The well known "Beermat Entrepreneur" and journalist Mike Southon interviewed me recently for his weekly blog/ezine, Mike also writes articles most Saturdays in the Financial Times (see here for online version)
This week, 25th April, the FT will feature the article (below) written about Company Rescue issues. Thanks to Mike for inviting me to share my views on CompanyRescue the fantastic rescue tool for struggling companies called company voluntary arrangements.
I highly recommend Mike's excellent website and marketing guides here http://www.mikesouthon.com/
Below is my column about the ‘Magic Email’, that will feature in Saturday’s Financial Times, which can be found in the entrepreneurship pages of the Money section. You can also find my columns on the FT web site here: http://www.ft.com/mikesouthon
The number of companies failing continues to rise as the recession bites and bills mount up. Dealing with creditors is one challenge, but when an impending tax demand puts the company payroll at risk, disaster may not be far away.
In these difficult times it is useful to remember the lessons of the last recession and talk to someone with first-hand experience, such as Keith Steven. Back in 1991 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. It became clear that the company was in dire straits, and it eventually went into receivership.
Looking back, he concluded that he had not been offered the full range of options, only liquidation. He therefore resolved to use his own experience to help others in this situation and formed KSA Turnaround, which specialises in company rescue.
The challenge in rescuing companies is in the essential nature of most entrepreneurs. To start a business, you have to be confident; many entrepreneurs are driven, motivated and extrovert people. For them, risk is something to be relished or even totally ignored.
Dealing with entrepreneurs on a daily basis, 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, the earlier the better, that you need help, specifically in cash flow management. Many entrepreneurs will admit a form of fiscal dyslexia; their eyes glaze over when confronted with a spreadsheet, even if they have a full or part-time finance expert as part of their team.
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 look at the ‘spikes’ in your cash flow, the times when payroll and taxes have to be paid.
Steven and his team of company rescuers can do their best work when it is early enough to have a sensible look at your fixed costs and see if, for example, it is possible to renegotiate the terms of your lease.
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, avoiding defaulting on your lease, which is, of course, your landlord’s worst nightmare.
This approach is based on a sensible dialogue with both parties’ interests at heart and 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 any negotiation should be done on your behalf by people like Steven and his team, who have not only made an honest appraisal of your business, but also speak the language of finance that your creditors understand.
Ideally, a company rescue is done in good time to prevent, rather than just treat the disease. If the patient is not quite terminal, then there are other steps before liquidation receivership or administration, including the Company Voluntary Arrangement (CVA). Steven defines this as 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. This stops pressure from tax, VAT and PAYE while the CVA is prepared, and you can potentially use the instrument to terminate employment contracts, leases, onerous supply contracts and even landlords leases if this is what is required to restructure the company into profitability.
Even the sensible approach of a CVA can be a mortal blow for the confidence of an entrepreneur, who almost invariably started their company with the best of intentions. The aim should be to exit the process with not just some self-respect, but also your family home, marriage and sanity intact, as Steven himself did back in the last recession.