Reorganisation and growth strategies in 2021
February 2021 | TALKINGPOINT | BANKRUPTCY & RESTRUCTURING
Financier Worldwide Magazine
February 2021 Issue
FW discusses reorganisation and growth strategies in 2021 with David Bryan at BM&T.
FW: How would you describe the organisational challenges facing businesses in the wake of the coronavirus (COVID-19) pandemic? In general, how would characterise their prospects for growth in the months ahead?
Bryan: The challenges for businesses are many and varied. After what seemed to be a growing recovery from the initial lockdown, much of the economy was thrown into reverse by the second and third lockdown. There is light at the end of the tunnel with vaccines, but this will take time and further restrictions on business activities over the winter months are highly likely. Although the Brexit deal is welcome, it will likely take a while to settle down and for businesses to adjust. It is extremely hard for businesses to plan in these circumstances. Some businesses have benefitted from the pandemic, but most are going to face several more months of uncertainty and lack of growth, although extended government support schemes will lessen the blow for many.
FW: What steps should businesses take to evaluate their strategy in the current market, and whether some form of reorganisation or restructuring is required?
Bryan: Short-term survival will be at the forefront for most management teams as it has been for many months, but there is a real danger of becoming too used to managing through varying restrictions with the help of government support. Businesses now need to start to look at how things might look post-pandemic and without such support. While it is impossible to predict exactly what will happen, it is possible to look at a variety of scenarios. Will the market for your business’s products or services return or will it be permanently changed? If so, how might that look and what will be the impact? This requires some modelling for the specifics of the business and cannot be generalised. It is also important to look at what you can control and what you cannot, and look beyond just your own business. For example, look at competitors and how they might be faring. Even in a reduced market there may be the opportunity to benefit from competitors failing. Ask what you might do in a certain scenario and what constraints there might be? A structured approach to scenario planning helps refine thinking and independent external advice can be very helpful.
FW: To what extent has the UK’s Corporate Insolvency and Governance Act 2020 (CIGA) helped to support and protect struggling businesses? In your opinion, have these temporary measures achieved their intended effect?
Bryan: The temporary measures are just that and most are due to end on 31 March 2021. Preventing statutory demands, winding up orders and evictions avoids a rush of insolvencies, so has arguably achieved its intended effect but is essentially kicking the can down the road. Some will have benefitted, will get through with these lifelines and be able to recover but for many, the need to deal with issues that have been postponed, and to repay additional loans and deferred tax payments will just not be manageable. Another less well-known effect of the Corporate Insolvency and Governance Act (CIGA) is the withdrawal of the ability to terminate a contract on the insolvency of a customer. This could mean having to continue to supply an insolvent business when you are not getting paid for the pre-insolvency debt. There are temporary exclusions for small suppliers, but these too expire on 31 March. Any business that is worried about the solvency of a customer should take urgent advice well before an insolvency event as there are potential ways to mitigate.
“After a long period of uncertainty and managing for survival, management teams need to lift their heads and start looking ahead.”
FW: In terms of the UK government’s funding support schemes, how have those businesses benefitted from those loans? What options are available to companies that may now be overleveraged and burdened with additional debt they may struggle to repay?
Bryan: There has been a well-publicised take up of such loans, with the aggregate in the tens of billions of pounds. It has certainly helped a lot of businesses to survive and sadly some criminals to thrive. The big question is how many businesses will not be able to repay them. The expectation is for a substantial number. The banks that have issued the loans with government guarantees have already put together a ‘panel’ of debt recovery firms to act on their behalf. Quite how this will all operate is untested but there should be options for viable businesses, in particular those that can demonstrate that their misfortunes are entirely as a result of COVID-19, to restructure that debt. Businesses need to understand that for such restructurings to happen, they will need to demonstrate they have done everything to put their own house in order first. They should also act early as these things take time to formulate and negotiate. Your negotiating position will not be helped if you are going to run out of cash in the next week or so.
FW: To what extent might companies need to completely rethink their business model and organisational structure if they hope to achieve growth in a post COVID-19 world?
Bryan: Most businesses are going to need to change. Whether it is a retailer having to move ever more online, a manufacturer having to rebuild a more resilient supply chain, a professional service business adopting some element of permanent working from home, there will be an impact on most businesses in most sectors. For those that have already benefitted from the changes brought about by the pandemic, it may mean continued rapid growth. That brings its own issues of having the right people, maintaining the culture and being capitalised so as to avoid the risk of overtrading. For others, COVID-19 has brought very sudden problems that will require changes to business models going forward. The trends to a more digital world and a green future are now embedded and will accelerate change. Those that act quickly and plan for that post-COVID-19 world will have the best chance of success. As the economy recovers, some businesses will fail and that will also provide opportunities for consolidation in certain sectors too. Automotive is a good example, where supply chains and electrification will change almost everything in the coming years. Rapid change always brings opportunity.
FW: What kinds of reorganisation options – both financial and operational – would you encourage struggling companies to consider? What essential advice would you offer on this front?
Bryan: Businesses will have to have a ruthless focus on costs and cash flow. Businesses only ever go bust because they lack cash. If you are not actively managing all aspects of cash flow and running a detailed short term cash forecasting process, then you need to get that in place. Resilience and flexibility are big lessons from the COVID-19 experience and those that are nimble and well-capitalised will be able to benefit from the opportunities that will arise. Sadly, some will not be able to adapt and will fail. So-called zombie companies that have proliferated since the 2008 crash that can only just pay the interest on their debt will likely be shaken out, as they are unable to invest or adapt fast enough. While painful, it is necessary. Viable businesses that have been adversely impacted by COVID-19 can recover if they seek help and act early. There is an appetite and plenty of available cash to support them in both the debt and equity markets.
FW: As companies seek to survive the current climate and rebuild for the future, how important will it be to identify potential problems early and act quickly to solve them? Do you expect to see a wave of reorganisation efforts as companies adapt to the ‘new normal’?
Bryan: After a long period of uncertainty and managing for survival, management teams need to lift their heads and start looking ahead. It is management’s responsibility to determine the strategy to deliver success across a broad range of outcomes, and you cannot wait for government. Planning and scenario forecasting is very difficult but rarely has it been so necessary. Risks and opportunities need to be identified and outline plans developed. It is no good waiting for absolute certainty, as by then it may be too late. Several recent surveys have predicted a wave of insolvencies in 2021. There are many ways to restructure but most are not quick fixes. Consensual solutions that deal with problems outside of legal processes and without publicity are always the best solution and other formal processes exist if that is not possible. This includes the new Moratorium and Restructuring Plan provisions of the new CIGA legislation. It must be stressed that all need planning and execution months ahead of problems biting. There is also a need to look outside of your own business. Customer and supplier failures can cause major problems for otherwise sound businesses. The failure of a competitor could be an opportunity. 2021 will be a volatile year and those that are alive to the risks and opportunities and plan ahead for how to respond will be well-placed to prosper.
David Bryan is a founding principal of BM&T and a hands-on senior financial manager with extensive experience working with international and UK companies in restructuring and improvement. He has operated at chief financial officer (CFO) level in large and small and medium-sized enterprise (SME) companies in the UK, the US and Europe, and has many years’ experience with public and private equity-owned businesses. His industry experience includes automotive supply and commercial vehicle manufacture, industrial systems. He can be contacted on +44 (0)20 3858 0289 or by email: dbryan@bmandt.eu.
© Financier Worldwide