How to turn a failing company into a success

As recession bites, we speak to some business turnaround experts on how to stave off disaster

When William Davies joined property repairs company Aspect Maintenance, the business was going through a tough time. It had serious cashflow problems, was behind with its tax payments and was in a company voluntary agreement. Nevertheless Davies, with a background in investment banking and private equity, and his business partner Nick Bizley, who specialised in maintenance, saw the potential in the company.

“We went through the numbers, spent time with the business and tried to find out why it was struggling,” says Davies. “We found that there was potential in the sector and the margins were big enough to run a good business, but the cashflow in the company needed to be managed better.”

One major problem was that Aspect’s engineers weren’t sending over crucial paperwork needed to raise invoices. The staff were being paid, but the company wasn’t. So, on joining, Davies set to work on the back end of the business, arming engineers with PDAs and bringing in new engineers as sub-contractors as opposed to PAYE, incentivising them to get the paperwork done. “If they don’t put in the paperwork they know they won’t get paid. If they were on PAYE, we would be chasing them for weeks,” he explains.

Today, Aspect is a profitable £7m business with 115 staff. Businesses in the current bleak economic climate are well advised to look closely at Aspect Maintenance and other turnaround successes. The likelihood is most of your business history has been created during good times, but now you are feeling the pinch. Figures from credit information company Equifax reveal that July saw a 59% increase in business failures over 2007, while some analysts are predicting two more years of gloom before recovery sets in.

The good news is that there are many examples of great businesses that were made stronger after they hit bad times.

“We went through a hard 18 months, but it was the making of the company,” says Mark Dixon, chief executive of the £1bn serviced office business Regus. The company got into trouble after the dotcom bubble burst as it had purchased offices in California on the assumption that there was growth in the market. Then the market went into recession. “We hit the wall at high speed, but when we put the car back together again we had made it even better,” Dixon says.

Regus survived by cutting £100m in costs in the first six months and selling off part of the business – a drastic but necessary measure.

Captain’s orders

Business turnarounds are a test of your leadership skills. You need to be able to make big decisions quickly. The economic situation is bad, so review your business in light of this and do it with brutal honesty. “You cannot be ostrich-like. There are probably a lot of companies out there who are thinking that this credit crunch could be about to end. My own view is that it isn’t, and that it is best to imagine how you will be in the worst case scenario,” says Dixon.

Tom Joule found himself looking into the abyss when foot and mouth closed down the countryside. His clothing business, Joules, made most of its money by selling at big outdoor events, but he found himself cut off from his customers. Joules had just launched its own line and had £100,000 of orders coming in from China. The deal had been brokered over irrevocable letters of credit and, to add some more drama to the mix, Joule had found the money by remortgaging his house.

He rapidly reacted by seeking a new market with clothing retailers. “It really is a matter of rolling up your sleeves. When things get difficult you’ve got to take action and you’ve got to act early as well,” says Joule.

Strict rations

We say it a lot in Growing Business, but only because it’s true: Cash is King. In turnaround situations, it is not the profit or the orders, but the lack of cash that will kill you. It nearly did for Aspect Maintenance and it could do for you too. If you are behind on bills and waiting for money to come in, a winding up petition could be the death knell. Colin Mills of the FD Centre provides part-time finance directors to companies that need help and has dealt with many turnaround situations.

“In the first month, we get a grasp of the situation and stop the bleeding. You need to get a grip on purchasing orders,” he advises. “Profit is something you can worry about in a month’s time. Right now your focus needs to be on the cash.”

A big part of cashflow management is dealing with people who want to be paid. Creditors and suppliers are also facing a tough time, and if you are missing payments, they might start to judge you as a bad bet. Alastair Crawford of i-CD Publishing had a tough couple of years as his company was bogged down with a legal battle with Royal Mail. It won the case, but his creditors needed to be kept on side. “Reassuring creditors is a selling job. You have to sell them the proposition that you can stay with it,” he says. “If creditors get the idea that there’s a problem then they can set off an avalanche – you have to keep people on board.”

Have face-to-face meetings with your creditors and provide them with clear explanations of your company’s predicament. This approach can include the taxman, not just other businesses. Good communication with your bank is also key.

“I had always given my bank good information, so prior to foot and mouth I had been to the bank with a very well thought out business plan,” says Joule, who needed financial help to support his new sales strategy. “The outdoor shows were instant cash whereas retailers can take 60 to 90 days to pay,” he explains. “The bank was fantastic and provided overdraft facilities to get us through that.”

Tight ships

“Businesses that are formed when markets are weak are often the best as they have to really work to get customers and get things right,” argues Mel Loades of the Turnaround Group Business Advisors (TGBA), which helps struggling firms and worked with i-CD Publishing. But many of you probably set up during easier times when you could afford certain luxuries. One of these is over-staffing.

Stephen Bentley bought Granby Marketing, a division of Omnicom, which was struggling and unprofitable. He underwent a rationalisation process and found that some departments were overstaffed. “We assessed the staff via a points system – it wasn’t last in first out – and made about 18 redundancies in the first six months,” he says.

Dixon was forced to cull about 10-15% of his staff and Joule also had to wield the axe. “While I was selling to customers, back in the office we were laying people off,” he recalls. But all of these businesses have now hired many more people than they let go of during that time. If they hadn’t made the cuts then they could have lost everything.

It isn’t simply down to reducing costs, but rather a case of improving efficiency. Davies spent money on back-end systems to improve invoicing, whereas Joule used his compensation money from foot and mouth to invest in a computer system to handle mail orders. “Sometimes you have to spend a bit to make money,” agrees Mills, “that’s why you need some cash in the business.”

Get your crew in order

On his first day in the office at Granby Marketing, Bentley received a knock on his door and found a disgruntled member of staff complaining that the HR manager had refused him holiday leave. He was perplexed as to why he was being asked to intervene, and when he spoke to the HR manager she had justifiable reasons for refusing the holiday. Bentley discovered that his predecessor had made a habit of overruling managers and this was one of many problems.

“We had to get a management structure in place and allow people to take responsibility rather than going over the heads of their managers,” he says.

As Bentley explored further, he found that his customer service team was also poorly managed. He promptly “changed the rules of engagement” and demanded far more interaction with customers. This prompted senior staff to leave, but Bentley wasn’t sad – on the contrary, it cleared the decks.

Loades finds that management is often to blame for a company’s failure. “If you meet senior management on their own, do they say the same things as when they are together? Are they acting like a management team?” he says.

This is something you might need a third party to assess and, of course, your own role needs to come under scrutiny too. But if you are convinced that your management team is working well then you need to pull together. “Get your people around you. If you tell them there’s a problem, they will help you solve it. If you say it will be alright they will think things are ok,” says Dixon. “It’s a war-time spirit that you have to get into your business. People will band together against the world.”

Similarly, Davies met with staff on day one: “We took the view that if we were honest with them about what had got the business into trouble in the first place, then they would remain,” he says. “We were frank about what the business could achieve over the next couple of years.”

Hidden treasure

Before Bentley bought Granby Marketing, he actually visited the company posing as a client, so that he could gauge the attitudes of staff towards the business. He recommends the technique to anyone thinking of joining a struggling business.

“You can only do this with the vendor’s backing, but you can’t let the staff know what is going on,” he says. “It was a great technique because I knew internally that they hadn’t been primed.”

One of the things he found was that there were some staff who could do much more for the company and help him turn it around. “There are some fantastic gems in organisations that don’t see the light of day,” he says. “Sometimes you find a willing victim who is desperately looking for an opportunity to prove themselves.”

The late Sir Harvey Jones, who revived the fortunes of ICI, suggested that after you meet management, you head straight to the shop floor and ask for their opinions. “You’ll find two quite separate explanations as to why the company is failing,” he suggested.

Take counsel

The opinions of third parties are also very useful, and the sooner you bring people in the better. Both the FD Centre and TGBA help struggling businesses by providing experienced professionals to help with financial problems, credit issues and strategy. “Having the right advisers is essential to ensure you are on the right track and to make sure that you make the most of your opportunities,” says Davies.

His accountant wisely instructed him to buy the debtor book, which was later used to generate cash. Lawyers, too, can be helpful, especially if you are dealing with late payments, either owed or borrowed. “Use the best advisers you can afford,” says Dixon, who brought heavyweights like KPMG, Slaughter & May and Deloitte into Regus. “You have to speculate to accumulate.”

A new course

The storm clouds aren’t about to disappear anytime soon, so you’re advised to treat this tough climate as the norm. If you are already in trouble, bring in the advisers, start your review and then make the tough calls. The future might seem bleak, but if there’s anything to be learned from the businesses featured here, it’s that if it doesn’t kill you, it will make you stronger.

Turning points

Here are a number of important areas to examine if you want to turn your business around:

Timely invoicing – the faster you send out invoices, the faster your debtors will pay you

Talk to the bank – they hate surprises and a good relationship is invaluable for the hard times

Handle creditors – a bit of face-to-face contact will help to calm their nerves

Bring in advisers – if you don’t have the necessary experience then admit it and get help

Rally your staff – create the old ‘war-time’ spirit that Mark Dixon used to boost Regus

Cut costs – some pain now will save you more later

Innovate – markets change and, like Tom Joule, you might have to change your strategy to survive

Comments

(will not be published)