A clear strategy and good advice are needed to turn around a business under pressure, says Liam Dowdall of our Dublin team.

Each day we read of companies going into receivership or liquidation in the economic downturn. Despite the difficult economic climate, there are clear actions that businesses can take to stay afloat and ride out the current recession. Over the past few years, our restructuring and recovery team has assisted many businesses to stay afloat. The key to any successful financial restructuring is for businesses to engage at an early stage in the process before the problems become insurmountable.

The corporate health of a business and the available recovery options over the course of time are inextricably linked. Early, decisive action is crucial for a successful turnaround. If early warning signs are not heeded, knock-on consequences can include balance sheet/profit decline, cashflow issues and ultimately failure.

Key to a successful turnaround

The key to a successful turnaround is for management to recognise that they have a problem and that they need to take independent and objective advice.

Companies with financial difficulties will exhibit difficulties in some or all of the following areas: the management team, relationship(s) with lenders, creditors and financial issues.

Address short-term working capital issues

Businesses do not fail because of short-term lack of profitability – they fail because they run out of cash. It is critical in any business turnaround to manage short-term funding requirements. Headroom is needed to allow the business to continue to meet creditor payments while it carries out its financial restructuring.

Key areas to be addressed during this phase are as follows.

  • Strengthen credit management procedures.
  • Communicate and engage with lenders to keep them on board.
  • Arrange suitable phasing of supplier payments including Revenue.
  • Seek additional equity investment from shareholders or connected parties.
  • Sale of non-core assets (including stock) to generate cash
  • Prepare comprehensive cashflow forecasts.

Consideration should be given to all alternative sources of working capital such as asset-based finance e.g. invoice discounting or stock finance.

As overdraft finance in Ireland has become harder for businesses to secure, asset-based finance such as invoice discounting is becoming more popular. Asset-based finance is predicted to grow by 9% in the UK and Ireland in 2013. Turnover for companies using asset-based finance is predicted to grow by 12% in 2013 in the UK and Ireland.

Finance can also be raised where there is unencumbered plant to provide additional working capital in the short-term.

Operational restructuring

After the initial phase of the restructuring plan, the next step is to work with management to carry out an operational restructuring of the business so as to create a suitable environment in which the business can successfully go forward.

Areas which we would advise on during this phase are as follows.

  • The strategic options available to the business to ensure its survival.
  • Assistance in the preparation and implementation of a comprehensive plan.
  • Assistance in the sale or wind-down of distressed or noncore segments of the business.
  • Liaising with creditors (including Revenue) and their advisers.
  • Negotiation with company lenders and possibly seeking alternative sources of finance.

Appoint interim management

As part of a turnaround strategy, the stakeholders/ management should consider the appointment of an interim manager where they see a management team deficit and where individuals with relevant expertise and skillsets can come on board. This approach has worked successfully in the retail and hospitality sectors in Ireland in the last number of years.

Way forward

When companies get into financial difficulties doing nothing is not an option. It is important for stakeholders and management to maintain communications with creditors, bankers and indeed employees during this time. A turnaround manager can give confidence to lenders, creditors and management that the challenges faced in the business are being addressed in a meaningful way.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.