It is useful to remember the lessons of the last recession of 1991.
Keith Steven not only remembers 1991; the events of that time are the ‘defining experience’ that drove him to create his current business.
He was running a retail chain but the company became over-extended and he found himself at loggerheads with his various landlords and the bank. The company was put into receivership.
Looking back, he concluded that he had not been offered the full range of options when the company got into trouble. He resolved to use his own experience to help others in this situation and formed KSA Turnaround, which specialises in company rescue.
Dealing with entrepreneurs, I am often reminded of Mr Micawber from David Copperfield, who was always convinced ‘something will turn up’. For entrepreneurs, this is typically a big order that has been on the horizon for some time. When this fails to materialise, optimism turns instantly to despair. Mr Micawber was always being pursued by his creditors.
The challenge is to understand when you need help, the earlier the better. A good exercise is to re-examine your management accounts and put in the assumption that 25% of your predicted revenue just goes away and your largest customer suddenly decides to buy from one of your most aggressive competitors. Then assume your biggest suppliers will no longer be so flexible on payment and then look at the ‘spikes’ in your cash flow, the times when payroll and taxes have to be paid.
This is not an easy exercise for many entrepreneurs, who a) are optimists by nature and b) often dislike the minutiae of finance (even of finance actualities, let alone ‘what-if’ financial exercises). But it is worth doing.
Warned in advance, Keith and his team of company rescuers can get to work. Terms of leases can be renegotiated. Landlords commonly ask for a year’s rent in advance, terms you were willing to accept just after that funding round.
Your moving to a monthly payment scheme will have a radical effect on your cash-flow and may even save your company. Landlords don’t want tenants defaulting on their lease any more than you want to go bankrupt.
This approach, based on a sensible dialogue with both parties’ interests at heart, can be extended to all your creditors. This includes your suppliers, the bank and even the tax authorities, who can be very reasonable if you approach them correctly.
But this negotiation should be done on your behalf by people like Keith, who have not only made an honest appraisal of your business, but also speak the language that your creditors understand.
Ideally, a company rescue is done in good time to prevent, rather than treat, the disease. A Company Voluntary Arrangement (CVA) is a deal between the company and its creditors to repay them from future profits or by selling some of the assets of the business.
In this situation the directors remain in control of the company, personal guarantees do not usually get called in and it gives the business a fighting chance to survive. The CVA process stops pressure from tax, VAT and PAYE, and you can potentially use the instrument to terminate employment contracts, onerous supply contracts and even leases if this is what is required to restructure the company into profitability.
Even the sensible approach of a CVA can be a bitter blow for entrepreneurs. Another aim of KSA is to ensure that they emerge from the process with not just some self-respect, but also their family home, marriage and sanity intact. An entrepreneur himself at heart, Keith Steven is prouder of this aspect of his work than any other.
Keith Steven is a turnaround management expert, developing leading-edge turnaround strategies and delivering innovative rescue solutions.
He developed the UK’s first on-line support website for struggling business. www.companyrescue.co.uk
This article is a chapter from ‘This Is How Yoodoo It’ – a collection of Financial Times columns written by Mike Southon. You can buy this book in hard copy and in Kindle version here: http://tinyurl.com/YoodooBook