Business recovery: external crisis management teams

In these turbulent times, all kinds of businesses are prone to finding themselves in some degree of difficulty.

Although crisis events are unpredictable, in the context of the present recession they should not be wholly unexpected. In all crisis situations, there is usually a serious threat to the organisation, and a very limited timeframe within which to resolve the issues. Unfortunately, one of the key parts of a successful resolution is time.

As the latest figures released by The Insolvency Service show, there were a total of 3,560 compulsory liquidations and creditor’s voluntary liquidations in England and Wales in the second quarter of 2008 on a seasonally adjusted basis. This was an increase of 11.6% on the previous quarter and an increase of 15.0% on the same period a year ago. The figures will get higher still.

Decision Paralysis

Due to the very nature of crises, panic ensues. Frequently, existing management teams find themselves in a state of denial, and a total paralysis of decision making and strategic thinking sets in. As the issues facing the company escalate, the problems swiftly increase in both size and complexity. Too often resources are directed at conducting a post-mortem ­ retracing events to identify the root of the problem and ascertain who may have been responsible. Generally internal politics are rife, and the blame-game takes precedence over the crucial task of running the business.

Haemorrhaging Cash

Swift, decisive and authorative action is mandatory to provide the organisation with the best possible chance of survival and to protect the interests of institutional stakeholders. An external third party, who comes armed with the ability to be objective, impartial and professional, can most effectively manage this tenuous situation.

The existing management team is often too close to the problem to be unbiased and typically lacks the specialist crisis management experience that is crucial to getting the company back on course.

Reduced cash flow is a very common problem for businesses these days. The lack of liquidity in the market is causing many lenders and investors to be far more cautious about investing in businesses which do not show a clear return while, in more buoyant times, they were more likely to take a risk.

Moreover, the current economic climate and troubles that have afflicted many industries have made it more challenging for businesses to prove they have the potential to be successful. For example, funders may dismiss businesses from industries such as construction or manufacturing without even looking at their business plans or proposals, just because of the reputation of the industry. As a result, potential stars might miss out on opportunities for financial support and success.

Rapid Response

Troubled businesses need to get help as quickly as possible. A crisis management supplier should be able to provide a rapid response service and be able to parachute into the troubled company at short notice to apply immediate first aid. This involves identifying the problems, reviewing the assets and most importantly taking control of the cash flow.

Many businesses could be saved if they ask for help before the business really starts to fail. Unfortunately, some businesses wait too long and end up being referred by a worried institutional stakeholder.

While this does not necessarily mean the end of the business, the later the notice, the more difficult it is to turn the business around. For example, if a lender refers a business to an insolvency expert, that lender is unlikely to be willing to put more money into the business. It is far more likely that the lender will want to recover as much as they can and get the perceived bad business off its books.

A crisis management team from an accredited organisation is an inst itutionally safe pair of hands. They have the ability to quickly move on from the faults of the past, secure stakeholder assets and look decisively forward to the future, addressing and reacting to the immediate challenges surrounding the business. If necessary, a series of emergency controls will be implemented.

Second opinion

The first task for the crisis management team is to conduct a comprehensive business review ­ a rapid but wide ranging analysis of the organisation, competitors and market context, identifying the severity of the situation and all the various options available. A full appraisal incorporates an estimation of assets, management of cash flow and creditor payments and search for hidden value. Clients are then provided with a menu card of the courses of action available, along with recommendations for recovery procedures.

A successful recovery or turnaround needs time, strong management and, in most cases, an injection of new money. Using an external crisis management team will give a business an objective view on finding the right solution for a business. This objectivity is useful throughout the phases of turnaround. Also, third parties may bring new contacts to the negotiating table to find more funding.

Secure Assets & Recreate Value

The focus of the crisis management team is upon corporate recovery, restructuring and rescue to maximise value, recover debt for banks and create value for institutional investors. The best solution is to turn around a business so that it can continue to trade, pay off its debts and create value for investors. Businesses may miss out on these opportunities if the owner manager is unwilling to admit defeat or is in denial about the true state of their business.

Robin Pugh is director of crisis management at Smith & Williamson