Carl Faulds, Head of Insolvency Operations at Leonard Curtis outlines seven key things to consider when it comes to the warning signs of business distress.
Leonard Curtis celebrates 30 years of restructuring and turnaround advisory in its current Group structure this year so there is nothing we have not seen in terms of business distress. What we do say to business owners – if they look as though they are heading for trouble - is to look for warning signs and act accordingly.
These are the seven key things to take on board:
Don’t bury your head and hope problems will go away
It’s very easy for any business manager to fall into the ‘hoping for the best’ trap, as business owners are naturally optimistic, and the alternative is too terrible to contemplate. Ignoring problems, however, is unlikely to be a solution, and this is more likely to lead to failure.
It’s essential to take stock of the reality of the situation, including external factors such what’s happening in the market, then bring the management team or trusted advisors together to review the strategy and decide what needs to change. This needs to be done at an early stage of any distress.
It is worth saying that even if a formal insolvency process becomes necessary, it doesn’t always mean the end of the road. Our focus is always forward with purpose whatever that looks like for a business owner.
Forecast. And then challenge your forecast
Regular forecasting particularly cashflow, is extremely important for any business, not just for survival, but also to identify opportunities for growth. Once projections have been pulled together - for both best and worst possible scenarios – they are an extremely effective guide to developing long-term strategy and managing day to day operations. Take time to regularly review and challenge your forecast to work out how you can bridge any gaps in your cash-flow.
Act quickly when you see trouble ahead
By knowing what to look out for - and what steps to then take - a business has more time to react. This emphasises the importance of forecasting. The the longer it takes to acknowledge difficulties, the quicker they accelerate, and the more problematic they become. If caught unawares, often by the time the ‘cashflow crunch’ hits and creditors are chasing for payment the options for remedial action reduce.
It is also important to understand what your business means to you. We meet with many business owners who, when they really think about it, don’t want to spend every day fighting fires. They recognise that sometimes it is better to work for someone else. We always ask business owners what ‘good’ looks like for them and then formulate a plan to make the best of the situation.
Even at the later stages, distress doesn’t always mean disaster. From time to time, we are all faced with a situation where we don’t know the immediate answer, so asking for help is the brave and correct thing to do.
Ask for help
Nobody should be afraid of asking for help, there is plenty of trusted support available from qualified professionals, including at Leonard Curtis and we have a very open door approach. Five years on from Covid 19, times remain challenging for many businesses, but again, a greater proportion of them can certainly be saved if issues are taken on board and specialist advice sought early.
Keep talking to your stakeholders
Once you have identified the cause of the distress and developed a plan to deal with the situation, communicating well with employees, customers and suppliers – the key people around your business – will help turn a distressed situation around.
Without customers, you have no business. Without your suppliers you can’t make your products and without your employees you can’t deliver them. So, knowing what to say and when to say it is important and part of the guidance we can provide. This should just be a natural extension of what you would normally be doing – knowledge from communication helps understand customers’ requirements and challenges and identify early any problems with potential debtors.
Being honest with employees – at the right time – to inform and reassure if you can, is fundamental – especially if there is a recovery plan involving their support or you need to manage any exits professionally.
Keep lenders and creditors on side
Again, this comes down to good communication from the management team.
The simple advice is to engage with lenders and creditors at an early stage, especially where difficult messages need to be conveyed. And, if you make a promise to pay later as part of a deferral arrangement, stick to it, otherwise, your credibility may be damaged and confidence in your ability to manage the situation is lost.
Don’t be afraid of a possible insolvency process - rescue is always the priority
Confusion surrounding the insolvency process - and fear of repercussions from seeking advice from a corporate recovery professional - means that many owner managers often leave it too late to get help. Asking an insolvency practitioner (IP) for guidance does not automatically lead to the closure of the business.
On the contrary, our priority - and that of most restructuring firms - is always to try to save a business if possible. Where we are consulted early enough, we can usually develop a practical strategy to put the company back on a steady footing. CVAs
One of the options may be a Company Voluntary Arrangement (CVA) which can be suitable for many more businesses than just high street brands and large multiple retailer chains. As well as engaging creditors up-front, a CVA offers flexibility and is a helpful recovery option to address cashflow issues, provided there is an underlying viable business.
Prepacks
Pre-pack administrations can also be the right option in some circumstances, but they are subject to external scrutiny - particularly where business sales to connected parties are involved. Make sure you take advice from a reputable and licensed IP who can help you steer the correct path. Those who get it wrong could face ongoing challenges from Creditors including HMRC and the Insolvency Service.
Family businesses tend to face an additional challenge in tough times as often there is a fear of disappointing parents, partners, siblings and children. The business owner’s personal identity is inextricably linked to the business and business distress can create stress in those personal relationships.
This makes it even more important to seek confidential impartial advice at an early stage. This means you can avoid letting personal relationships cloud your judgment at an important time and making things worse.
Leonard Curtis offers a range of services including negotiating with creditors, arranging additional funding as well as all the various insolvency options and are happy to provide confidential initial advice without any cost or obligation to support businesses of all shapes and sizes.
