Business-rescue practitioners like to see themselves as emergency workers. They play out a hospital drama in the corporate world, interpreting the vital signs of an ailing company, assessing its chances of survival and deciding whether to resuscitate it.
The most difficult part of nursing a company back to health is funding the initial stages of turnaround, says Werksmans director Paul Winer. Though the company is expected to continue paying operating expenses, there is usually little chance of cash being generated in the short term.
Turnaround costs are dependent on how early the rescue process is started. It is best if directors react early to financial distress and implement turnaround action while suppliers, customers and key staff are still intact. Failing this, there should be an informal creditor workout, whereby the ailing company's management and creditors agree on a strategy to turn the company around and repay creditors.
"But these often fail because of dissent from minority creditors or tardy turnaround execution by management," says Corporate Renewal CEO Jan van der Walt.
Lastly, statutory turnarounds, or formal business rescue, provides for a specialist turnaround manager to be appointed, a clamp down on minority dissenting creditors and debtor-friendly measures, such as a moratorium on debt repayment. Statutory turnaround, however, is expensive and success rates aren't particularly high internationally. In the US, where Chapter 11 of the Bankruptcy Code makes provision for business rescue, research shows that only 15% of companies survive the process.
US firm McMillan, Nachtman & Phillips-Patrick took a sample of 101 successfully reorganised publicly traded firms and found that the direct costs - including legal, accounting and management consulting of the Chapter 11 process - were an average of 24% of a company's asset value at the time of rehabilitation.
These costs were incurred over nearly two years - the average time these companies spent in reorganisation.
"A turnaround requires a cheque book to fund working capital," says Van der Walt. "But lenders are obviously reluctant to further increase their exposure to a distressed company."
He says private-equity firms that do finance turnarounds tend to focus on underperforming rather than distressed companies. The possibility of a R2bn business-rescue fund mooted by government would go a long way to address the turnaround finance constraint. But it is unclear how this would be funded or what criteria would be used to distribute funds.
Business-rescue specialists may undertake a risk-sharing arrangement, whereby they accept equity instead of a fee for their work.
"Once they have found a turnaround to be viable, there should be some incentive for turnaround practitioners to improve profitability," says Van der Walt. "Stakeholders are more at ease if the turnaround experts are at risk for successfully executing their recommendations rather than merely earning fees."
But Deloitte reorganisation services director John Evans says this only works for listed companies, where specialists can take the upside as the share price improves. "Specialists could instead accept a lower fee for the initial stages of a turnaround and then accept a bonus if they perform well," he says.
Measuring a turnaround specialist's performance purely in financial terms can be misleading. "There is a difference between business turnaround and financial turnaround," says Corporate Renewal MD Themba September.
"It's often easy to get a distressed company back into the black by merely cutting costs, such as chopping research and development and advertising spend, but for turnarounds to be sustainable, the fundamental causes of distress have to addressed."
Business turnarounds are rarely completed in less than 18 months and usually take between two and three years, says September. Though financial turnaround can be accomplished more quickly, it takes years for the strategic, organisational and operational changes to be completed and for the real results to show.
