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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?

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

Directors and shareholders should focus on corporate systems not just the numbers

monitoring financial reportingIt will be some time before the former directors of retail giant Tesco appear in court following investigations that arose out of an over-statement of profits revealed by Tesco in 2014.
So far the Serious Fraud Office (SFO) has charged three of them with fraud and false accounting and the UK’s Financial Reporting Council (FRC) is still investigating Tesco’s former auditors Price Waterhouse Cooper (PwC).

Monitoring businesses systems

In our view it is a mistake for shareholders and directors to simply focus on the numbers as this case highlights. Our view is formed by our observation of corporate insolvency that are generally caused by people and systems failures, rather than the financial symptoms that everyone focuses on.
Accordingly, it is more important is to look at the systems and the corporate culture behind the numbers.
Tesco has been well known for aggressively managing its figures to present its business in the best and most profitable light. But it is not the only example of everyone looking in the wrong direction. Another was the collapse of Barings Bank and loss of £827 million in 1995.
While it is obvious that shareholders may primarily invest in a company in order to earn profits, it is surely in their interests to monitor the managers and understand the systems behind such reporting in order to have confidence in a company’s potential for longevity and continued success.
Surely, manipulating the numbers, as was the case of Nick Leeson at Barings and appears to have been the case at Tesco, might have pleased shareholders in the short term but the question is whether such a culture is sustainable.
Independent monitoring on behalf of shareholders and advice for directors, such as the thorough examination that is used by rescue and turnaround advisers when a company is in difficulty, will reveal whether a company’s accounting and reporting systems are conservative or aggressive when reporting its profits.
Short term thinking is not necessarily in the best interests of investors/shareholders who might consider independent monitoring and advice. Such independent advice is normally only brought in when a company is in difficulty or insolvent but it may be useful to have such a monitoring system alongside the auditors.

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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?

Categories
Accounting & Bookkeeping Banks, Lenders & Investors General Rescue, Restructuring & Recovery Turnaround

Further evidence that a safe pare of hands is not enough for growth

Some new figures on attitudes to innovation from Price Waterhouse Cooper reinforce the point that growth will not come from being risk averse and hoarding cash.
In the UK the most innovative top fifth of companies grew 50% faster than the bottom fifth and, more alarmingly, the survey found that in the UK just 32% of companies regarded innovation as very important, compared with 46% of German and 59% of Chinese companies. Just 16% of UK companies planned to prioritise product innovation in the coming year compared with almost 33% globally.
Further proof, if it were needed, that, while it would of course be foolish to be complacent about economic recovery, the risk-taking, innovative manager is needed more at this point in the cycle than the risk-averse accountant.
 

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

A safe pair of hands does not include plans for growth

UK companies are reportedly hoarding as much as £700 billion in cash. Despite this, business investment grew by just 1.7% in June, according to Bank of England Governor Mark Carney, in his first speech to businesses in Nottingham.
It appears that businesses are still not confident of sustained economic recovery, and this may be understandable following the shock waves after the onset of the global economic crisis in 2008.
When times are hard the general rule is to put an accountant in charge as they will basically hoard a company’s cash.  Accountants are generally pretty risk averse and when the emphasis is on controlling cash flow they are a mainstay of business survival.
But at what point in the cycle should companies start to look at investment and growth for future profits? And at what point should accountants take a back seat and hand over to someone else?
In UK we tend to be slow to adapt to changes in the market. Let’s face it no one will criticise managers for not losing money. Only too late will shareholders realise they have been left behind.
We are still pursuing a strategy of hoarding cash when perhaps the time has come to shift from pessimism to optimism and at the very least we should be planning for growth. Now is the time for carrying out market research, modest investments, testing markets and building capacity for growth. 
We need managers with courage, managers who value mistakes and will learn from them, managers who know how to grow businesses.

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

Pre-packs under scrutiny again?

Baker Tilly’s purchase of the debt-laden accountancy firm RMS Tenon has put the use of pre-pack administration under the spotlight again. It follows other recent high profile pre-packs such as Dreams and Gatecrasher and the debate about Hibu as publisher of Yellow Pages.
While a pre-pack may be a useful tool for saving a struggling business by “selling” its business and assets to a new company immediately upon appointment of an Administrator, the consequences to unsecured creditors and shareholders can be catastrophic as it normally involves writing-off most of their debt and all the investors’ equity. The only beneficiaries are normally banks and other secured creditors who control the process through their appointed insolvency practitioners.
In the case of RMS Tenon, which had more than £80.4 million of debt, unsecured creditors and investors are reportedly furious that their entire debt and shareholdings have been wiped out, the more so because Lloyds TSB, its only secured lender, allegedly forced the sale by refusing to grant a covenant waiver while at the same time agreeing to finance Baker Tilly’s purchase of the assets of RMS Tenon.
While the sale has safeguarded the jobs of around 2,300 RMS Tenon staff, and this is surely to be welcomed in the current economic climate, there are plenty who will once again question pre-pack administration. It may be legal, but is it an acceptable and ethical method of rescuing a business in distress? There are other restructuring options that offer a better outcome for creditors and shareholders, such as Schemes of Arrangement and Company Voluntary Arrangement for instance. But all too often these are not pursued.
As the UK economy proceeds along its halting path to recovery the last thing that is needed is short-term and self-interested behaviour by secured creditors.

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Banks, Lenders & Investors Insolvency Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Administrator's fees of £500k for a small firm

This shocking story in the Daily Telegraph did not name the insolvency firm who built managed to charge a staggering £500,000 for the administration of a small company with 40 employees, see http://tinyurl.com/jwzlcmc.
It appears that secured lenders pulled the plug on this small shopfitting business, presumably to recover their secured loan. The article refers to 10p in the £1 being paid to unsecured creditors.
Given that secured loans are paid ahead of the insolvency fees and that these are paid ahead of unsecured creditors, then this business had significant assets. While the fees will have been justified as representing the time and costs incurred in performing their duties, administration fees also need to be proportionate. Stories like this don’t do the insolvency profession any favours.
Insolvency firms will always justify any adopted procedure and its associated fees but sometimes we might question whether they are justifiable.  If there were sufficient funds in the business to pay such fees then why wasn’t an effort made to restructure and save it such as by using the much less expensive CVA (Creditors’ Voluntary Arrangement) procedure?
Indeed who was advising the directors and shareholders? Too often directors make the mistake of trusting the advice of an insolvency practitioner who is normally working for the secured or unsecured creditors. They rarely ever appoint their own advisors.  
All too often a company in difficulty is closed down rather than being restructured. In most cases everyone loses out: directors, shareholders, unsecured creditors and employees. 
The only “winners” in an administration are the insolvency firm and the secured creditor that appointed them.

Categories
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.

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Banks, Lenders & Investors General Interim Management & Executive Support Rescue, Restructuring & Recovery Turnaround

Employee Equity can Improve the Chances of a Successful Restructuring

Businesses and the UK economy are under pressure from inflation thanks to increased taxes, such as VAT, and commodity prices and also pressure due to declining sales thanks to the reduction in consumer spending.
The current situation is as there has been a considerable amount of wage restraint in the marketplace with employees more concerned about keeping their job than earning more. This fear of job loss however does not apply to all staff, where retaining certain key employees is crucial as their loss would have an adverse impact on the business.
This is a common problem for restructuring advisers who need to solve it when dealing with companies in financial difficulties. When a business is in financial difficulty management often seeks to reduce staff costs such as by asking employees to take a pay cut in order to help the company survive and to keep their jobs.
Many attempts at restructuring insolvent companies fail due to flawed restructuring strategies and an inability to get the support of staff for a realistic solution. In the case of the Rover car company the opportunity was there to restructure the company using the £500 million dowry from BMW. But management failure and a lack of ownership of the problem by staff and their union representatives contributed to the company failing five years later when all employees lost their jobs.
Employees tend to be more concerned about the survival and future viability of their jobs than most other stakeholders. Banks and lenders tend only to be interested in the security of their outstanding loan, and shareholders often sell their shares or just ‘hang on and hope’ without further investment.
Involving employees in the development of a restructuring plan instead of imposing decisions on them can bring about solutions such as real cost savings and flexibility.
This notion of giving employees a greater say in their future exists in other countries, notably in Germany where employees’ representatives sit on the board of directors, and in the USA where unions like the Teamsters often hold shares in their member companies and are actively involved in strategic decision making.

Categories
General Insolvency Interim Management & Executive Support Personal Guarantees Rescue, Restructuring & Recovery Turnaround

An Outline of Shareholder and Director Liabilities When a Business is in Difficulty

When a company is insolvent the duties of the directors as its officers move from a primary duty to shareholders to a primary duty to protecting the interests of its creditors.
Shareholders’ liabilities are limited to the value of their equity and are protected from liability to creditors under what is known as the “corporate veil”.
However, if the shares are only partly paid for and the company enters formal insolvency the creditors can, via the appointment of a liquidator, demand that the shares be fully paid in order to discharge the creditors’ liability.
It is also possible that a company’s shareholders might have given a personal guarantee at some stage during their involvement with the company.  It might be that at start-up for instance, particularly when a family member has started a small business, or when the company subsequently entered a contract such as a lease, some or all of the shareholders personally guaranteed the contract and then later forget about it, especially if they are no longer directors or officers of the company as they may have been in its early days.  It can also be an issue after the shareholders have sold their shares but not discharged their personal guarantees.
Directors, on the other hand, can be held to be personally liable under the Insolvency Act 1986 for money owed to creditors. They must not sell any assets under their market value. They must not pay some creditors and not others in a way that seeks to prefer those being paid.  The fiduciary duty imposed on the directors of an insolvent company leaves them with personal liabilities that are not imposed on shareholders.
However, it is often the case with small companies that the director and shareholder are one and the same and in those situations the director must remember that he or she wears different hats as director, shareholder, employee and also as a creditor, if they have lent money to the company. This is in particular an area where repaying director loans can attract a charge of preference referred to above.
It therefore makes sense to get outside help from a business turnaround or rescue adviser if you are involved in a business as both a shareholder and as a creditor. It is in the advisor’s interests to offer realistic solutions to help restructure the company.