Lack of funding is opportunity for buyers

On 12th October 2012 the iconic London black taxi maker, Manganese Bronze Holdings, announced a recall of 400 of its TX4 cabs after a fault was discovered in the steering box. An operational nightmare perhaps, but a fixable one.

Just eighteen days later, however, the entire group of companies limped into administration, crippled by the operational costs of fixing the fault, in an unexpected, unwelcome bill. Several other issues had lurked beneath the surface – weak UK sales, supply chain problems and high costs, culminating in four years of losses. A discovery of accounting errors during the first six months of 2012 caused further damage. The steering fault had hit the company right when it hurt most.

Three months later in January 2013, Zhejiang Geely, the Chinese vehicle maker, emerged as a white knight and bought what remained of Manganese after the rigours of a spell with the administrators. It bought 80 per cent of the company (it already owned 20 per cent) and its assets for just £11 million.

At the time the new owners pledged to jumpstart the business, and pump millions of pounds into the Coventry-based factory of the London taxi maker over the next five years. And true to their word, the TX5 is soon expected in production, while staff levels have bounced back to 168, after 60 per cent of its original 175-strong workforce lost their jobs in the administration process.

Manganese Bronze is not the only company that has been limping along, just focusing on surviving the lengthy, harsh recession. Countless others are experiencing problems getting access to funding and so are unable to set their sights on growth, having just emerged from the recession. This common scenario represents an untapped angle for a business purchase and rescue, and is good news for buyers looking to profit from bringing a business back to black.

Recent research conducted by R3 found that 35 per cent of businesses are reporting at least one indication of distress – falling profits, decreased sales, having to fall back on the overdraft facility on a regular basis, or redundancies. One might be inclined to think, however, that the outlook is rapidly improving as we head out of recession.

But as R3 president Liz Bingham observes, “it is easily forgotten that one of the most dangerous times for a business is immediately after a recession, when a lack of investment as a result of recessionary cutbacks and the stress of servicing growing demand take their toll.”

At present a quarter of companies are chugging along, working with machinery and equipment that badly needs replacing, with 65 per cent of firms saying this situation has led to lost orders. Many companies have plans to invest in new machinery, premises and new technologies simply to keep up with customer demands. Gaining the resources to concentrate on growth, frustratingly, remains a pipe dream for many.

Business turnaround experts say fresh, effective leadership (and an injection of new funding) can be the perfect tonic to bring a struggling business back to good health and head towards growth.

Insolvency can creep up on a business that may have been just coping under less than ideal conditions for some time. Prepared, observant buyers with a clear action plan will see this as an opportunity to step in and take the reins here.

And in the case of Manganese Bronze, which had been floundering for years, it can take an immediate, seemingly unfixable problem to force a company to seek such help. As we have seen, Geely has refuelled and steered the taxi maker towards success.

Finally, some wise words from business turnaround veteran Luke Johnson (which can also be applied to small businesses): “Most large but failing companies can be saved. But they need fresh leaders, an admission of previous mistakes, a new culture and transformed operations. Unfortunately it is always easier to repeat the actions of the past than to change and perform differently.”

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