Why is there no visible market for turnaround?
… there are 2 sides of the coin limiting the market, the effectiveness of the solution (on the supply side) and the multitude of factors that blur the demand to explain..
Who would admit to one?
There are never any accurate financials without some initial work, so the start is subjective view; a lack of confidence or late delivery of numbers or inability to do what they say on time etc
Visibility, cash does not lie but only a factoring company with a view of the current account and debtors / cash called down gets a full view of the debtor cash but liabilities and creditors are often more difficult to establish
Who knows what one is? What is the definition of insolvency; -ve balance sheet, inability to meet creditors payments on time within a reasonable window
Who is in control?
Banks are in control but don’t have a solution to the scale of the issue, and front line staff often don’t have the decision making to sign off funding fast enough to suit the business as there are no useful up to date financials – this is circular
A turnaround requires all stakeholders to stick together through the process, and an honest Indian to oversee and challenge the decisions. If a bank can see a quick exit that often is not good news for the business
Banks have a very limited responsibility in the process; they lend money to people that don’t need it and when things get tough they want it back
Extend and pretend in the 90s was a sound strategy but in 2012 there are more fundamental challenges that will not rebound naturally
There is NO macroeconomic view of where cash will migrate to in the globe, and which countries are possibly in permanent decline therefore which should prepare for it
Banks have limited ability to pull together even their own services from their in house peers, for example credit card services, overdraft, pensions, mortgages etc, which can create unsustainable delays
Conflicted Professional bodies
The IFT are focused at larger organisations and have stitched up the market playing to the deep seated BUT well founded worries of the banks. E.g. Lloyds only use IFT members yet the IFT accredited individual does not provide a robust solution!
There is no QA of working turnaround professionals on assignment, you need a working peer reviewed structure for that
The budgetary resources to catch unlawful directors is insufficient to police the process
IPs are becoming accredited turnaround professionals by the IFT. IPs are part of a solution but what is required is a dispassionate and effective broader external team and framework
The TMA are a well rounded body but don’t have any delivery function or accreditation
Why are there 2 professional bodies?
Turnaround Service providers
Scarcity drives hoarding or work within professional service firms, doing what is right for businesses requires an abundance
Some teams are made up of insolvency practitioners with limited view of management and operations excellence – core to a successful turnaround
The scale of the issue; there are 250,000 SMEs in the UK and a handful of corporate, yet the market to supply it is geared towards larger corporates leaving the vast majority of SMEs without support
the banks typically don’t have the resources to supervise schemes to lend to businesses through small loans guarantee schemes etc
Banks portfolio managers don’t have the business skills or reliable supporting solution to address the problem, so don’t deal with businesses much less than a certain size
Most solutions are not resourceful enough to engage with SMES to generate “cash and stem the blood loss” to fund the fees
The big 4 dominate through the each of their audit practices the £50m+ market
Coping with the challenge on assignment
The team has to be “oven ready” with a framework of rules of engagement to be able to accommodate changes as the scenario unfolds to suit the business not themselves
The turnaround team may be invited by an external investor to be party to the management moving forwards which is a potential conflicted scenario
Building an extended network of investors and IPs requires substantial network development and beyond the resources of a solo TD to achieve
There is no standard definition of turnaround and or even a successful outcome
Excess capacity confuses the capability issue
What does a successful turnaround look like? At best it is always it is making the very best of a very bad job.
Management teams won’t admit to one or don’t dare to raise the flag expecting things to get better
Escalating badly behaving banks or unfairness of the HMRC through the political system is a very real threat for publicly owned banks, and UK plc
Management pick up the phone to the wrong person
Corporate finance are a common port of call, bank and creditors are the last to know. The HMRC are misunderstood – and NOT technically a business creditor, although they have allowed a outstanding debt of about £50Bn to accrue financing UK Plc. They do precipitate administrations but unlike banks without regard to the business viability or with respect to the collateral economic damage
External parties try and sell to management teams management teams whom become pied pipers collecting these until the inevitable insolvency event happens and the vultures land
Economic factors hiding the issue and preventing Darwin’s extinction
Artificial Fiscal policy – Interest rates are too low to precipitate a natural cleansing of weak companies
Many good businesses are secured on property valuations which are now undervalued, leaving a technical insolvency or zombie company
Bank employees have been complicit in borrowing too much money too and investing in flawed property deals so have a vested personal interest in not acting
some Banks have been allowed not to present their accounts for many years possibly hiding issues to be addressed
Banks are not lending is a misnomer on face value – there an no business plans worth investing in and as Alan Sugar suggested 8/10 he looked at require an IP
Zombie companies damage markets, as they create a false market for products as they should have been shut, leaving the market to naturally regain its own level
The UK plc balance sheet is broken but no-one will admit it, so no one wishes to push the house of cards, what will the precipitate this event?
Engagement skills are insufficient
Turnaround execs don’t have the skills to engage to get the client to a point of realization that they need to act and or if they do can’t develop the rapport through delivery fast enough to remain effective and achieve a successful outcome across enough fronts
Like A&E Triage turnaround requires a team not an individual
An understanding of distressed behaviour is required, which requires executive coaching skills and an understanding of the distressed mind and making sense of the odd noise it makes. Management teams are often consequently replaced too soon by investors destroying value
Turnaround stakeholders are always conflicted, so a successful outcome is always a compromise
Stakeholder control switches from management -> bank ->insolvency practitioner -> new investor, and the process appears to move in a seamless manner
Banks want their money back
Asset strippers success is recovering the assets and closing the business
Asset based lenders don’t care if there is a successful business as they have their security
Turnaround professionals want their fees
VCs can be ruthless in achieving a financial outcome
Investors won’t invest pre insolvency; won’t pay existing creditors; good money after bad. Investors won’t invest unless the asset base supports or exceeds their investment
VCs over leverage organisations to maximise cash returns per transaction often burdening the real business with unsustainable debt
Banks are very worried about their reputations so would rather not act to mitigate any adverse PR and become “action shy”
Directors skills are lacking
Most company directors have no idea of the legal risks the face due for example through wrongful trading, nor have much knowledge of the insolvency act 1986 of companies act 2006
Financial returns on turnaround are relatively low and very high risk require real courage
Turnaround professionals tend to look after themselves when a dispassionate approach right for the business is what is required
Taking equity as a turnaround professional to reward the risk taken can put the TD at risk of a conflict of interest
Solo solution dominated by banks turnaround panels is flawed
The individual turnaround solution is unreliable; not enough capacity, goes on holiday, no QA oversight, very proprietary, inconsistent service etc
Banks selecting turnaround professionals based on their personal prior experience of working with them is catch 22 market and they are not trained in selecting these people either its all based on hearsay without any proper QA
Most centrally managed bank teams of professionals are focused on restructuring debt not securing the operational ability of the business to generate sustainable levels of cash moving forwards
People posing as turnaround professionals
What is a Definition of a turnaround?
Very few even seasoned executives can cope with the challenge when faced with the reality nor understand the legal technicalities
The solution requires a team so an individual is flawed
The shortest time a director has been accused of wrongful trading from joining is 10 days – a single person cannot create a viable plan or get to grips with the issues and create the financials in a few days. But there are few to catch them.
The skills to become a lead turnaround professional are more personal skills than technical skills, what are the professional development stages?
Shadow directorship risks – create a risk compromised outcome, rather than a drive to act correctly.
The paradox of professionals is to know what you know, but in the instance of a turnaround its more important to be aware of what you don’t know but know when to take advice from the specialist member of the team or extended team
investors
Sometimes there is a good business with no exit – so no investment and will fail
HMRC inflexibility forces many good businesses into administration
Business angel networks are motivated to provide cash only often endorsing an doomed status quo when what is required is turnaround support
Bank services are not joined up and can compete to recover their assets without working to the same plan and attempts to do so cause delays that cause businesses to fail
Endless increasing returns on investments which have been the norm are probably now unrealistic. Exits are more difficult to realize cash with longer earn outs etc
VCs are under pressure from troubles in their own portfolios can limit their capacity ability to scale to support good but sometimes complex businesses to fix
Exits are becoming impossible in 2012 as there are few shining stars to sell with flat growth, and someone has to have the cash to buy them
Corporate do their own divestment’s / acquisitions internally without touching the world of turnaround, and have the cash to fund this themselves so never comes to the banks notice
Many SMEs just shut their doors and close down, and never ask for help
VCS are under threat of going bust because they cannot sell their investments, so the temptation is to take cash from their portfolio and or restructure the businesses with debt
Traditional bank lending against cash flow has stopped – No one lends against cash flow projections any more, only against assets
VCS are very bright but often lack management skills to lead the change they embark upon, adverse PR from issues can make further fund raising more difficult
Some portfolios of former successful VCs are struggling, and they need to challenge their model from origination, deal, incubation, maturation – exit and who they partner with in order to scale or manage their own portfolios
2012 market and top line stability
Turnarounds historically have been dependent on a stable top line and cutting the business back to a defend able core. In the current market business pressures are coming from falling revenue forcing VCS into uncharted territory that makes the investment look more like a high risk growth investment
There are not many good businesses to invest in, and very little visible deal flow – as Alan Sugar said – most need an IP or don’t have a plan and no one ids the successful outcome; some require operational excellence to identify what might good look like
Turnaround Terminology is very confusing
A financial restructuring is what the banks call a turnaround when that’s the easy part as the difficult part is getting the business to independently generating sustainable levels cash
VC restructuring terms like mezzanine, pick & pack, etc mean nothing to many, and were evolved in the good old days when in fact the tough market has forced some simplification, more debt / equity and asset based lending pushing out the very complex instruments
The Turnaround market – A challenge to fix! These issues are the reasons why icebreaker do what we do