Turnaround - spotting the warning signs

Restructuring and Insolvency

By Phil Deyes, Director at Leonard Curtis.

Covid-19 has hit businesses in a way that no-one could have imagined. With nearly two-thirds of entrepreneurs feeling their business might not survive the pressures of the pandemic, the governmentes decision to continue to give SMEs some much needed breathing space is welcome.

The continued extension of insolvency measure changes to protect businesses by giving them more time to consider a rescue plan has made - and will continue to make - a real difference.

Over the last eight years, Leonard Curtis Leeds has worked with hundreds of regional companies in every conceivable predicament. Yes, the times we now find ourselves in are unprecedented. However, the principles weve always adhered to when working to rescue a business remain the same.

Spotting the warning signs early is always key. Fortunately, under the right specialist guidance, many SMEs are agile enough to quickly adapt and deal with new scenarios and to capitalise on new opportunities that present themselves. Herees how:

1.Dont bury your head and hope problems will go away. They tend not to

Ites very easy for an owner-manager to fall into the hoping for the best trap, as the alternative is too terrible to contemplate. Sadly, it is this reaction that is most likely to lead to the failure of their business.

Ites essential to take stock of where they are, whates happening in their market, bringing the senior team together to strategically pull together whates been learnt so far and how they must adapt.

This should be done when problems are first recognised and then at regular, ideally monthly, intervals moving forwards.

Even if a formal insolvency process becomes necessary, it doesnt always mean the end of the road.

2.Forecast. And then challenge your forecast

Forecasting is extremely important for any business, especially now. In order to survive and identify new opportunities, forecasting is essential. Once projections have been pulled together - for both best and worst possible scenarios - theyre a really effective tool to guide strategy and decision making. 

Take time to regularly review and challenge your forecast to work out how you can bridge any gaps in your cash-flow.

3.Act quickly

By knowing what to look out for - and what steps to then take - a business has more time to react. The longer it takes to acknowledge difficulties, the quicker they accelerate and more problematic they become. Often, by the time debts are unable to be repaid, options are very limited.

We recommend that companies use the governmentes extended deadlines to their advantage and benefit from the extra time to get a plan in place, rather than waiting until the last minute in weeks and months to come.

We also meet with many business owners who, when they really think about it, dont want to rebuild their business. For many, they recognise that it wasnt particularly viable prior to the pandemic. Others find themselves at a life stage where starting back from scratch isnt what they want to do. We often ask business owners what good looks like for them and we formulate a plan from there.

Even at the later stages, distress doesnt mean disaster. From time to time, we are all faced with a situation or posed a question that we dont know the answer to. By working with specialists however, youre best placed to find a solution.  

4.Ask for help

We shouldnt be afraid to ask for help as without it, we dont - and often cant - succeed.

UK businesses have borrowed over £50billion under government-backed lending programmes since March. One in four firms that took on debt through state lending programs say they may have to scale down operations to repay it and one in five state  that profits only just cover their debt interest payments.

Times are clearly very tough for many businesses, but again, a greater proportion of them can certainly be saved if issues are taken on board and specialist advice sought earlier.

5.Dont be afraid of the 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. There is a misconception that asking an Insolvency Practitioner (IP) for guidance will automatically lead to the closure of the business.

On the contrary, our priority - and that of all restructuring firms - is always to try to save it if possible.  Where we are referred early enough, we can usually develop a practical strategy to put the company back on a steady footing.

For example, a Company Voluntary Arrangement (CVA) procedure is 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 to be tailored towards very particular circumstances such as future lockdowns and the constraints of the tier systems. Ites a helpful recovery option to buy time until business picks up and can also offer some debt forgiveness.

Pre-pack administrations can also be the right option in some circumstances, but they are now subject to increased external scrutiny - particularly where business sales to connected parties are involved.  Make sure you take advice from a reputable and licensed Insolvency Practitioner who can help you steer the correct path. Those who get it wrong could face ongoing challenges from the taxman.


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