Company turnaround tricks

As every entrepreneur knows, growing a company is fraught with perils. Your business model, for instance, might have worked well up to a certain stage of development, but may prove woefully unsuitable at the next one. Key customers or suppliers may let you down.

Rising interest rates and falling asset values may put you in a squeeze, or a transient period of booming business may have encouraged you to overextend your business.

If something like this happens and your company is plunging into the red, do not despair. Provided you spot the warning signs in time and take appropriate action and advice, you stand a good chance of turning it round, even though it can be painful.

In most cases, companies that have successfully surmounted such crises have done it either with the help of new management or outside specialists, or both.

Three years ago, holiday company MyTravel Group was staring potential collapse in the face. Bill Dawson, recovery partner at professional services firm Deloitte, was called in to see what could be saved.

He set to work with the help of fellow accountant John Darlington, who had previously steered the recovery of cider group Bulmers, and is now leading the equivalent department at another Big Four firm, KPMG.

Today MyTravel is one of the country’s leading package holiday providers. It sports a market value of £882 million and chief executive Peter McHugh says that this year he expects the company to turn a £17.5 million loss into a pre-tax profit of between £40 and £45 million.

In 2005, TV producer Peter Urie, who sold his Media Merchants children’s TV group for £14 million in order to retire at 48 and learn to fly, was induced to return to the fray.

He agreed to become managing director of overstretched film production group Metrodome, which was losing money and groaning under £3.5 million of debt.

Seeing the light

Urie has now turned it back to profitability, organised a £1 million private share placing and persuaded a key creditor to convert a £1 million loan into shares. He plans to raise more funds from City institutions in the New Year.

Geoffrey Defries, an accountant of 30 years’ standing and more recently a specialist in turning around companies with long-term prospects but near-term problems, has joined forces with Turnaround Capital, a company set up to back such companies and help them on the road to recovery and perhaps flotation.

Steered by wheeler-dealer Renwick Haddow of Arc Fund Management, Turnaround Capital has administered its medicine to a variety of companies, including a debt collection agency hit by the loss of a major customer, and a lottery operator starved of capital and pursued for allegedly unpaid VAT.

Dawson, based in Deloitte’s Manchester office, says he is usually working on three potential turnarounds at any one time and reckons to handle 20 to 25 every year. Two thirds he describes as ‘stressed’, where the danger signals have been spotted in time for remedial action to be launched in an orderly way, while the other third are ‘distressed’, where problems have been allowed to rise-up and it is a question of managing stakeholders, with all hands to the pump.

‘If the cash is going to run out in three months, it can be a struggle,’ he warns. ‘Beyond that, you’ve got a fighting chance.’ At MyTravel, he recalls, there was ‘an element of surprise because the company’s accounting policies at the time did not set warning bells ringing in time. We looked at MyTravel’s cash reporting and its strategy and we had to deal with stakeholders and the Civil Aviation Authority.

‘Cash is more often than not the cause of the problem,’ reflects Dawson, ‘though management can often be a problem too, especially in family-owned businesses. The company may be in breach of its loan covenants and suppliers may be nervous.’

The first priority is to help the business in question create a ‘stable platform’, and that involves, say, handling cash using three-month outflow projections, something most companies are not used to doing. ‘That establishes a two to three month platform, what we call “the burning platform”, when we get onto it.’

These days, he says, banks can help a company trying to turn itself around by bringing in asset-based lenders. These will lend against stock, intellectual property, receivables and debtors, and use invoice discounting.

Lenders, along with other stakeholders including venture capitalists, will usually insist on an urgent reconstruction to set the company on an even keel after the emergency measures are in place. This pressure often leads to the appointment of a chief reconstruction officer (CRO) to push it through.

Dawson says that Darlington, known for his Bulmers success, came into MyTravel as de facto CRO and the turnaround gathered momentum. Deloitte has teamed up with London-based consultants Iain Lynam and Mike Grant, whose Aaronite Partners provides a pool of CROs as long as the company, or more usually its lenders, are prepared to pay for him or her.

Clearly, this process can be riddled with sensitivities, suspicion, bluffing and bruised egos. ‘Knowing how to handle situations is as important as knowing your company’s sector,’ insists Dawson.

Will to success

He is clear that, however difficult turning a company round may be, the alternative of going insolvent is rarely in anyone’s interest. ‘Debt restructuring and finance is much more popular nowadays than insolvency,’ he suggests, pointing to the rise of ‘distress funds’ and innovative lenders in this field, such as Sun Capital or the Endless group.

It was headhunters from Los Angeles who persuaded Peter Urie to return to the business arena and take on the challenge of restoring the fortunes of Metrodome. ‘It had done well as a distribution company and floated on AIM in 2001,’ he recalls, ‘but it bought too many high-risk feature films that lost money, and it also lost money on internet ventures.’

TV Loonland, a German-based children’s animation group sold by its founder Peter Volckler in 2000, had by then bought an 83 per cent stake in Metrodome in an acquisition spree that left Loonland with £20 million debts. Urie soon decided what he had to do.

‘I told them I would have to join the Loonland board and work to dilute their stake. My other condition was that I must run
Metrodome as though it was mine.’

Michael Bream, Loonland’s Austrian principal shareholder, decided to back Urie and he became corporate development officer of the German group. Urie was pleased to find most of the existing Metrodome staff ‘excellent’ and the personnel changes he made mostly involved changing who did what and clarifying the management structure.

‘I wrote a new business plan and got both the banks and staff enthused,’ he reflects. ‘The company had been trawling for one big hit — like cult favourite Donny Darko — and investing 70 per cent of its revenues in high-risk foreign-language films,’ with only 30 per cent going into home entertainment projects, which were ‘much steadier cash producers.’

Urie insisted the company should reverse these proportions. ‘I put 70 per cent into home entertainment and only 30 per cent into theatrical release films.’

He claims an ‘almost immediate’ hit with last May’s investment in Flight 99, a film about the New York World Trade Center attack. ‘We paid £40,000 and it will make us £500,000,’ he brags.

Urie claims to ‘bridge the cultures’ between the ‘creative people’ and the ‘suits’, and says it has been ‘absolutely vital to carry people with me.’ Since his arrival, the RBS banking group took shares instead of fees in a fundraising, which cut Loonland’s proportionate stake to 71 per cent.

All these changes saw Metrodome make an interim loss, but that should be reversed before long. Urie’s plan is now to raise more money from institutions to acquire film rights overseas, in mainland Europe, Canada and Australia, and reduce Loonland’s stake further.

At Turnaround Capital, which is planning a PLUS market float for itself and would like to launch a turnaround fund, Defries says ‘a lack of financial management is a common theme’ in most companies where a stake is taken. ‘Sometimes management can be reformed and those that cannot we identify and gradually remove,’ he explains.

The question is: ‘Can they listen to your advice and will they take it?’ he says. ‘That can be tough.’ Turnaround Capital’s policy is to leave suitable management with a big chunk of the shares, says Defries. ‘If a venture capital group puts up money, it usually takes a 30 per cent stake, but I’d take only ten per cent.’

Turnaround medicine does not come cheap for those at the helm of companies in distress, but rewards for rescuers can be tempting. Analysts estimate total fees and other costs for the MyTravel retrieval could have been £10 to £12 million. CROs and new brooms usually need handsome payment but, as Turnaround Capital suggests, value recovery can be impressive — at least in those cases where the medicine works.

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.