How to turnaround a failing business in four steps

Don Bailey, the owner of a specialist components manufacturing business in Buckinghamshire approached his bank for a loan in January 2011. The company already had an overdraft facility, but this was steadily heading up towards its limit. The bank was concerned that the company’s revenues were on a downward slope and there had been operating losses incurred for each of the last five years.

Not only did the bank turn down Don’s loan request, but let him know in the meeting that they had just completed a review of his overdraft facility, and that, in accordance with the bank policy, were going to have to cut the limit by 50 per cent at the end of March 2011. This was not what Don had expected. He had plenty of new orders in the pipeline, but without the loan the business was not going to survive the year. Worse, the loss of the overdraft would push his business into a technically insolvent position within six weeks.

Don did his best to raise the money and renegotiate with the bank, but sadly failed to prevent his business from falling into administration. However, the appointed insolvency practitioners managed to find an experienced entrepreneur to make a cash injection to both solve the short-term liquidity problems and to purchase capital equipment - in return for near ownership (80 per cent; Don was left with the balance) of the business. The investor followed a set of turnaround strategies that had served him well in the past and the business was again thriving by the end of 2012.

Back in August 2010, a hospitality business based no more than ten kilometres away from Don’s company also approached their bank, Natwest, for a loan. Again the bank was concerned about declining revenues but in this case introduced the director to a local business turnaround expert who offered a free consultation. At the meeting, the turnaround specialist proposed that a comprehensive business plan should be put in place and that this could be funded by a grant from Skills South East.

Three months later a business plan and financial dashboard was in place to give the owner a clear picture of where the business stood each month in relation to its plan, which monitored a number of KPIs. A realistic budget was able to be set for 2012/2013, and periodic meetings were scheduled throughout the following year between the turnaround specialist and the key managers. At these meetings, the latest KPIs would be discussed and changes proposed to improve the performance of the business.

The end-of-year figures showed a revenue increase of 30 per cent and NPBT increase of 225 per cent.

These are examples of two quite different, but successful, owner outcomes stemming from floundering businesses that required “new eyes” to set sail on a profitable course.

The fact of the matter is that the majority of failing companies spiral downwards into collapse, often as a result of their owners’ reluctance or inability to seek the right help.

The insolvency trade body R3 announced that in May 2013, 134,000 small businesses were only just keeping their heads above water and struggling to pay bills when they fell due, up from 110,000 in June 2012. According to R3, “the number of businesses with very serious cash flow problems has climbed over the past twelve months”.

Liz Bingham, the president of R3, comments: “These businesses are in a very perilous position. While they have yet to enter formal insolvency procedures, businesses with such serious cash flow problems may find that the day of reckoning is not far off”.

“Now that the economic recovery is stronger, the likelihood of a jump in corporate insolvencies has increased”.

Buyers looking to spot opportunities to reverse the fortunes of failing businesses are preparing to cast their net wide as the flow gathers pace.

The next looming quarterly rent bill for many businesses is 29th September, a day that has historically precipitated administration for many flagging companies. Canny turnaround buyers armed with cash and experience are waiting, poised.

Whether you’re an investor or the owner of a distressed business, it’s worth taking a look at the four stages to a turnaround to help focus efforts in uprighting a company on terra firma once more.

Pre-turnaround – Is there a fresh pair of eyes to lead or advise on the entire process? If you are the incumbent owner/manager, then you will not be the turnaround expert who is needed. Draft in someone with the skill and experience to handle a structured, efficient about turn. Most failures are traced back to poor decisions made by management so it will be imperative to weed out the bad apples here. Take it on the chin if the turnaround expert tells you that your own decisions were part of the problem, and be prepared to let go the reins. Get the remaining strong staff on board to support the turnaround.

Situation analysis – Judge whether the business can be saved or not. Are available resources enough to help kick-start the enterprise? Uncover the problems, map out your strategy to fix them and identify priorities. Increasing revenue, bringing costs down, selling or redistributing assets and strengthening the position in the marketplace are all paramount.

Crisis stabilisation – To prevent the business sinking further, take action to stem the loss of cash. Look at what assets, such as unused property/equipment, can be sold. Restructure the debts so that repayments are manageable for now. Consider staff redundancies, chop unprofitable services and products, and let go of overly demanding customers who aren’t paying their fair share of the service used. Adopt a swift, efficient and clear approach here.

Turnaround – Build strong foundations by focusing on upping profits. A prudent, if obvious, approach would be to reinvigorate customer and supplier relationships, sell current products to new customers and new products to established customers. Improve operations, and make staff accountable for potential problem areas in day-to-day operations. Renegotiate short and long-term debts. Ensure you get the best returns on any investments and assets.

Success is infinitely more likely if you address problems early on in the turnaround process and follow the action plan down to the letter, with the best turnaround expertise to back you up. Remember that it takes more than a feat of financial re-engineering to see a failed business succeed.

Going forward, stay focused on building profit and competitive advantages, ensure you get the best out of staff and consistently meet and exceed your customers’ expectations.


(Note that names have been changed)

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