The turnaround guys

Corporate recovery experts Peter Yeldon and Mark Smillie on ensuring your business won't need them

There aren’t many people who would be proud to have been involved in a string of failing business ventures. But for Peter Yeldon and Mark Smillie, founders of corporate recovery firm Middleton Partners, their track record with disaster-hit companies is one to be proud of.

This isn’t because of the efficiency with which they dispatch their quarry and pay off the creditors. It’s because, when the Grim Reaper has come knocking at their clients’ doors, their record of sending him away empty handed is as good as any.

With a combined 30 years specialising in corporate insolvency and company turnarounds they’ve been around the block a few times and seen the full gamut of failings – some critical, some not. They have also rescued thousands of businesses and tens of thousands of jobs.

Yeldon cut his teeth and built his reputation as a receiver, investigator, administrator and liquidator. His high profile roles include the re-organisation of Lloyds of London into Equitas and the liquidation of the Maxwell’s offshore companies. Smillie too has seen some action, specialising in company turnarounds with businesses like yours, typically turning over £1m-£100m.

They’ve purposely chosen to drop out of the rat race of working for the big firms – Yeldon left top-tier firm Smith & Williamson – and they jettisoned suits to put owner-managers at ease.

“We want people to relax with us and talk candidly. We don’t want them to feel they’re dealing with a City suit – someone who’s looking to fleece them. Our role is to try to save businesses, not shut them down.”

The trouble is too few businesses put themselves in a position to be rescued. The trick to survival, say Yeldon and Smillie, is to avoid getting into that position in the first place. The first thing you can do – however well your business is performing – is to recognise the warning signs. The second is to know how to act when trouble strikes.

You can never get help early enough

It hurts to admit your business is failing, but facing up to the situation and getting specialist help is the first step to recovery. Smillie and Yeldon believe that if many of the companies they see had done something two or three months earlier a solution could have been found. And doing something doesn’t mean going to your accountant.

“Companies often listen to someone who has been through something entirely different. You wouldn’t take medical advice for something serious from someone who has had a different condition,” says Smillie.

Turnarounds hinge on you having a period in which to implement the necessary changes: cutting costs; renegotiating deals with suppliers; raising your profit margins; diversifying; downsizing or retraining staff takes time – and time’s a commodity you need to value.

Doing nothing is not an option

The trouble is too many entrepreneurs try to battle on alone. Doing nothing is the worst course of action and only makes everything worse. Sure, you can work all the hours with good intent, but you are essentially hiding from the problem. It only takes one creditor to put in a winding-up petition and your bank account will be frozen. That’s when your business stops, because as Smillie says, it’s difficult to trade without a bank account.

“It’s just as liable to be a creditor to whom you owe £7,000 as it is £70,000 to be the one who puts in a petition. Over a short period of time, this can lead to the directors losing their business, the staff losing their jobs and creditors potentially losing their money.”

You may well find yourself in the position to pay one creditor, but when you start prioritising, based on who’s hounding you most, then you’ll soon be juggling every cheque that comes in, and who exactly do you pay next? That’s certainly no way to run a business. Seek advice. What might seem terminal is an everyday problem to a professional and one with a possible solution.

A problem now…

Turnover is vanity and profits are sanity. It’s an old cliché, but high turnover can be the route of all evil. “The way people fool themselves that they don’t have a problem is when they have big turnover. But it just takes a seasonal blip and if the business can’t handle it then the model is not robust enough,” says Yeldon. If your trade creditors are higher than your trade debtors then you have a real problem.

…Or in the future?

Even if you aren’t in that situation now, you could unwittingly be doing things which could land you in future trouble. A common characteristic of a struggling business is weak financial control.

“The best businesses will have three monthly cash flow, which they review monthly. A 10% increase in costs and your debtors taking 20% longer to pay invoices could have a devastating effect on your business if not checked. You’d be surprised at how few businesses do that,” says Smillie. Get your financial controller to supply you with the figures you need in a form that you understand, says Smillie. “Many companies I see are unhappy with accountants but haven’t instructed them properly.”

For rapidly expanding businesses where the owner-manager knows the sector, but not the nuances of finance, it’s not always easy to make sure the financial expertise available is in line with your move from small to mid-size business, says Smillie.

Sit down with them, discuss what you need, how it will be prepared, what makes sense and what you must understand.

Bad dept kills companies

Bad debt can sink your business, no matter how many great sales you make. Failing to address this marks the beginning of the end.

“Bad debt comes about when it hasn’t been chased. If you’re owed £100,000 and the debt goes bad, that could be your year’s profit,” says Yeldon

Equally, if you lose £50,000 you’ll have to make sales of £250,000 at a gross profit margin of 20% to win that back, as well as coping with the immediate impact of being £50,000 down. With debt, you’re effectively lending people money so check that they are good for it.

After all, who wants to do business with someone who never pays their bills?

Sending letters doesn’t normally have the desired effect, says Smillie, so you must take a robust approach. Call the client’s accounts department and ask simple yes or no questions to get a clear idea of exactly when your money will arrive.

Get you finding stategy right

“You can’t shovel money into the furnace and assume it will turn your business around,” says Yeldon.

If you are thinking of raising money to help your business survive you have to be sure it won’t disappear into the same black hole that swallowed up your other cash. If people won’t finance you, it’s because you are a bad bet. Any chance of a lender not seeing their money again is enough to refuse you cash: your business has to be in good shape to start with.

If you are in a distressed position you must be realistic about the type of money you need to raise in order to survive and how much you will actually get. If you aren’t using some form of invoice finance then this should be your first option as it is quick to arrange.

If you exhaust all funding avenues the temptation is to remortgage your house. More often than not, this approach will land you in more trouble down the line. Putting your house on the line will also add to outside pressure. This is because you may be remortgaged to the hilt, working long hours and unable to operate at your best, which will only make things worse.

Equally importantly you may never see the money again and you could lose your house. “If it’s a short term cure to tide them over then the expectation is that they can extract it not long after,” says Yeldon. This isn’t the case, he adds. You cannot pay yourself or related parties (e.g. family or friends) back before other creditors if your business fails and if you have done so you could be asked to pay this money back.

Watch out for vultures

Either you are fundable or you’re not. The problem is there are plenty of vultures ready to make money out of your desperation to keep your business going. Don’t be taken in, says Yeldon.

“There are a lot of charlatans out there – the phantoms of finance. On the whole it’s an unlicensed area. You can tell very quickly whether it’s going to be possible or not, so don’t be convinced that your business is financeable when it’s not,” says Yeldon.

One thing you shouldn’t be doing as a means of raising money to solve cash flow problems is paying an upfront fee.

Only pay a fee on successful completion of refinancing. Smillie recalls one ownermanager who paid £37,000 for finance of £200,000 and never saw a penny. “He’s an intelligent guy, but got conned by these promises and needed the cash.”

Again this is a reason to seek advice from specialist quarters. There are many private and institutional funds designed specifically for companies with cash flow problems and a good adviser will have contacts with these organisations. If a business is viable and funding requirements are sensible, then you will probably raise finance. But if the money you’re planning to borrow is to pay off losses then you’re effectively just topping up your debt and are unlikely to get anywhere fast.

Insolvency isn’t necessarily the end

Your company may be insolvent but that doesn’t necessarily mean the end for your business. A Company Voluntary Arrangement (CVA) may be the answer. A CVA is ideally suited for a company that had a problem, but has resolved it and is trading profitability again, yet is being strangled by debt. This is an agreement between you and your creditors which consolidates your debts and allows your business to repay them in part or in full over a new timescale.

The way they work is by adding up all your unsecured liabilities – VAT, PAYE and creditors – and put them into one pot. You then do a cash flow forecast for the next two-to-four years and work out what the company can afford to pay back. Typically, this would be on a monthly basis for the agreed period. This is then confirmed with the creditors. The money is then paid back over an extended period, so if you owe £500,000, your payment might be, say, £14,000 a month for three years.

“If an agreement is done realistically, it will work,” says Smillie. “You may get a huge amount of resistance from company directors, but the truth is that if you’re about to run out of cash and you’re not financeable, what other option do you have – liquidation or receivership.”

Most importantly, says Smillie, if your business is running profitably, a CVA lets you continue trading without any external interference in your operations. Staff and directors retain their jobs, and the creditors get something as opposed to nothing – which is exactly what they would get if they were to pursue a petition for a winding up arrangement.

Smillie says the two most common concerns are whether the bank will buy into the new arrangement and whether suppliers carry on supplying.

“In our experience,” he says, “if the proposal makes sense the bank will carry on supporting. It will have security and the arrangement takes the pressure off the current account.”

“Equally, suppliers will nearly always support a company in CVA – even if most directors insist they won’t.” Suppliers will go on your track record and the period over which you built up the debt. If it was quick they may be less understanding, but the fact remains that if they don’t co-operate they get nothing.

You need 75% of your creditors to vote for it in order to proceed. “If an agreement is struck, the difference will be that they won’t give 60 days credit any more – they will probably just 30. But the company shouldn’t need 60 days as it should have cash flow.”

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