Happy New Year to all Turnaround Talk readers. Let’s hope that 2022 will be a year of major growth and prosperity.
While a lot of us will only be officially back in the office later in the week, I am sure that we have all got at least one eye on 2022 and what needs to be done. January is typically a month of strategizing. This cannot be achieved without looking back at 2021 and the lessons that were learned during the year.
There were a lot of successful business rescues and business turnaround’s that were implemented during the year. Once again, SOEs took centre stage with the SAA saga providing more twists and turns. Eskom also took centre stage with many experienced BRPs pointing out that the company will benefit significantly from some form of informal restructuring.
The informal restructuring trend was the focus of a report by Deloitte at the end of 2021 which points out that the trend will only grow in significance over the next few years. The bottom line is that, we should let companies get to a stage where their only salvation is business rescue or liquidation. Additionally, many companies cannot afford to be placed into business rescue, therefore, liquidation is their only option. How are we going to grow our economy if we don’t have a landscape that is geared towards growth? And we need companies to achieve this.
What is the mantra for 2022? Early intervention is better than facing business rescue and/or liquidation.
Strength does not hold up
The value of early intervention was discussed at a round table which was hosted by Turnaround Talk at the end of 2021.
Speaking at the round table, Phahlani Mkhombo – MD: Genesis Corporate Solutions – pointed out the disruptive nature of the Covid-19 Pandemic and how it serves as a reminder to all companies that they need to be vigilant and seek help at the early stages of their distress.
“In 2020 and 2021, we saw that was happening across the globe. Covid-19 was a major disruptor and forced many companies to take evasive action. For some, this came in the form of business rescue or some form of restructuring (formal or informal), but for many other companies, bankruptcy and liquidation were the only options. The aviation industry was hit particularly hard with many airlines across the globe forced to ground their fleet. From an African perspective, this forced many African airlines, that had strong balance sheets, into bankruptcy,” said Mkhombo.
He added that the Pandemic has caused a massive economic fallout in South Africa, and most other countries around the world that has resulted in the worst economic recessions since the Great Depression. Being aware of areas or issues where your company is vulnerable is critically important.
Danger, Gevaar, Ingozi
It is up to BRPs to assist companies and help them get ahead of their distress. There are tell tale signs that a company is approaching financial distress that distressed business owners may miss because of the emotional distress that they are experiencing at the time.
If informal restructuring is a growing trend, it means that BRPs will have to shift their business and realign their service offering to become regular collaborators within the businesses ecosystem. The Deloitte report makes mention of the rise of the Chief Restructuring Officer and the important role that they will play in risk management. This is the nexus where BRPs will play an important role.
“There are various warning signs indicating that a company is experiencing financial distress, or it is heading towards such state. Being aware of these signs can help prevent failure,” says Mkhombo, “when you’re running a business, the ultimate sign of financial distress is usually running out of cash: you just don’t have any money left. However, even though it seems obvious, running out of cash is almost always a symptom and not a cause of business failure. The key, like any illness, is to catch the symptoms early, so that you can begin to identify the causes and manage it accordingly. Business can avoid insolvency by taking actions before it is too late.”
Take control sooner rather than later
While there are a lot of intricacies and legal requirements that are associated with the business rescue and restructuring process, a very experienced BRP once described the business rescue process as very simple, at the end of the day, X+Y must = Z.
To BRPs, this may be the case, to a distressed business owner, they cannot make the wood for the trees and will need advice on how to address their distress.
“A business facing financial distress must react as quickly as possible before it is too late to avoid business rescue. The chances of success are higher when there is early intervention. Other informal restructuring options can be considered if there is early intervention. Doing nothing cannot be an option,” said Mkhombo.
He added that, if a storm is coming, you must prepare yourself to safeguard against its perils before it hits you. It is critical to have accurate and timely information to help develop a viable plan to pull out the company from financial distress. “As with any financial crisis, there is no 100% guarantee of the success due to some external factors beyond control of the company, but a well-thought-out plan will present a greater likelihood of a positive outcome,” said Mkhombo.
A 360° view of a business
Going back to Eskom’s challenges, many BRPs agree that business rescue will not benefit the company is any way, shape or form. However, an independent business review (IBR) will benefit the company in that it will explicitly point out where the company is functioning effectively and where there are major inefficiencies in the business. Perhaps this will be undertaken when the company has been split into its three separate operating units.
“An IBR provides a distressed company with a 360°view of the business which rapidly establishes the true financial, commercial and operational position. It is critical to have accurate and timely information to help develop a viable plan to pull out the company from financial distress,” said Mkhombo.
He added that the other benefits of an IBR include:
- Identifying warning signs of distress;
- Diagnosing and understanding the root causes of distress;
- Providing a short to medium term cash flow review and a working capital review of the business;
- It provides an operations review of the business;
- An IBR is a major predicator to contingency planning;
- It allows companies to explore their options; and
- Distressed companies can communicate with stakeholders clearly and effectively.
Just think of the last four points and how Eskom would get more sympathy from the public if an IBR was undertaken.
Putting your best foot forward
At the end of the day, we cannot ignore the fact that BRPs are in business to effectively implement business rescues and make recommendations regarding business turnarounds. Nobody is saying that BRPs cannot focus on this as their bread and butter.
However, as pointed out in the beginning of the article, liquidation is the only option for some companies that become financially distressed. It is therefore up to BRPs to help these companies identify the warning signs of their distress and to work with them to address this.
BRPs are the hero’s that South Africa deserves and needs right now. We cannot wait for Government to magically implement policies that will encourage employment, we need to make sure that every company has a fighting chance at survival so that they can be contributors of economic growth and future employers when Government can get over their political infighting and implement employment growth strategies.