When you hear the word distressed or turnaround what comes to mind? Too much debt? Mounting losses? Risk of insolvency?
While in severe cases a turnaround situation can and does mean these things. But not always. Actually, even stable and profitable businesses with no immediate risk of insolvency, or excessive losses require operational improvement and need to make 180-degree shifts.
Although a large drop in sales or mounting liabilities makes it obvious when a turnaround is required, when it has been business as usual for a long time how do you know when a substantial change is required?
In this article we will highlight some indicators that business generating £1million to £10million in sales may need to be ‘turned around’ and what to do about it.
Here are 4 subtle signs your business may retire turnaround:
1. Below average profitability or Breakeven
A business can be consistently profitable and still be underperforming.
If a company is generating a 5% profit margin, 10% return on capital and reliant on debt to support operations while there are many competitors in the same industry are generate 15% profit margins, 20% returns and are debt-free, it is often an indicator that operation improvement is not only possible but also required.
Many times, if a business has stable revenues, profits, and margins the owners can conclude that it this the ways the industry works and that there are no ways to sustainably improve performance.
Sub-industry standard profits can be indicators of excessive cost, low return marketing or capital expenditure, operating inefficiencies, under-priced or loss-making goods/services.
2. Lack of financial and operational reporting
Many business owners have built respectable businesses generating £1million to £10million sales over 5, 10, 20 and even over 30-year periods. Many times, this has been achieved through the sales ability, marketing savvy, connections and technical expertise of the founder(s).
Sometimes owners can get so caught up in the day to day blocking and tackling of running the business that they may only look at the accounts produced once a year and only look at the weekly sales and bank balance to get a feel for how the business is doing.
Others go a step further and look at monthly or quarterly profit and loss statements aged debtor reports but still neglect detailed balance sheet and cash flow statement considerations.
Although a business may have a substantial sales base and has been operating for many years, without detailed reviews of KPI’s critical business drivers, various cash flow metrics, balance sheet strength, and other key data it may be a sign the business is underperforming or worst heading for future trouble.
3. Cash flow always seems to be a problem
Many business owners have been led to think that if a business shows a healthy profit on its P&L it means the business has done well. Other have heard the saying “Revenue is vanity, Profit is insanity but cashflow is reality. But what does cashflow being reality actually mean?
In fact, profit and cashflow are kissing cousins and are not only distinct from each other but often wildly diverge from each other. Profit measures the net gain from the transactions but cashflow measure in reality whether you actually or lost cold hard cash.
Many businesses can operate and exist for years reporting profits but always struggle with cash flow problems due to factors such as supplier and customer payment terms, unpaid invoices, VAT bills, pricing errors, excessive costs, insufficient scale etc. Cash flow pressures can be structural or caused by operating decisions.
If you have an established business that struggles with cashflow it could be a sign that the business could require some preventative turnaround assistance.
4. Dependency of debt to finance operations
Debt is a standard way of financing any business large or small. Debt can be used to fund internal growth, acquisitions, cover large expected costs, and fund working capital requirements. However, debt can also be used to mask what amounts to fundamental operating problems.
Debt can be like a medical drug that the patient started using to address a temporary symptom and then became dependant on instead of addressing the underlying issue.
Of course, some businesses are capital expense or working capital intensive and require some debt on a temporary or seasonal basis. However, if a business has become completely dependent on and overdraft, invoice financing facility or bank loans to fund operations it means the business on its own does not generate sufficient profit and/or cash flow.
What to Do
If you find that your company is facing one or more of these situations there are several options you must consider. Once you have decided that you want things to improve you can use this guide to look for areas you can improve your own.
Alternatively, you can seek a buyer to acquire all or a majority stake in your company, although it won’t lead to a premium price it may what is required to the business survives in the long term.
Your other options are too look for an investor who can provide turnaround expertise in exchange for sweat equity or who is willing to invest in the business to partner on a turnaround
Reid Green & Co can be the buyer or investors of choice in these types of situations. We specialise in investing in, acquiring and partnering with sub £10million revenue businesses which limited investment, exit or business improvement options due to complex and unique situations.
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