Thought Piece: Turnaround

Why is turnaround business declining, yet company failures growing?

Award winning Finance Journalist, Peter Williams, discusses developments in Turnaround with Peter Charles.

 

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Transcript

I'm Peter Williams, I'm a financial journalist, I'm talking to Peter Charles.

PETER W: You've just come from a meeting with a turnaround client, what's your view of the state of the turnaround market?

PETER C: I guess the state of the market is everybody thinks that turnaround should be big business at the moment, but actually nobody is seeing it. So, when I talking to the insolvency practitioners they are completely surprised that they are not ramped with business. Equally, when I'm talking to turnaround practitioners, they are also finding that they are not getting much business either.

PETER W: So why is that?

PETER C: Well the answer is, is I think the same as Greece I suppose, and that is, what is it called, it's called pretend and extend. So let's pretend that we are credit worthy, extend some more credit or extend the time and not face up to the issue. The other thing that seems to be happening is that the number of companies that are actually being struck off, not the ones that are being liquidated, but the ones that are being struck off has gone up to an all time high recently.� Now there are some peculiar reasons for that in terms of the way that it is being dealt with by Companies House, but there is a suggestion that instead of liquidating the companies, entrepreneurs are simply closing the doors and walking away and not actually closing down the company, and that would explain why the IP's are quiet and it would� also explain alongside kind of extend and pretend would explain why we are just not seeing enough turning business for insolvency practitioners or turnaround people.

PETER W: OK, extend and pretend is a great phrase, who's driving that, is it the banks or the companies? What's the banks saying on all� this?

PETER C: Well that's a good question, and not one I've been asked before.� I think probably it's the banks.� The last time I saw conditions like this it was 2002, when the world banks, when all the central banks in the world were reflating the economy, partly because of the events of 2001, and what happens is that the banks just let the belt out, they let the overdrafts go up to maximum, they just allow people just to roll over the loans they have already got and it makes the entire economy very quiet. I think probably with the level of uncertainty that's going on at the international level, both in the US and in Europe, in the US with their hitting their debt ceiling and in Europe with all of the activities around the Euro, if I was a banker I would be pretty cautious.� The other thing is that the banks� simply aren't lending.� So if you've got collateral or you've got a good business, people are always reporting to me that the banks simply aren't lending. PETER W: OK, well let's move away from the banks for a second.� Let's go back to the entrepreneurs. You say that they're not closing down businesses xxxx(around 2mins 45 secs), they're just walking away from that. Explain that in a little bit more detail. PETER C: Well the idea there is that if a relatively small business gets into difficulty, instead of the directors spending money tidying up their affairs, if they find that the business just isn't worth it, they might just quietly go and get a job, they might just quietly close that business down and retire.� What they're not doing if finishing off.� They're not finishing off with a formal insolvency and the creditors are finding that they're not going to spend going into the courts trying to get money when they know there is none. So there is no pressure to close these companies down. The other possibility is actually there is a new turnaround industry growing up in the business.� So as it were the old guys with grey hairs aren't getting the business and a new set a new carder of turnaround managers that might be growing up who are actually much younger than the ones now.� So it could be that the next layer of management down is getting stuck in and actually is turning the companies around but doing them inside out, instead of bring in outsiders to do it.

PETER W: Peter, presumably you see a value in traditional turnarounds, are other people failing to see that value?

PETER C: The key issue here is that the client has to appreciate that there is some kind of problem they need to deal with. So, the absolute traditional turnaround is either what you might describe as a Trojan horse, or you might describe it as it's forced by the banks or certainly forced by an external party. So the traditional view is that the management team that got the business into trouble is psychologically incapable of getting that business out of trouble again.� So in other words they are just not capable of changing their minds about the thing that caused them or that caused the business to get into difficulty in the first place.� So the traditional view then has that the bank or the financial institution or very occasionally the shareholders will force management's hand and quite often the turnaround practitioner goes in with an enormous amount of power, clear down the board and then just basically fire everybody, go to the next layer down and start again and you rerun the company from the top down. It's possible that one of the reasons that management teams today don't call in traditional style turnaround practitioners is because they think that's what's going to happen to them and therefore at the point that they do, they've either left the business so long that it's very, very difficult to turn it around or they've completely had their hands forced by the banks.� In an environment where the banks are cautious about pushing management into making changes, they don't want to be seen to be the ones who are causing the economy to go down they are under an awful lot of pressure to lend more so having headlines where the banks are actively taking money back would be a very, very bad thing for the PR for the banks. So I think in that environment the pressure is not on the management team.� If there is pretend and extend going on, if they are just being given a little bit of latitude in the way that the debts are being dealt with, then that allows more to go on, and then if the management team themselves are concerned that the turnaround practitioner is going to come and fire them or blame them, then actually there is very little incentive for them to call in somebody on the turnaround side.

PETER W: You're not saying that the banks are being too soft are you, because clearly in previous recessions banks have been accused of pulling the plug on decent companies too early and refusing to you know demanding overdrafts back at a moment's notice etc. So are you saying that the banks are now being too soft at this stage in the economic cycle?

PETER C: OK that's a very, very big judgement, you'd have to look at the kind of geo political level almost as to whether the banks are being too soft. Whether or not it's too soft... Well, let's put it this way, from the perspective of a turnaround practitioner, the banks are being too soft because, certainly not me because I take a different approach which we'll talk about in a moment, but certainly for the traditional turnaround practitioner the banks are being too soft, otherwise they would all be busy in the middle of a recession.

PETER W: Peter, you've got a slightly different approach to turnaround.� Can you explain that?

PETER C: Well I guess in the end the traditional turnaround person gets most of their work from the banks one way or another it is from or through or around banks.� I get most of my work from referrals from other entrepreneurs, from other business people and from other people I've worked with in the past, and therefore I'm always on the company side.� And I've always taken the view that if you can get somebody the right kind of information, you can get somebody the right financial information, and that financial information is supported by the right kind of non financial information and presented in a way that people find it easy to understand, the thing that they were refusing to do before becomes the thing that they are then prepared to do. So that the blind spot that they had before it then becomes visible, at which point you don't need to change over the management. So it's then that the management aren't then at threat from the turnaround person coming in, and the other thing is to, the issue isn't whether or not I look good, the issue is whether or not the management of the business look good, they can turn the business round and I can quietly step out. So there are two different things, one is I don't subscribe to the view that it's the person who got the business into trouble who is incapable of getting it out again, and secondly I don't get most of my business from banks and therefore there isn't a kind of soft conflict of interest going on inside the business.

PETER W: Fine, so when should companies come and talk to you if they think they've got a turnaround issue?

PETER C: In my experience, people will only come and talk to me when they are more scared of the problem than they are of me. So there is a sense in which when there is a turnaround to be done something has to change. So actually people should come and talk to me once they have arrived at the point that something has to change.

PETER W: Peter Charles, thank you.