Choosing advisors: help is at hand

Choosing advisors: help is at hand

When it comes to turnaround advice, it pays to act quickly. But choose carefully - a good adviser could be the difference between a fresh start and liquidation

business turnaround cover

Picture the scene. You are the managing director or finance director of a
once-thriving SME. In recent months your business’s financial position has
slipped and now alarm-bells are starting to ring. So what do you do? And where
should you turn for advice?

The answers depend on the size and type of business you are running, and the
nature of the problems it faces: perhaps it has begun to suffer
quarter-on-quarter losses which, if sustained, will put its solvency in doubt;
maybe input costs are outpacing revenues due to currency fluctuations; or
perhaps new legislation means the business has to crystallise an unexpectedly
large pensions deficit on its balance sheet.

Whatever the trigger, the important thing is to act quickly. As soon as you
suspect that your business may be heading into potential insolvency territory,
you should apply two solvency tests. The first is a cashflow test to ensure
there is enough cash to meet debts as they become due. The second is a balance
sheet test – generally a more complex exercise – to establish whether the assets
exceed the liabilities.

These solvency tests may be critical not only to the business and its
creditors, but to your personal liabilities as a director. If your business is
simply underperforming and is not yet in any real danger of insolvency, the best
approach may be to engage an experienced turnaround practitioner, probably a
member of the Society of Turnaround Professionals (STP), a sister organisation
to R3.

STP was set up in 2000 with support from the UK Government, financiers and
leading accountancy firms, and its members are well-versed in helping companies
improve their financial performance by taking on an advisory or executive role.
By bringing in a turnaround professional at an early stage, many businesses
successfully trade their way through their difficulties, while steering clear of
any kind of formal insolvency process.

Directors’ liability

However, the business’s financial problems may already have gone too far for
this approach. Again, the warning signs vary, ranging from the breaching of bank
covenants to the serving of a winding-up petition. In such cases, you, as a
director, must take a series of proactive steps to minimise the risk of personal
liability. This is because, if the business slips into formal insolvency, the
administrator or liquidator will assess whether the directors did everything
possible to protect the interests of creditors.

The first move is to engage appropriate external professional advice
immediately, including insolvency advice, both legal and accounting, from
members of R3. Many directors are concerned about taking on the extra costs of
this advice at a time when the business is struggling. But, if the worst
happens, you can be sure the directors will be more heavily criticised for not
having taken this step. Equally importantly, the right advisor can make the
difference between a fresh start and a liquidation.

Protect your interests

Once they are on board, your advisers will guide you in protecting the
interests of both creditors and directors. This includes ensuring that financial
information is accurate and up to date, and is discussed at regular board
meetings. If the right quality of management information is not available, then
personnel and systems must be put in place to provide it. And the board of a
company under financial stress should preferably meet face-to-face at least once
a week, to show it is managing both the financial situation and ongoing
business-as-usual.

Your board should also study regular forecasts of cashflows and shortfalls,
and keep large creditors informed about any corrective restructuring or
disposals. A general cost-cutting drive should include a moratorium on major new
expenditure and a detailed review of third-party contracts. Directors may even
show willing by reducing their drawings. If these actions fail to prevent
collapse, then the board should have a solid fallback plan based on sound
insolvency advice.

Throughout the turnaround process, your board should discuss in detail what
advice has been given, how it has been implemented, and if not, why not. At each
stage, the core requirement is to demonstrate and maintain confidence, backed by
sound advice, that the business is viable in whole or in part.

The need for sound advice raises the question of what you should look for in
a turnaround or insolvency expert. The rule here is ‘horses for courses’, since
every business and its financial position are unique. The wealth of choice
available means any business can tailor its advisers to its specific needs.

The choice should depend on the experience, size and fee scales of the
available advisors. For example, a small local business would be unlikely to
engage a global accountancy firm majoring in global restructurings. However,
even small businesses may find it comforting to know that their regular
accounting or legal advisors have insolvency practitioners in-house to help if
necessary.

Financial difficulties can hit any business. For a director, the watchword is
to get the right advice fast and not put your head in the sand. There are
professionals readily to hand who can not only save your business, but improve
it. If you fail to use them, you may ultimately have to answer to your
creditors.

Patricia Godfrey is president of R3

Case study: Getting Northern Colour back in the black

The building and decorative paints and coatings manufacturer Northern Colour
presents a fairly typical case study of a turnaround, according to Nick
Ferguson, chief executive of the Society of Turnaround Professionals, which
conducted the turnaround. When he was called in, he found a business whose
brands occupied top quality and price position, but whose management was focused
on building headcount and sales rather than cash and margins. As a result, the
business was increasing its bank borrowings to fund working capital, at a time
when the construction industry was entering a cyclical downturn.

With the banks threatening to pull the plug, the board became convinced that
radical action was needed and appointed Ferguson. During a 12-month period the
company cut its workforce from 480 to 240, paying redundancies with short-term
loans, something the banks were prepared to provide since they could see the
right steps were being taken. Northern Colour also sold little-used assets such
as land, warehousing and distribution facilities, and changed its management
culture from sales and size to profit and cash. This meant it effectively moved
from being a bank borrower to depositor, while maintaining its premium price and
quality position in the market, creating the efficiencies and confidence to
enable renewed growth and investment.

Ferguson says the Northern Colour turnaround underlined the need for boards
to move more quickly.

‘Virtually every STP member will tell you that they have arrived in a
business only to be told: ‘you should have been here months ago,’ he says. ‘The
later we get involved in a turnaround situation, the greater the pain and
bloodletting. Management denial is often a fact of life, and it needn’t be. In
Northern Colour’s case, the board could, and maybe should, have moved earlier,
but at least it took action before the banks did it for them.’

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