Business

UK Business Turnaround situations

Introduction

The UK has a vibrant economy and typically sees around 25,000 new businesses formed each month, other than in periods of turmoil.   An area where the UK could improve on is the number of businesses that fail each month.

Once a company enters an insolvency process it is usually too late for things to be turned around, other than via the sale of the business to a stronger company.

More businesses could benefit by bringing in experienced professionals before their problems become intractable.

A skilled turnaround specialist can help by raising fresh capital and restructuring a company, so it is repositioned in its sector.   The process of turning around a business does typically involve a reduction in headcount which brings with it many Human resource challenges.

Why do businesses need turnarounds?

There are many different reasons, but examples include long term changes in a market sector brought about by technological change such as the growth in internet shopping at the expense of the traditional high street stores.

Sometimes the founder or entrepreneur who developed the business retires or moves on and the drive and market insight is lost.

In another situation competitors move into a market which was previously sheltered from competition and drive down prices, this can be a real challenge where an organisation has not previously experienced a competitive market.  Similarly imports or dumping into markets can be a difficult challenge.

If costs rise then a business needs to pass those costs along to its customers, if pricing is under the control of the sales team there can be a reluctance to ask customers to pay more, which in time will erode the companies profits and move it into losses.

Sometimes Government actions lead to market changes such as the move away from Fossil fuels which then creates challenges in sectors that are dependent on those markets or technologies which then no longer have a long-term future.

Changes to taxation or other Government policies such as the introduction of the Living Wage in the UK or the departure from the EU (known as Brexit) lead to changes in a market which can be a challenge for companies to adapt to.

The UK Transport and Logistics sector for example became dependent on Eastern European drivers in the years leading up to Brexit which were in short space of time no longer available, this has created driver shortages which are then impacting on the businesses concerned.  In this example this was at the same time as other cost pressures emerged in the industry such as the introduction of compulsory pension contributions and a levy to fund the training of apprentices.

What does a turnaround look like?

Most turnarounds follow a similar pattern, in the initial phase a team of professionals gather data on the business and discuss with senior management the issues and the marketplace.

The second phase is to produce a forecast model that shows trading over the coming 12 – 36 months.

The third phase is to incorporate into the model a series of corporate actions such as a fresh fund raising and a restructure to reduce costs.

Once the plan is agreed with senior management, then an implementation phase follows where the agreed corporate actions are implemented.

Usually at this point the turnaround specialists takes a step back and leaves the remaining management team to continue running the reduced and leaner business.

Getting investor and bank support

Gaining the support of new and existing investors together with bank support is a critical part of the plan as their buy-in to any re-organisation plan is required for any plan to succeed.  Having open and honest discussions with lenders is the best approach and the feedback from such discussions gives the turnaround team a framework to build their modelling around.

Sometimes bringing in turnaround professionals is a requirement and condition for ongoing support.

In other situations, if the relationship between management and their bankers have broken down, it becomes necessary to refinance loans and that means finding a new lender that is prepared to fund the business often at a time of financial distress and uncertainty.   This can be a challenging time for a turnaround team as often a timetable will be set by the existing lender during which new funding needs to be in place.

Where possible it is better to negotiate ongoing support from the existing finance providers as they have an understanding already of the business and already have a vested interest in the achievement of a successful re-organisation.

The Financial model

An experienced accountant will normally produce a forecast model which contains an integrated Profit and Loss Account, Balance Sheet and Cash Flow Statement, incorporating historical data and forecast for the future.

The model will be stress tested for various scenarios such as lower sales or slower sales growth to determine how sensitive the business is to changes in trading and how robust the recovery plan and proposals are.

If bank lending is in place, then usually this model will include a Cash Flow Available for Debt Service (CFADS) section which is format the banking community use to identify how much cash a business is generating and how and where it uses the funds so generated.

Where to find help

Often businesses will seek advice from their Accountants or lawyers, an alternative option is to reach out to specialist services such as FD Capital who are an FD and CFO niche boutique service that provides experienced senior financial professionals on a part-time, interim and Full-Time basis, many of which are professionals with business turnaround experience.

FD Capital are based in London and the West Midlands; they however have a national network of professionals meaning they can find a suitable professional no matter where a business is located.

The important decision is to bring in external assistance if the internal team and network does not have the skill sets required.

Conclusion

Turnarounds in the UK are needed much more than is realised and many businesses fail because they don’t seek and find the assistance needed before their financial problems become too great.

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