Categories
Cash Flow & Forecasting Finance Insolvency Rescue, Restructuring & Recovery Turnaround

Investing in a struggling business – is it ever worthwhile?

the uphill battle to save a struggling businessWhile many people are attracted by the low cost of buying a struggling business where they believe they can do better – and reap the rewards – there is always the risk they are deceiving themselves or being over-optimistic.
It may be that there is a demand for its product or service but if a business is struggling, it is struggling for a reason.
So, it is important for the potential buyer to look closely and with care at why the business is in trouble and to ask themselves whether they honestly have the knowledge, skills, stamina and enough finances to be able to bear the loss if a turnaround should prove unsuccessful.
While a degree of self-confidence is important, confronting the reality of the situation is even more so.

Are there issues the struggling business is hiding?

When reviewing the circumstances of a struggling business a degree of scepticism is likely to be needed.
There may have been problems that can be remedied, such as poor management, poor organisation, a lack of funding or lack of financial control.
On the other hand, there may no longer be a market for the product or service, such as when technology has changed as has been the case with the transition from cameras using film to digital photography, or it may be too competitive such as the van delivery market, or the company’s reputation is severely damaged. Often the mountain is too steep to climb and it may be better to walk away.
Are the directors being honest about what has been happening? Are the suppliers who may also be angry creditors likely to be supportive of a restructure attempt? How many employees will have to be retained by the new owner under the TUPE rules and will this place an excessive burden on costs going forward? Will clients stay with you or even come back?
The answers to these questions, and many more, are crucial when considering buying a struggling business.

Are there better options?

If they would be useful to your existing business it may be better to buy the assets of a struggling business, which will be handled by valuers and surveyors.
In this way buying the database of a struggling business may be a more cost-effective way of increasing the customer base of an existing business than marketing to entirely new customers.
It may be safer to pay more for a profitable business with growth potential where the reason for sale is clear such as someone wanting to retire.
There is always a case of “caveat emptor” (buyer beware) so this route isn’t for the feint hearted and you can afford to make costly mistakes.
Get it right and the spoils can be huge, but you are warned.

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.

Categories
Banks, Lenders & Investors Cash Flow & Forecasting General Insolvency Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Insolvency does not have to be the end of your business

When an SME encounters cash flow difficulties and cannot pay its bills many owners assume that their business is bust and should close.
It does not have to be the case. If the core of the business of a company is offering a genuinely useful and saleable product or service, it can normally be saved.
A detailed look at cash flow and accounts is the first step in the process of turning around a struggling business although this needs the help of a business doctor plus commitment, realism and honesty on the part of its owners.
The business doctor will help to identify the profitable activities that should be saved and also has a number of techniques in the toolbox to help deal with the pressing debts that impact on cash flow.
An increasingly useful tool provides a way of dealing with debt by reaching agreement with creditors to repay all or part of the debt in an affordable way that allows the business to focus on building its strengths for the future.
This is a Company Voluntary Arrangement also referred to as a CVA.  The CVA is a binding, formal agreement that is agreed with creditors but needs the help of a business doctor or turnaround adviser. To find out more, K2 Business Rescue has published a useful guide to the steps that need to be taken: K2 CVA Guide 2013. A copy along with other useful guides is available as a free download via the Resources section on the K2 website.