Between a rock and a hard place – who would be a chairman banker or VC?
Criticised by the press and politicians for not lending to business and stifling the recovery on the one hand yet criticised by everyone for reckless lending only a few short years ago. Now perhaps Sir Alan was correct when he said “The moaners are bust. They are bust and they don’t need the bank – they need an insolvency practitioner”. Many think not.
Bank lending is no longer against cash flows, purely raising funding against the debtor book – the highest profit for the minimum risk. Debt financing is no longer for funding growth it’s the first and last port of call for survival’. This strategy at best stunts manufacturing, at worst kills unwitting businesses without adequate funding for working capital.
As if to emphasise the point further for me, of 400 businesses in a bank’s portfolio recently passed to VC for consideration, only 12 were bought. The rest of these zombie companies remain in the banks portfolio. Interestingly, another high street bank’s head of restructuring recently stated at a recent TMA event ‘all is fine’ in their portfolio’adding he is trying, ‘not to be too concerned about the global financial issues, but what about the long term business fix?’ with his head in the sand, I would be concerned that all that sand is irritating his scalp!
So the question becomes, what is holding back firms? What is stopping your company? What is stopping you?
One of our recent discussions with an EMEA conglomerate president painted a worrying picture. Their value add is down to only 8%. With top down pressure on prices and bottom up pressures on cost – ‘we don’t have a business in 2 years’. A major business review is required and NOW, not in 2 years time!
An automotive component supplier becomes insolvent, blaming a fall in revenue and lack of bank funding. Unfortunately the pricing & value add mismatch made this inevitable.
A surveying business revenue is falling -from £11m to £4m. To compound this, they are underselling and giving away the value they bring. You can get away with giving away value in the good times, but in a tougher market you don’t have a business if you don’t know, or have forgotten what you’ve got it or how to sell it.
With the growth coming from the BRIC, the baseline expectation of cost is much lower – this should be challenging firms to take a long hard look at their major business models, their product led recovery, and their ability to deliver world class service without overhead. So like Lenovo when they took out IBM from the PC market with a 30% drop in price, they made a step change in competitiveness. We are finding the VC work we are looking at in Eastern Europe day rates are 30% of UK rates, so you have to be smart to make money.
Surprisingly (perhaps), many VCs still do little to manage the companies in their portfolios. This can have a significant impact on the exit price. In one business review, the VC had a value of £3m in 2 years; we had a value of £18m. Its not rocket science, just good management, an exceptional value centric team, and a lean robust delivery model.
Business survival and growth must depend on generating significantly more cash from a leaner cost base; yet everywhere you look it’s more of the same? Not wishing to under value the power of prayer as a business planning tool, it is profound technical and operational transformation that will drive value creation over the coming years, not a reliance on the doing the same thing over again, expecting a different result. In this climate thats a route to unwittingly destroying value built to date.
If it’s just you, it should be easy to fix but it’s probably not, and who do you turn to, thats may have a common objective?. You will need a different skill set. That’s why we are launching, as TMA sponsors, our 2 day portfolio executive turnaround program with the TMA.
Are things going to get better? The gap in lost GDP per person between the UK and China Q42007 – Q2 2011 is now 40%, Ireland 47% and Greece 41%, Italy 42% and USA 39%. The BRIC countries are tearing away creating huge shifts in world trade, and with Argentina and Turkey up with the pack racing ahead too, its a good time to think? And if you think it is tricky now, deleveraging and creating a fighting fit business model, wait until we get some real default on sovereign debt, then we can see what the indicators look like. There may come a time – forcing survival without any bank funding.
As for Icebreaker, we have another project starting on Tuesday. The client shares the hallmarks of many firms in trouble with a couple of vital exceptions. Firstly a high integrity boss who is comfortable to ask for help, and secondly, one that asks for help early, rather than when its too late. That leaves us with a much easier problem to solve – delivery for him.