The reasons why a business enters administration are numerous but they tend to have one common denominator: slow reaction times.
While the fate of some companies is truly out of their hands, in most cases an administration is down to the fact that the firm was simply too slow to evolve in one way or another, be it in response to industry change, customer needs, government legislation plans or technological innovation.
It’s a harsh world out there and in business those who come out on top are those who evolve first; the companies that make the leap with a new idea, product, system or structure. The drive and strategy to deliver is equally important, but it’s the constant innovation that really lets companies stay on top of their game in an increasingly fast-pace digital and global economy.
For distressed business buyers, this isn’t about choosing to innovate to make more money because there is no choice. Without innovation buyers will lead the business towards the same fate it suffered under its previous owners.
If a business has folded, things are past the point of serious; there is little hope remaining. It’s going to take something big to turn things around; a few cutbacks here and there simply won’t be enough. Buyers have to come at the purchase with a new perspective and a bank of fresh ideas.
In most cases, the fact that things are in such dire straits means that the business and its assets can be bought for well below market value. This low price of entry means that while the turnaround won’t be easy, those who persevere with an innovative plan will find that the returns prove worthwhile.
Where to start
Ideas are the key to profits, but they can’t be formulated in the absence of research. The best place to start is on a fact-finding mission.
Look at why the target acquisition folded. Make this a strategic imperative right from the start and find out what the company’s competitors were doing differently that enabled them to weather whatever storm it was that took the target out.
Conduct an HR review - is there anyone key to the future success of the business? Are there customers that could be dropped? Does the Pareto Principle apply i.e. does 80 per cent of the business come from 20 per cent of the customers? Similarly with suppliers: if the business was previously locked into supplier agreements on unfavourable terms, can a change of suppliers now make a difference to operational costs?
A decision to make early on is the ultimate end goal of the takeover. What is the motivation behind buying this business out of administration: Do you and your team aim to make a profit by turning it around and selling as quickly as possible? Is the plan to strip out its assets and sell those on individually? Or will the company be restructured and integrated into an existing company? Each option comes with differing levels of risk and and value for the buyers and will of course be heavily influential in the strategy here.
Once key data has been researched and corporate objectives are clear, the takeover team are free to start bringing in the creativity. Work within the parameters set by the information gathered and decisions made but remember that the goal here is to innovate; the biggest profits lie in identifying a route to evolution that hasn’t been spotted by anyone else.
A suitable turnaround
The perfect opportunity or smart idea will be different in almost every case. In some situations, it's actually quite simple, but identifying the right simple idea is often the challenge.
It's a challenge that the turnaround team at Moss Bros have pulled off with excellent results over the past year. In 2014, having been steadily losing money since the latest recession, the company ditched a number of in-house labels and instead shifted its focus to its core name and brand.
Chief executive Brian Brick dubbed the in-house labels “pseudo brands” that “don't really mean anything to anyone”. Instead of the “pseudo-brands” - Blazer, Ventunio 21 and Dehavilland - the firm brought in names that complemented its core brand: Moss London, Moss Esq. and Moss 1851. The decision, which was made quite deliberately as part of serious efforts to implement a turnaround and save the company, worked, and the firm, which had been on its way out, has bounced back.
In fact, Moss Bros’ like-for-like retail sales were up 9.7 per cent in the 26 weeks to 1 August 2015. Meanwhile, like-for-like hire sales rose by 9.8 per cent, total revenue increased by ten per cent to £61.3 million and pre-tax profits showed a remarkably healthy rise of 44 per cent to £2.8 million.
The great and innovative idea that enabled all of these financial improvements ended up being one of those fantastically simple ones: a rebrand and a strong new focus on customer service delivery. Not such a complex solution, but it was one that required an entirely new perspective and the innovative vision to see what customers really wanted rather than what the business was set up to deliver.
Brian Brick, chief executive with Moss Bros, commented: “The successful launch of our new Moss Bros sub-brand line up at the start of the Autumn 2014 season, in conjunction with our ongoing store refit programme, has ensured our customer offer is now more closely defined and aligned with our target customer groups and is steadily building equity in the Moss Bros brand.”
Sunshine and storms
Moss Bros offers a useful insight into a relatively simple turnaround that nevertheless would most likely have failed if its orchestrators weren’t able to react to the market with the speed and agility they did. Not all turnaround strategies will be this straightforward, particularly for those buying a business out of administration, but of course, as the difficulties and risk go up, so too does the potential for returns.
One of the latest markets to see an increase in ‘high risk, high reward’ distressed acquisition opportunities is the green energy industry. It’s rare that an industry can change so much so quickly, but government legislation has thrown the sector up in the air over the past couple of months.
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Here’s what the government has said: A range of cuts to green energy campaigns including a proposed 87 per cent reduction in financial aid for householders installing solar panels have been announced. The secretary of state for energy and climate change, Amber Rudd, claims that the decline in technology costs has meant that continued subsidies on things like the installation of home solar panels are no longer needed. She suggests that the public would instead benefit from protection from higher energy bills.
This set of changes, which is under consultation for implementation in January 2016, will mean that it will take homeowners 25 years to pay back the costs of installing a rooftop solar energy generation system and has already massively hit demand and affordability for solar panels.
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These changes have already directly resulted in at least two solar power companies entering administration and forecasts have suggested that many more could be on the horizon, with some 20,000 jobs at risk across the sector.
Among the firms affected is the Mark Group, which was forced to appoint administrators from Deloitte Group in October. The firm was owned by SunEdison up until hours before its administration when it was handed over to the company's management. SunEdison's residential and commercial business unit vice-president Mark Babcock, laid the blame firmly at the feet of the UK government.
“Given the latest changes and proposed changes to the feed-in tariff [subsidy regime], it is difficult to see [Britain] as a viable market going forward,” he said.
Mr Babcock isn't alone in his thinking. Tory MP for Somerton and Frome, David Warburton, commented on the changes: “We know the solar industry fully expected some rationalisation, but a drop of up to 87 per cent in subsidies overnight is draconian and more than I suspect the industry can bear.”
The cause of these companies' administrations is clear: an over-reliance on a government policy which was unfortunately never set in granite. They weren’t able to pull a contingency plan into place quickly enough to survive the sudden drop in commerce.
A silver lining
But there is a flipside to these companies’ distress. Those operators that have a contingency plan set up and manage to weather the changes in legislation could find themselves with a raft of opportunity before them in the form of a sudden influx of distressed businesses in their sector.
Those ready to pounce will find themselves with access to commercial assets at knockdown prices as administrators seek to recoup finance for creditors and sell machinery and stock. But the innovation and preparation that enabled some companies to survive the changes in the industry might also be what helps them find that one key idea that transforms their operations. Add to this the higher than average number of distressed businesses in their area, and surviving firms have the means to pursue their growth plans at a reduced cost.
Where next?
For those that do take this route, the next step is to get serious about preparation and strategy. No distressed business acquisition should get anywhere near completion without a hefty amount of due diligence work being done; take nothing for granted when weighing up a target.
After that, it’s time to give your innovative ideas the best start in life with as much planning and preparation as possible. This might involve staying abreast of general business developments, such as the increasing importance of the Chief Digital Officer role in almost all industries looking to successfully exploit the digital revolution; but it also involves monitoring what your competitors are up to in order to evaluate any single company’s position within the market, and, of course, what its next move could be.
Successful entrepreneurs and business people repeatedly cite the value of being prepared, proactive and flexible in business, but these qualities cannot be emphasised enough when buying a business out of administration. The potential rewards from an innovative turnaround are enormous but they require groundwork. Without it, the great ideas that are so vital to bringing a failed company back to life simply won’t have the platform they need to succeed.
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