There are two golden rules with turning a business around:
The earlier you take substantive action to turn the business around, the more likely it is that you will succeed and the less it will hurt;
The later you leave it, the less likely it is to succeed without the need for writing off some debt through a formal insolvency process such as Administration, CVA, Receivership or Liquidation.
The one essential point you need to take on board is:
'The business is not the company'.
The business can survive the demise of the limited company. Bear this in mind throughout, as this means that just because the company goes into formal insolvency does not automatically lead to the failure of the business too. This simple fact means that formal insolvency processes have a place in the tool chest for turning around a business that is in a late stage of decline: they enable the business to cut free the company's historic debt burden, leaving management to focus on other pressing issues. It also means that IPs, because they alone can implement the formal insolvency process needed, are ideally placed to facilitate a turn around of a business in an advanced stage of decline.
Let's explore further where the skills and services of IPs and other advisers overlap. Here is a typical decline curve for a company.
Once a company goes into decline, issues conspire together to cause the decline to steepen. A problem in one part of the business causes issues elsewhere, the deterioration accelerates. This means that as time goes on, turning around the business becomes more tougher. And when the 'point of insolvency' (i.e. that time when when the company becomes 'insolvent' using the Insolvency Act definition) is reached, it becomes even harder to turn the business around and your options reduce. Latterly the business deteriorates to the extent that the company is well and truly underwater, it is heavily insolvent, and there may be no business worth saving.
Spotting the warning signs of problems early really does increase the options you have and the time you have to implement them.
IPs prefer to first get involved in turning around businesses sooner rather than later. If approached early, they work together with other advisers such as the company's existing accountants, turnaround or profit improvement consultants, or business coaches, with each providing their own skills to the situation. At this stage the actions necessary to turn around the business are not as 'brutal' as further on down the line. There is no need for the company to go through a formal insolvency to write off historic debts. Being 'fresh' to the situation, the IP can often explore issues with the directors that the company's other advisers feel unable to: and this can be the difference between halting the decline or not.
As the company travels down the curve, the IP still uses the same turnaround practitioner skills, but by now you probably also need him to help you conserve cash within the business, to manage the relationship with your existing funders, and to raise further cash. By this stage the actions you need to take to achieve the turnaround will often have become more brutal, the decisions get tougher, you need someone to counsel you especially as the stakes for you are higher, time is shorter, resources are scarcer, and you are at risk of things getting out of control and losing everything. It is at this stage that the company's bank is likely to look to reduce its exposure (their argument will be that you have already had plenty of time to turn things around, yet you haven't done so so far, what is to change that?), unless you actively manage the customer/bank relationship. This relationship is often best managed with the help of, or through, an Insolvency Practitioner, he knows how he banks work, and employing him to help you demonstrates your commitment to make big changes to how the business operates.
From
the point of insolvency, turning around the business in its existing form becomes more difficult. One major point to take on board is that
the point of insolvency is much earlier than you would think. Read my website commenting on the point of insolvency to see whether you have reached that stage. By this stage, time is running really short. Now stakeholders in the business, almost overnight will change their focus, they will concentrate on their own personal interests, which will differ from the company's. You will not get as much support from your bank, suppliers, staff or customers as you enjoyed prior to this point. Private equity investors will not introduce their cash into the company merely to settle your historic debts: they have to be persuaded that doing so is not a waste of their money. They will often push you to lose some of the company's debt using a formal insolvency process so that their cash is used positively, for the benefit of the business, rather than for the benefit of the company's creditors. Often directors see this as a personal affront: it is not, it is just business. If you do manage to secure additional lending outside of formal insolvency, you could be asked to give personal guarantees, often unlimited and possibly for the first time so that you not the investor/banker takes on the risk of the turnaround succeeding. CVA, Administration and Receivership now become an essental tool for either saving or turning around the business. Your legal obligations as a director change: your prime duties are now owed to the creditors, not the company. You decisions now come under the spotlight, you are at risk of being made personally liable if it all goes horribly wrong. Your family's financial well being is on the line as the stakes become even higher. The IP's role is now one of supporting you with the operational turnaround, raising more money in such a way as to minimise the risk to you and your family, liasing with stakeholders to get the best support, and dealing with the formal aspects of any CVA, Administration, Receivership or, in the case of small companies for which the previous options make liitle sense, Creditors Voluntary Liquidation.
Even further down the curve, the position will have deteriorated to such an exent that there is no business worthy of saving, insolvent liquidation is inevitable. The IP's role here is to deal with the legal process of liquidation, although he can often help you save something from the ashes.
People often leave it quite late in the day to approach an Insolvency Practitioner for corporate turnaround support: this is due to their perceptions of the work done by Insolvency Practitioners, pride, or simply because they bury their heads in the sand in the hope that a big order will come along to save them. Don't make the same mistake.
To summarise, the IP has the skills, and later on down the curve the formal powers, to help you save your business. At what stage down the decline curve and how far underwater the company and the business is when you approach the IP will determine the options you and he have, how much time you have to implement them, and the support you have from stakeholders. The earlier you take action, the more options you have, the less it will hurt in the long run.
Read on now for the warning signs which suggest your business is in need of a turnaround and the 'point of insolvency' which changes how you should be approaching issues generally.