working for SMEs.

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Banks, Lenders & Investors General Rescue, Restructuring & Recovery Turnaround

Investors need to rethink their requirements

Many of us believe that a change in investor culture is long overdue. We need to incentivise long-term investment in sustainable growth instead of short-term ‘quick flip’ or ‘get rich quick’ schemes that deceive everyone into thinking that making money is risk free and easy.
It is this short-term thinking that has made it more difficult for Private Equity firms to raise new funds for further investment.
Private Equity firms depend on their reputation for making profits for their investors and their problem since the Credit Crunch of 2008 has been that funds have been tied up in businesses that are effectively zombies because of the amount of debt they have, no matter whether these businesses may have good potential for growth.
Similarly both lenders and investors are very wary of taking a risk with new and small businesses, hence the Government’s failure to persuade funders to support start-up companies and SMEs, even profitable ones and those with potential for growth. The only source of funds really available for such businesses are book debt and asset based lenders but these only improve cash flow they don’t provide equity or loan capital for investment.
To address the funding culture issue we need to justify a switch from investing in property to investing in businesses. This will involve understanding a risk rated return on investment that provides for better returns to investors.
There are a number of ways of achieving this change of investor behaviour, one is to penalize investment in property by taxing them, another is to provide for matched funding from banks alongside new equity, possibly with a Government guarantee, another would be for debt forgiveness by banks to restructure their ‘zombie’ client loans alongside new equity, others could be an expansion of the Enterprise Investment Scheme and Seed Enterprise Investment Scheme, or simply a reduction in the corporation tax rate.
But all this requires a Government to confront those who view property as their source of security.

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Banks, Lenders & Investors Cash Flow & Forecasting General Rescue, Restructuring & Recovery Turnaround

Calls for Private Equity investment to stimulate growth

There has been a chorus of voices recently wanting to see private enterprises or Private Equity firms investing to stimulate a recovery and growth, both in the UK and Europe.
It’s all very well demanding someone else invest money but why should they? There are many ‘zombie’ companies that could be ripe for investment but in effect are overvalued due to the debt burden which will almost certainly never be repaid. These firms need restructuring with bank lenders prepared to take a hit if they are to be attractive for investors.
The chorus may not be aware that investors normally rank behind the bank, or are they hoping investors are naïve enough to underwrite the bank debt by pouring good money after bad? Private Equity companies rarely have either the time or the patience to spend on business improvement as most rely on financial restructuring followed by a swift exit to deliver a huge return on investment to their own investors.
Another factor is Private Equity’s reliance on cheap and easy money to recover their investment by refinancing assets and to realize profits by funding a sale where the lending market underwrites their returns. This is how many of the banks were left with bad debts so it may be a while before they return to providing cheap and easy money.
Private Equity firms, like most alternative investments, depend on their ability to attract funds from investors who want to see an adequate return, normally in a relatively short period. 
Since the financial crisis began many investments by Private Equity have been locked in due to the inability to refinance or sell their investments, which has impacted on their return to investors and thus on their ability to raise new funds.

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Banks, Lenders & Investors Business Development & Marketing General Turnaround

Short term thinking is wrecking the UK’s future

As if risk averse lenders were not problem enough UK businesses have long complained that there is too much short term thinking stifling any chance of recovery.
Increasingly we have career politicians with little or no experience of business or life outside Westminster and with little incentive to think beyond the next election, so we get tinkering with taxes and regulation on businesses without a long term strategic vision.
The financial Industry, too, is more concerned with short term rewards (dividends, gains and bonuses) than in long term investments in industries that make stuff or have innovative ideas.
Shareholders and investors have been focused on short term dividends or income rather than investing in the longer term.
We need to encourage money to be invested in the right places and for the long haul.
It seems, some are beginning to agree. At a conference in London on Friday, May 10, called Transforming Finance, academics, campaigners and financiers will gather to develop ways for building a better banking system. http://tinyurl.com/cxnvyyr
Among them will be Catherine Howarth, CE of Share Action, a lobby group which will be emphasising the point about the need to think over the longer term.