Since the UK’s EU Brexit referendum, the number of businesses in financial distress has increased by 40 per cent. This is according to new research from a major insolvency practitioner firm and suggests that the need for effective turnaround experts is greater than ever.
Begbies Traynor’s latest Red Flag Alert report shows that the number of businesses facing financial difficulty at the end of September 2019 totalled 489,000. It also found that there has been an 8 per cent rise year-on-year in the number of companies facing critical financial distress. Businesses in this situation are often not far away from insolvency, but this can also mean they could be perfect turnaround opportunities for the right buyers.
What’s led to the growing number of distressed businesses?
According to the report, a combination of factors has led to a ‘perfect storm’ situation, which has had a direct impact on the financial health of UK businesses. The uncertainty caused by Brexit has resulted in poor consumer confidence and a lack of investment. Businesses claim they are finding it increasingly hard to plan, due to the uncertainty as to the kind of deal we will leave the EU with or, for that matter, whether there will be a deal at all.
As well as the Brexit issue, the US/China trade war is also having a macroeconomic impact, the headwinds of which are being felt by UK businesses. Ric Traynor, the Executive Chairman of Begbies Traynor, explained: “The broader macroeconomic environment is a real concern and could ultimately have a much greater impact on UK business than the specific terms of any Brexit deal. The growth in protectionist trade policies, combined with faltering consumer demand in both the US and Europe are a real concern.”
Which businesses are falling into distress?
No business is immune to the factors discussed above, but some industries are feeling the pinch more acutely than others.
Real estate and property businesses have suffered the most, seeing a 16 per cent increase year-on-year in the number of businesses in significant financial distress. The construction, retail (bricks, mortar and e-commerce) and travel industries have also seen a major rise in the number of businesses feeling critical financial distress over the past year, indicating that these are also areas worth monitoring for turnaround experts.
What are the signs of distress?
Distressed businesses are likely to show some of the following financial signs that you may be able to spot as a prospective buyer:
- Resignations of key finance staff
- Diminishing liquidity
- Inability to meet debt covenants
- Reduced capital investment programmes
- Reduced EBITDA margin
- Delays/inability to file financial statements
- Accounting restatements
- Sudden redundancies
- Management turnover
Tips for turning around a distressed business
If you’ve found a business that is in significant financial distress but you believe you can successfully turn around, then making an offer may bag you a bargain. However, whatever the purchase price, the real hard work is yet to begin. Here are some fundamentals to successful turnarounds, from the experts.
- Keep a close eye on the cash
Establishing whether and how the business is making money is a key part of a successful turnaround. This involved looking at the areas of the business and analysing their performance in terms of cash generated or lost. It’s a good idea to get board members to focus on the cash in the bank and whether the business can meet its immediate operational costs, rather than monitoring complex metrics or strategic goals.
- Make sure everyone knows they have a crisis on their hands
If you effectively convey to all stakeholders that a crisis is at play, they are more likely to respond in a way that will make a real difference to the bottom line of the business. Without the creation of a crisis situation, staff may be unwilling to display the flexibility required of them and managers won’t act with the urgency needed.
- Focus on retaining key staff members
While its easy to focus on senior management, your key members of staff may actually be front line members of your employ that need reassuring and nurturing. They will often be able to help you turn the business around better than almost anyone else, providing they receive clear messages from you on the changes that need to take place and the rewards that can be reaped.
If you identify the right people who have leadership qualities but have not had the opportunity to flourish under the old regime, you could be onto a winner.
- Incentivise success
Once you’ve taken ownership of a struggling business, it’s a great time to reassess the incentives previously offered to staff. Now is the time to examine where the failures lie and with whom. If people succeed beyond expectations following the change in ownership, rewards should be paid out without reservation, but for those who don’t meet their targets, perhaps bonus cuts should be considered.
In conclusion, no one ever said that running a business is easy. And these are exceptionally tricky times for any entrepreneur or experienced business owners to make a true success of their operation. However, now is a good time for spot opportunities for turnaround projects that can help to save businesses on the brink. Often, it just takes the right person to come along with the right expertise to revive a struggling business, regardless of the economic and socio-political situation.
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