What is the best course of action if a business finds itself in distress? Alexander Wood, restructuring and insolvency partner at Coffin Mew, explains how turnaround management can end up putting a business in a stronger position than the one it was originally in …..
A business’s profitability and effectiveness can be affected by a variety of factors; whether unfavourable market conditions, boardroom conflict, inefficient management or a disengaging client base, the varied challenges of the trading environment can cause a business to fall into difficulties.
In the early stages of business distress, a company may suffer from cash shortages or suppliers who become more aggressive in their demands for repayment. These symptoms can be indicative of more serious operative or strategic problems. Unless they are addressed promptly the business may face failure rather than mere distress with consequences for staff, trade creditors, lenders and shareholders for which the directors may be liable.
An effective remedy is to turn to a turnaround or restructuring expert for objective, experienced guidance. Turnaround management and restructuring involves planning and analysis with a view to returning companies to solvency and relies on a professional practitioner. This expert is usually engaged as an adviser, at least to start with; sometimes, as the restructuring progresses they are appointed to the company’s board to give them greater control or to demonstrate their belief in the process by putting themselves in the same boat as other directors.
Either way, the practitioner will quickly identify underlying problems, focus on key elements of the business like operations or finance and manage key stakeholders. Following that, the practitioner will, in conjunction with the whole board, formulate a recovery plan which may include restructuring debt obligations, reducing operating costs, streamlining product lines and accelerating growth of high-potential products.
A turnaround can be an uncertain and worrying time; implementing the turnaround action plan can involve difficult decisions, which may include redundancies or the selling of unprofitable aspects of the business. It also means following difficult advice and/or handing over the reins of a cherished business to an outsider who may suggest unfamiliar approaches that feel unwelcome.
By way of a recent example, a client company had come close to an operational standstill due to unfortunate personal conflict between the two director-shareholders. With no particular fault ascribed to either party, they had simply fallen out and neither was prepared to give up on what they had built. Together with a restructuring adviser, we implemented a plan for the company to be put through solvent liquidation with the shares put to the open market where the majority shareholder made the highest bid and took on the business in a new vehicle. It was the best possible solution to unblock the conflict which guaranteed complete continuity of business retaining all employees and causing no losses to suppliers or customers, while the minority shareholder was at least paid full market value for his shareholding.
Another client had become over-reliant on a particular customer in an overseas jurisdiction which was experiencing well-publicised structural problems in its sector that in turn meant it had lost support of credit insurers. To enable the business to diversify safely, we spun that customer’s business into a separate entity with sufficient backing from a new lender to the group and security provided by management to see it through at least the next two years. That allowed management to concentrate on generating other income streams domestically and in other jurisdictions using its renown for dealing with the fragile customer and with separate finance lines for each branch of the business to reinforce control over each and reflect the new risk appetite of the overall board.
So is the restructuring process worth attempting?
Aside from the obvious benefits of potentially avoiding the serious consequences of insolvency, companies that come through a turnaround often find themselves stronger than they were before the downturn; management practices become leaner, operations are more efficient, culture has been reformed and the company is more responsive to market conditions. At the very least, even if the restructuring proves unsuccessful, attempting it can protect management, morally and legally, from subsequent criticism.
For further advice with turnaround management and restructuring, contact Alexander Wood: