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Presentation explain best practice guideline turnarounds authors david bryan.
BUSINESS WITH CONFIDENCE icaew.com/cff
BEST-PRACTICE GUIDELINE
TURNAROUNDS
Authors: David Bryan and Alan Tilley, Bryan, Mansell & Tilley LLP
Stephen Cork and Katie Moffitt, Cork Gully LLP
May 2011 Issue 53
In association with
02 Turnarounds
CONTENTS
03 icaew.com/cff
04 Introduction
05 Scope and de?nition of a turnaround
06 Basic requirements for a successful turnaround
of a distressed business
07 Managing the immediate liquidity crisis
08 Assessing business viability and enterprise value
10 Managing the business operations during the
turnaround process
13 Supporting management in communications
and stakeholder management
15 Establishing the forecasts and business plan
17 Negotiating the ?nancial restructuring
19 Exiting the leadership role
19 Managing international and cross-border issues
20 Risks and rewards
20 Summary and conclusions
05 Figure 1: The Decline Curve
05 Figure 2: The Turnaround
09 Figure 3: The Value Break
11 Table 1: 13 Week Cash?ow Forecast
© Bryan, Mansell & Tilley and Cork Gully 2011
The views expressed herein are not necessarily shared by the Corporate Finance
Faculty or by ICAEW. Guidelines are published without responsibility on the part of
the publishers or the authors for loss occasioned in any person acting or refraining
from acting as a result of any view expressed herein.
ISBN 978-0-85760-265-8
GUIDELINE
INTRODUCTION
EVOLUTION OF TURNAROUND PRACTICE
The legislation governing the protection of creditor and
debtor interests in corporate distress is still evolving. It
varies from jurisdiction to jurisdiction and this impacts
on turnaround and restructuring practice in international
cases; an increasing issue in a global economy.
Different legislation in different countries is also
impacting the evolution of the turnaround process as
professionals move from country to country and challenge
accepted local practice. In the UK, the growth in US
investment banks in London has led to the import of
concepts rooted in the US bankruptcy process where it
has been more appropriate to give failed entrepreneurial
activity a second chance.
The 1979 US Bankruptcy Code facilitated the process
known as ‘debtor in possession’. Management was given
the chance to reorganise the business and restructure the
balance sheet under court supervision while managing
day-to-day operations protected from creditors by
an automatic stay. During the 1980s a new group of
professionals emerged in the US, skilled in helping
management to navigate through the complexities of
managing in this ‘zone of insolvency’ (see Scope and
de?nition of a turnaround). These became known as
turnaround managers and the role of chief restructuring
of?cer evolved later to describe this activity.
TURNAROUND MANAGERS AND CHIEF
RESTRUCTURING OFFICERS
In the UK, change managers or ‘company doctors’
took over ailing businesses as chief executives and were
statutory directors. But as companies slimmed down and
?attened their management structure a need developed
for executives with speci?c skill sets to work on an interim
basis to drive change. This could be change by a speci?c
project in a solvent company or, where it involved a major
redirection of effort to prevent decline becoming corporate
failure, change in the zone of insolvency (see page 5) to
prevent an insolvency ?ling.
Following the Insolvency Act 1986 and the introduction
of licensed insolvency practitioners it became convenient
to distinguish professionals engaged in corporate rescue
ahead of formal process from insolvency practitioners and
the term ‘turnaround manager’ evolved. As turnaround
management boutiques from the US established
a presence in the UK the more formal title of chief
restructuring of?cer (CRO) became prevalent. Banks would
often make the appointment of a CRO a condition of a
standstill agreement and while it has no statutory de?nition
the term became recognised as an important element
of corporate rescue.
GOOD PRACTICE IN THE UK
Turnaround managers or CROs normally have a
background in senior operational management with
a corporate organisation, or ?nancial services with a
professional services organisation or bank, during which
time they would have developed the experience to
negotiate and manage stakeholder expectations under
extreme ?nancial pressure and to tight deadlines. Regular
educational events and annual conferences are run by
two membership organisations: Turnaround Management
Association UK (TMA-UK) and the Institute for Turnaround
(IFT), both of which promote high ethical standards and
codes of practice.
DIRECTORSHIPS, SHADOW DIRECTORS
AND RESPONSIBILITIES AND LIABILITIES
Neither the position of turnaround manager nor CRO
has precise legal de?nition in the UK. Accordingly the
terms of engagement and duties must be de?ned in an
engagement letter which should be clear on scope and
reporting responsibility. Whenever possible this should be
a direct report to the chairman or board of directors to
ensure the turnaround manager has the requisite authority.
The position is not consultancy or advisory. It is by
necessity hands on and, therefore, is an executive role. It
is not necessary to be a statutory director to perform the
function and is best avoided so as to exhibit a degree of
independence to external stakeholders and a disassociation
with directors’ past actions. However, it is likely that acting
in an executive and leadership capacity will be interpreted
as acting as a shadow director and subject to the same
duties, responsibilities and potential liabilities as a statutory
director. A shadow director is a person in accordance
with whose directions or instructions the directors of a
company are accustomed to act. A person is not deemed
to be a shadow director if it is clear that he is acting in a
professional advisory capacity only.
A turnaround manager or CRO should conduct himself
within the statutory duties of a director and as if he was a
director, while maintaining a position of independence and
objectivity to all stakeholders.
As a company enters the zone of insolvency the
directors’ responsibilities move from protecting
shareholders’ interests to a duty to protect the interests of
creditors. In a potential liquidation if turnaround efforts
fail, a director or shadow director may be held personally
liable for civil damages for wrongful or fraudulent trading,
or criminal damages for fraud misconduct or falsi?cation
of accounts. A turnaround manager working in the zone of
04 Turnarounds
insolvency must acquaint himself thoroughly with the legal
implications of his actions and ensure that his decisions
are both properly documented and capable of defence.
He should act with integrity and transparency at all times.
He should ensure his actions maintain enterprise value and
do not damage the interests of all or any one group of
creditors. In this way he should avoid the potential risks of
subsequent legal action. In any event acting with integrity
and transparency with all stakeholders will enhance rather
than undermine the chance of a successful outcome. It is
not just an ethical approach to turnaround but the most
practical one.
SCOPE AND DEFINITION OF
A TURNAROUND
POINT ON THE DECLINE CURVE AND THE
ZONE OF INSOLVENCY
Companies are dynamic. They are either moving forward
or backwards against competition. When moving
backwards management has the opportunity to change
policies to reverse the trend. When management fails
to address the issues and falls into a state of denial they
embark on the decline curve (see ?gures 1 and 2). They
may institute a change of direction from internal action
while they have the liquidity to manage the necessary
changes to management and policy. Or they may continue
down the decline curve until their ?nancial position
makes them vulnerable to an external shock such as loss
of a major customer or contract. At such time they are
likely to be in the zone of insolvency and under liquidity
pressure. Turnaround management actions discussed
in this guideline relate to turnaround management at
this point of decline. As this will be a point of extreme
creditor pressure, turnaround with consensual creditor
support and turnaround by leveraging concessions under
threat or other near insolvency-related processes become
intertwined and these issues are considered below.
WARNING SIGNS
In an entrepreneurial society there will always be business
failures. What is essential is a mechanism to rehabilitate
failing companies to preserve as much value as possible.
As live companies are inherently worth more than dead
companies early recognition of failure means earlier
turnaround action and increased chances of success.
However, management can be the last to recognise
the symptoms, or action the remedies, and remain in
denial until it is too late. Recognising the symptoms
from outside is less easy to achieve but nonetheless
there are telltale signs.
There are two basic approaches to evaluating risk of
business failure: the statistical approach and the intuitive
approach. The former depends on the availability of
accurate and timely data and uses statistical analysis
of liquidity, pro?tability and gearing to evaluate the
likelihood of an insolvency event against a benchmark
of historic data. It is more relevant to larger publicly
traded companies with complex capital structures where
information is in the public domain than small- to medium-
sized companies.
The intuitive approach is more familiar to readers
of ?nancial statements and observers of business and
management. While based on the same factors as the
statistical approach it relies on reader judgement over
statistical evidence. The ?nancial symptoms are those of
declining pro?tability, declining sales and margins all of
which lead to liquidity pressure, inventory build-up and
collection and aging problems on receivables. As the
process continues the company begins to miss forecasts,
both pro?t and cash. Funding headroom diminishes and
covenants come under threat. Supplier payments get
extended leading to production scheduling problems.
05 icaew.com/cff
Figure 2: The Turnaround
Time
L
i
q
u
i
d
i
t
y
Figure 1: The Decline Curve
At this stage the company is in the vicious circle of decline
with ef?ciencies, quality and service levels declining and
customers defecting.
This becomes a key de?ning moment; if new
management changes are made which can arrest the
decline the company may navigate its way to safety. If
management remains in denial a liquidity crisis becomes
almost inevitable. However, it is often preceded by
desperate measures to hide or sidestep the problem. In
the ?nal stage of decline ?nancial statement irregularities
or failed merger or disposal attempts are not uncommon.
While senior management, preferably chief executive,
change is needed the better internal managers desert the
sinking ship. Unfortunately only when external pressure
is brought to bear is it likely that a turnaround manager
is appointed. Often this only occurs when the company’s
bank relationships are transferred from the normal
relationship managers to a work-out department. Work-
out departments are comprised of experts in distressed
situations and it is their role to maximise the bank’s
recovery from a distressed business. It is regrettable that
turnaround managers are appointed later than they would
like to be. Thus the norm on appointment is entering a
liquidity crisis.
LIQUIDITY TRIGGERS
Companies do not fail though lack of pro?ts. They fail
through lack of cash. A company should consider ?ling
for insolvency if it is unable to pay its debts as they fall
due in the normal course of business. In practice there is
often a degree of latitude to this de?nition and businesses
have been known to limp along, living from hand to
mouth until a critical payment cannot be met which
makes continued trading impossible. Such an event could
be insuf?cient funds to meet payroll, insuf?cient funds to
secure delivery of a critical component or the interruption
of utilities. It may also be triggered by a creditor
petitioning for a winding-up order or a bank withdrawing
facilities for breach of covenant. For a turnaround manager,
having visibility and effective control of the cash ?ow is the
critical ?rst stage in any assignment.
BASIC REQUIREMENTS FOR A
SUCCESSFUL TURNAROUND
OF A DISTRESSED BUSINESS
Not all distressed businesses can or should be saved.
From the outset the turnaround manager must make the
decision whether turnaround or break up in formal process
is appropriate.
SHORT-TERM LIQUIDITY
A turnaround manager cannot produce cash from thin air
but he can make a reasoned assessment of the immediate
cash requirement and availability. Depending on the size
of the company and the complexity of the business it may
take one week to one month to determine a plan of action
and a dependable cash ?ow forecast to support it. The ?rst
step is to rigorously analyse the cash control and to impose
a strict discipline over collections, payments and purchase
ordering, if necessary taking over direct management of
these functions. Surprisingly, distressed companies can
have cash management delegated at too low a level,
with non-urgent payments continuing due to lack of
supervision. Establishing proper priorities over payments
can conserve scarce cash resources buying time for longer-
term solutions to be sought.
VIABLE CORE BUSINESS
Having assessed the ability to survive at least while a
survival and recovery plan is prepared, an assessment of
business viability should be made. Is there value in the
goodwill of the business over and above the realisable
value of the assets? This is considered in more detail
below but mindful of the possibility of wrongful trading
a turnaround manager must assess whether the business
has the products or services that meet a market demand
and can support a valid revenue stream to produce an
operating surplus. If not then administration or liquidation
may be the appropriate route.
CREDIBLE MANAGEMENT TEAM
From the outset of appointment of a turnaround manager
the incumbent management team will be associated with
the business problems. Often they will have lost supplier
con?dence by breaking payment commitments, and
customer con?dence through quality or delivery issues.
The turnaround manager must bridge the credibility gap
at the outset. Whom to make redundant, when and how
is a matter of judgement. Turnaround is a team effort and
management have the product knowledge and customer
contacts that are essential for business success. This
knowledge must be retained. Harnessing and controlling
those attributes while demonstrating leadership in the
turnaround to all stakeholders is required.
The turnaround process will take time and the rebuilding
of the management team will also take time. Directors
may be shareholders with controlling positions or have
service contracts with expensive termination clauses
that cannot be met from cash ?ow. As the turnaround
process progresses the turnaround manager must win the
con?dence of those members of the management team
required for the future business while retaining credibility
GUIDELINE
06 Turnarounds
with external stakeholders whose support will be needed
to achieve success. Those members of the management
team discredited beyond redemption or otherwise surplus
to requirements must be removed as and when liquidity
permits.
FUNDABLE BUSINESS PLAN
Having established business viability, suf?cient liquidity
to prepare a survival and recovery plan, and established
management control over the operations the emphasis
moves to the preparation of a business plan that is both
credible and fundable; credible in that the revenues and
margins are based on a realistic assessment of the state
of the overall market and of the business’s competitive
position, and fundable in that the level of debt of the
ongoing business can be serviced by realistic operating
pro?ts and cash ?ows.
In tandem with the preparation of the plan the
turnaround manager must continue to ensure control
over the operations and ?nances of the business and to
consider the tactical approach to stakeholder negotiations.
Concessions and support will often be required and the
turnaround manager must assess the strength of his
leverage before beginning negotiations.
MANAGING THE IMMEDIATE
LIQUIDITY CRISIS
ESTABLISHING IMMEDIATE CONTROL
OVER TREASURY MANAGEMENT
Almost the ?rst step a turnaround manager must take is
to establish the exact liquidity position of the business.
This will require immediate access to bank statements and
internal cash ?ow forecasts. There will be pressure from
creditors (many already overdue) as well as pressure to
meet key payments: payroll, utilities and rent. From the
start it is imperative that executive control is assumed over
cash management. On large assignments this may be done
by parachuting in a dedicated cash manager. In other
assignments, where there is a capable accounting function,
control can be achieved by delegation and tight daily
management. Whatever the solution, in the ?rst days of an
assignment, visible and effective control of cash availability
by the turnaround manager is essential if an insolvency
trigger is to be avoided. As soon as practical after averting
an immediate crisis a more formal process of cash ?ow
forecasting and management must be implemented.
PRIORITISING KEY PAYMENTS
Payment pressure will come from those creditors with
the tightest credit control functions, the most aggressive
collection procedures and the most leverage. Threats to
take legal action will occur. However, the use of scarce
liquidity to meet the most aggressive collectors may not
be the optimum use of funds. First call on cash must be
payroll and as this is usually the biggest single obligation
and occurs only at the end of the month this must be
factored into cash ?ow as the number one priority and
with a built-in safety margin. A business cannot run
without power or telephones so these must also be given
priority. A check must be made to ensure that any court
orders and legal threats are handled. If a court judgment
has not been made the creditor should be contacted and
an understanding of revised payment terms reached.
Depending on the critical nature of the vendor this could
be a deferred payment plan progressively reducing the
total outstanding but tied to a continuation of supply.
A turnaround manager brings credibility to the process
but must be frank and accurate. Payment promises
and plans must be achievable and achieved to preserve
credibility. As con?dence is restored the immediate
pressure eases. However, con?dence restored can be
quickly lost if payment plans are missed or communication
is lost. It is better to communicate bad news changes to
plan than not to communicate.
IDENTIFYING ‘LOW HANGING FRUIT’
In many companies cash collection is delegated at too
low a management level and regarded as a chore or an
embarrassment by senior management. It is commonplace
for companies in the zone of insolvency to have signi?cant
overdue debtors. Payment delays may be due to warranty
issues, contract completion issues, settlement disputes or
just customer payment delays. Intense senior management
attention needs to be focused on resolving disputes and
issues to collect in all outstanding debts and then keeping
on top of cash collection.
Invoices should be promptly raised and sent to expedite
due dates.
EXAMPLE 1
At an auto parts supplier in Germany and Portugal
an outstanding debt of over €500,000 from a major
manufacturer in Mexico was one year overdue because
of confusion over VAT applicability on shipments from
Portugal to Mexico. By research and determined follow
up with the various tax authorities in both countries the
matter was agreed to the customer’s satisfaction and
the cash received. This was one of a number of overdue
accounts which together were making the difference
between solvency and an insolvency ?ling.
07 icaew.com/cff
Excess inventories can be sold off even at a discount
if this improves liquidity. Work in process may have
accumulated due to production parts shortages.
Likewise other surplus assets may exist that can be
turned into cash. This can be scrap inventory, excess
motor vehicles, surplus plant and equipment, non-critical
subsidiaries or branch operations, or surplus real estate. It
may be necessary to take less than book value to generate
much needed cash but this may be a loss worth taking to
save the company.
CONTROLLING SUBSIDIARIES’ CASH
MANAGEMENT
Groups that do not have centralised treasury management
require speci?c attention as cash records and access to
bank accounts may be delegated to the subsidiary. There
is a risk that a liquidity event could happen unbeknown
to the parent company. More common is the hiding of
cash availability at the subsidiary level and the inef?cient
use of cash to pay suppliers on due date ahead of
greater priorities elsewhere in the group. Direct control
over subsidiary cash management should be instituted
immediately.
Subsidiaries may also have undisclosed funding
headroom.
EXAMPLE 2
Invoicing of large contracts was handled by a remote
department ignorant of liquidity pressures at head of?ce.
Invoices would take many days to raise and despatch. By
expediting the process, over 30 days of cash ?ow bene?t
was achieved.
EXAMPLE 3
At a major international capital goods manufacturer more
than a month’s production of machines worth over €3m
was held awaiting critical parts from overdue vendors thus
creating a vicious circle of adverse cash ?ow. By cutting
production schedules and diverting resulting cash savings
to ?nish and dispatch the held units, positive cash ?ow
was restored and production rebalanced within available
cash resources. In time, production levels were increased
as cash availability permitted and pro?tability restored.
EXAMPLE 4
At the same international manufacturer it was necessary to
dispose of the French and Spanish subsidiaries to generate
much needed cash to enable the US parent to continue
operations while its own disposal to a Korean investor was
negotiated.
GUIDELINE
ASSESSING BUSINESS
VIABILITY AND ENTERPRISE
VALUE
Having addressed the capabilities and competencies of
the management team and getting a sense of the cash
available, the turnaround manager must consider whether
the business or parts of it have viability. The risk of further
erosion of creditors’ value and of the directors’ ?duciary
duties to both secured and unsecured creditors of the
business should also be evaluated.
An initial view has to be taken: whether the strategy is
to return the business to generating average earnings in
the medium term or whether the focus should be an exit
through a sale where speci?c cash and earnings strategies
will be applied to enhance the sale value.
LIQUIDATION ANALYSIS AND BREAK-UP
VALUE
The turnaround manager will need to prepare an analysis
of the company’s business and assets. An estimate of
the outcome for each class of creditor on both a going
concern basis and a break-up basis is required to inform his
discussions with management of stakeholder groups.
Initially an assessment of the company’s latest balance
sheet, management accounts and asset registers must
be undertaken and it should be established whether the
company’s records are up to date. Where specialist assets
exist it is recommended an expert valuation agent is
instructed to report on the value of the company’s business
and assets on a going concern and break-up basis. The
valuation analysis will distinguish between the assets that
are owned and encumbered and provide a considered
estimate of the value of intangible assets such as goodwill,
intellectual property and trademarks.
The turnaround manager will also need to determine
the liabilities of the company, ensuring that all secured,
unsecured, contingent and prospective claims are
identi?ed. This will require the assistance of management
as it will be necessary to determine liabilities owing under
employee contracts including pensions, landlord claims,
08 Turnarounds
EXAMPLE 5
On an international assignment for a US company in
breach of covenant and under bank work-out department
supervision, it was noted that the French subsidiary with
an intercompany liability of over US$5m had unused
factoring facilities of US$3m. By using the facility to
the maximum much needed cash was up-streamed to
the parent.
hire purchase and rental or contract hires, as well as normal
trade creditors.
Once armed with the values of the assets and liabilities
of the company, the turnaround manager will prepare an
estimated outcome statement showing the likely outcome
for all classes of creditors and will help him determine
whether there is any potential value in the goodwill of
the business, whether it can be preserved, and therefore
whether a turnaround approach is appropriate.
VALUE BREAK FOR SECURED AND
UNSECURED LENDERS
In a restructuring in insolvency, the value that will be
returned to creditors after the costs of the restructuring
process will be distributed in accordance with the statutory
order of priority. Broadly, secured creditors receive the ?rst
distribution, and then unsecured creditors.
The return that each class of creditor receives will be
dependent upon the value of the business and/or its
assets – and how far this can be allocated to creditors in
their order of priority. The point where the cash runs out
is known as the ‘value break’ (see ?gure 3). Those creditor
groups that are underwater ie, where the security that
they hold, if any, entitles them to receive little or no value
for their existing exposure, are unlikely to support an
insolvency-based restructuring of the business. In all cases,
therefore, the creditors with highest ranking security will
need to be supportive of any restructuring proposals that
the turnaround manager puts forward and be comfortable
that there are no signi?cant risks to their position.
SUBSIDIARIES AND NON-CORE
OPERATIONS
Businesses are structured in many ways with situations
varying from a single to a multitude of statutory
entities owning the various parts of the business. These
sometimes, but not always, fall into discrete operating
business units. In approaching the turnaround situation,
the turnaround manager will need a knowledge of what
commercial processes are undertaken within each entity,
and how integrated these functions are, or have to be,
for the group. Shutting down a loss-making entity whose
continued operation is essential to the wider operations
and future pro?tability of the rest of the group should
clearly be avoided!
In simpler group structures there may, however, be
quick wins that the turnaround manager can achieve.
Underperforming, non-essential divisions that are held in
discrete statutory entities but are a drain on the remainder
of the group are obvious candidates to be placed into
an insolvency process such as liquidation, allowing the
turnaround manager to focus on the rest of the business
which can be saved. Again, existing management is
important in obtaining the detailed knowledge required
to make these assessments but so are the company’s legal
advisers who will be able to advise on which entities hold
title to speci?c essential assets and which entities hold the
lucrative contracts that are to be continued by the business
once it has been turned around.
09 icaew.com/cff
Figure 3: The Value Break
£1m
£3m
£6m
£2m
£10m
£12m
£10m
Value of
business/assets
Shortfall to
creditors
Assets vs
Costs & liabilities
in order of priority*
‘Value Break’
?Cost of restructuring (professional fees etc)
?Amounts loaned under ?xed charge
(restricted to secured assets)
?Amounts loaned under ?oating charge
?Shortfall to ?oating charge holder – ‘hair cut’
Secured creditors
Unsecured creditors –
‘out of the money’
* Preferential debts, as de?ned under the Insolvency Act 1986, have been excluded for simplicity. Additionally, in an insolvency, the Insolvency Act 1986 provides that up to £600,000 would be
given to unsecured creditors by way of a preferential debt known as the prescribed part – a ring fenced portion of assets taken from the assets subject to ?oating charge. Again, for simplicity,
this has not been shown.
GUIDELINE
10 Turnarounds
DEFINING THE OPTIMUM CORE BUSINESS
In many turnaround situations the solution adopted will
involve the restructured business focusing on its market
sectors and customers where pro?tability can quickly
be achieved. Forming a view on this will also drive
the structural mechanics of how the business is to be
restructured and the changes to the underlying entities
within the group that need to occur.
REASSESSING THE VALUE BREAK AND
SELECTING THE OPTIMUM PROCESS
Having decided upon the viability of the industry and
the company’s potential position within it once turned
around, a reassessment of the value break and whether
this can be enhanced for creditors or shareholders should
be undertaken. If the costs of the restructuring detract
from the value that can be gained through an insolvency
process then that route should be taken. However, if a
restructuring can be economically undertaken that will
enhance value and push the value break lower down the
order of priority so that more creditors are ‘in the money’,
this route should be followed.
More than one possible way of restructuring the business
to achieve the turnaround will exist and, depending upon
the particular circumstances of the company or companies
involved, all possible methods should be explored and
evaluated by the turnaround manager so that he can bring
into effect his turnaround plan.
CONSENSUAL RESTRUCTURING
Where a broad consensus exists, or can be created, a
consensual approach to a restructuring is often preferable
to a formal insolvency-related approach which usually
impairs the value of goodwill. A consensual restructuring
avoids the costs and stigma of an insolvency process and
the resultant detrimental impact on the business which
the turnaround manager is attempting to save. Entering
a formal insolvency process can typically lead to adverse
press coverage which may in turn drive a change in
customers’ attitudes, and also causes uncertainty for staff,
whose retention and performance may be critical to the
success and survival of the business.
CVAs, SCHEMES OF ARRANGEMENT
AND PRE-PACKS
In assessing business viability and an optimum solution,
the possibility of using these processes should be part
of the evaluation process (see Negotiating the ?nancial
restructuring).
Company Voluntary Arrangements (CVAs) can be
used by a near insolvent company to help reduce and
reschedule payments to its creditors without entering
formal insolvency. A CVA takes place between the company
and its creditors and can be tailored to suit speci?c
circumstances ie, in order to effect compromises and
settlements with a particular creditor or class of creditors.
Typically the terms of CVAs can last for three to ?ve years.
A scheme of arrangement (Scheme) is a compromise or
arrangement between the company and its creditors (or
any class of them) and/or its shareholders (or any class of
them). A Scheme is similar to a CVA; however, it is not an
insolvency process under the Insolvency Act 1986 as it is
proposed by the company under the Companies Act 2006
and requires court sanction.
A pre-pack is a situation where a deal for the sale of a
company’s business and/or assets is negotiated before
insolvency and the sale is completed immediately following
an insolvency appointment. Pre-packs often involve
the sale of the business back to the existing owners or
management. This route is commonly used where the
owners and directors of a business are closely associated
with it and where a speedy transaction is needed to keep
continuity of service to customers and suppliers. Pre-
packs can be contentious and liable to challenge if the
objective is to avoid creditor liability by undervaluation
of the assets transferred to the new venture. Accordingly
care and objectivity, preferably by third parties, should be
taken over business and asset valuations. Pre-packs are not
appropriate where greater value would be achievable for
the creditors in a normal administration.
MANAGING THE BUSINESS
OPERATIONS DURING THE
TURNAROUND PROCESS
THE ROLE OF MANAGEMENT AND
EMPLOYEES
Managing a turnaround is a team effort. A turnaround
manager brings focus, priorities, experience, credibility,
leadership and energy to the process. He takes the
leadership role in managing stakeholder expectations. The
management team continues to manage the day-to-day
business and manage the employees. However, with the
poor performance occurring on their watch, there may
have been functional discord in the team. Identifying that
dysfunction and remedying it is a priority. This may be
simply by changing emphasis in priorities or having to
remove a disruptive in?uence.
A criticism sometimes levelled at turnarounds as
opposed to the more abrupt removal of management
teams that occurs in most insolvency processes is that the
management team which caused the problem still remains.
11 icaew.com/cff 11
In reality in a turnaround the management structure and
team on the departure of the CRO is not the same as the
team on his arrival. The change is evolutionary rather than
revolutionary so that the CRO can preserve the best and
release the non-performers progressively while retaining
essential skills and business knowledge.
CASH FLOW AND TREASURY
MANAGEMENT – 13 WEEK CASH FLOWS
Gaining control of cash ?ow and treasury management
is the immediate priority for survival. Continuous
management of it thereafter is critical. The 13 week
cash ?ow is an essential tool in this process and should be
managed at a senior level, monitored by the CRO and be
understood by everyone in the management team who
has an in?uence on maximising receipts and collections
and committing expenditure and payments.
Table 1 shows a basic receipts and payment format.
Each line should be supported by an appropriate level of
detail and delegated accountability. The report should be
updated weekly and discussed at the beginning of each
week at senior level under the CRO’s direction. Renewed
priorities should be established. The past week’s actual
performance should be analysed and investigated.
SALES (£000s) (Note 1)
Customer / Product / Channel A (Note 2)
Customer / Product / Channel B
Etc – analysis compacted for simplicity
TOTAL SALES
3,859 4,483 (624)
1,979 2,167 (188)
8,771 8,388 383
14,610 15,038 (428)
4,762 4,573
2,269 2,230
9,616 9,368
16,647 16,171
4,376 4,167 4,596 4,773
2,094 2,068 2,036 2,096
7,605 7,768 7,644 7,621
14,075 14,004 14,275 14,490
54,643
26,425
106,920
187,988
INFLOW (£000)
Customer / Product / Channel A (Note 2)
Customer / Product / Channel B
Etc – analysis compacted for simplicity
TOTAL INFLOW
OUTFLOW (£000)
Suppliers
Utilities
Payroll
Capex
Closure / Relocation expenses (excl payroll)
VAT & Sales taxes
Corporate taxes
Debt service
Lease payments
Interest
Etc – analysis compacted for simplicity
TOTAL OUTFLOW
29,230 29,275 (45)
765 1,147 (381)
1,775 2,669 (895)
648 1,306 (658)
215 262 (47)
535 568 (34)
61 47 14
0 0 0
596 436 160
19 83 (64)
2,004 1,825 179
35,847 37,618 (1,771)
12,743 4,840
379 270
1,824 1,932
134 1,303
1,799 203
558 524
970 697
0 0
87 274
0 0
2,126 1,921
20,620 11,964
10,676 5,085 4,762 23,711
330 323 412 355
2,840 56 391 9,923
2,074 173 163 223
2,680 38 0 0
980 392 361 697
2 53 112 2
0 0 0 0
113 146 98 111
0 3 0 19
2,386 2,151 2,668 3,267
22,081 8,419 8,967 38,308
146,518
4,888
47,142
9,005
13,484
6,939
3,953
0
1,567
71
35,948
269,513
NET INFLOW / (OUTFLOW)
Opening Balance
Closing Balance
(14,274) (12,749) (1,525)
89.3%
(13,500) (13,500) 0
(27,774) (26,249) (1,525)
(7,012) (1,880)
(27,774) (34,786)
(34,786) (36,666)
(18,999) 204 9,170 3,042
(36,947) (55,946) (55,743) (46,573)
(55,946) (55,743) (46,573) (43,531)
(15,757)
(27,774)
(43,531)
Facility
Headroom + / (-)
(50,000) (50,000) 0
22,226 23,751 (1,525)
(50,000) (50,000)
15,214 13,334
(50,000) (50,000) (50,000) (50,000)
(5,946) (5,743) 3,427 6,469
(50,000)
6,469
Notes:
1. Sales forecasts are included as a reality check to ensure that cash in?ows are not out of line with sales over time.
2. Analysis should be appropriate to the business and its cash ?ows. This may be by customer, by product, by distribution channel etc. Sales receipts from factoring should be identi?ed separately.
3. The forecast shows that cash will remain within facilities for the 13 weeks as a whole but action to delay payments or accelerate recipts will need to be taken in weeks 35 & 36.
6,097 4,864 1,233
1,832 592 1,240
13,644 19,413 (5,768)
21,573 24,869 (3,296)
2,537 6,401
900 568
10,171 3,115
13,608 10,084
1,988 3,594 4,454 8,159
361 364 3,130 6,675
733 4,664 10,553 26,515
3,082 8,622 18,137 41,350
62,613
37,270
153,874
253,757
Week 25
Actual Fcast Var +/(-)
FORECAST
26 27 35 36 37 38
13 Week
TOTAL
Table 1:
13 Week Cash?ow Forecast Date xxxxx (Week 26)
Forecast accuracy:
(Note 3) (Note 3)
GUIDELINE
12 Turnarounds
concessions with bene?t to the employees in job retention
and the company in retaining essential skills while
conserving cash.
Other overheads that should be cut or deferred while
the turnaround is progressed are those not required
for immediate bene?t to revenue generation such as
advertising and marketing, business rates on surplus
properties, property maintenance, and non-essential travel.
However, such measures come with their own dangers
attached and while a CRO needs to make dif?cult decisions
a degree of judgement is required not to do irreparable
damage to the business.
In manufacturing businesses materials often represent a
signi?cant cost. Reducing material cost is a more long-
term process but cost reduction task groups should be put
into action. Areas to be considered are supplier change,
material substitution, design change and process change.
Additionally a CRO should consider dropping low margin
products from a range to reduce unpro?table activity. Care
should be taken to ensure that decisions are taken on the
variable cost basis and not the fully absorbed cost basis
which will just leave ?xed overheads to be recovered on
other product lines.
PERFORMANCE ENHANCEMENT –
MARKETING AND TOP LINE MANAGEMENT
While it is not unknown to plan or effect a turnaround by
increasing prices or sales volumes it is normally unrealistic
to plan a turnaround on short-term revenue increases. But
the top line performance needs as much attention as the
cost base. Preserving present revenue levels is essential
to cash generation and a return to pro?tability. In the
longer-term having a credible marketing plan that supports
business growth is important in attracting new funders.
Again, ensure the plan is based on credible market data
and achievable market shares. The ‘hockey stick’ revenue
forecast, where revenues grow slowly at ?rst and then
shoot up, is dif?cult to sell to doubting stakeholders and
potential funders.
The CRO will quickly initiate or undertake a competitive
analysis of the company’s product lines and where possible
seek selective price increases. External resistance is to be
expected. Internal resistance should be tested by factual
evidence. Sales departments can be reluctant to raise prices
but, if the evidence supports a price rise, resistance can be
tempered by incentivising incremental sales and margins.
EXAMPLE 6
On an assignment in Germany a 10% wage reduction
was achieved as part of a broader recovery plan with the
essential cooperation of union representatives.
Too often this is neglected and shortfalls are rolled
forward into the future. Moving the goalposts is weak
and ineffective management. Percentage accuracy of
weekly performance should be measured and underlying
causes investigated and remedied. Anything less than
consistent 95% accuracy levels will cause too high a level
of unpredictability and risk tripping an insolvency trigger.
FINANCIAL AND NON-FINANCIAL
PERFORMANCE INDICATOR REPORTING
Once control is established over cash the CRO will
concentrate on ensuring that timely and accurate reports
of all essential ?nancial and operating performance data
are received. The survival of the business will depend
on continued order intake and improved operational
ef?ciencies. The critical quality of the cash ?ow reporting
will depend on the accuracy of sales forecasts and
production forecasts. Working capital levels will depend
on the accuracy of production schedules and resource
allocation. Key information should be available on a
frequent and regular basis. The CRO should be aware of
the factors affecting the normal rhythm of the business.
In this way activity and actions can be prioritised. In the
short-term survival and achievement of a stable platform
results from immediate knowledge of where the leaks
are so they can be attended to ?rst. Without stability and
con?dence in the forecasts a CRO cannot command the
necessary credibility to engage effectively with stakeholders
and negotiate with any certainty of deliverability.
PERFORMANCE ENHANCEMENT –
COST REDUCTION
Turnaround is not just about cutting costs and
restructuring balance sheet debt. However, cost reduction
is the most practical way to improve the bottom line in
the short term. In most companies the largest costs are
employee costs but redundancy programmes are cash
intensive and disruptive. Nevertheless, they are usually
the easiest way to cost reduction as control is in the hands
of management. They should be implemented as soon
as cash availability allows and should be done with due
regard to contractual and legal requirements. Subject to
obligations to adhere to consultation periods the process
should be as quick and clean as possible to remove
uncertainty for those not affected, allowing the remaining
employees to put the upheaval of redundancy behind
them and concentrate on the future.
It may be possible to reduce costs by engaging with
employee representatives and negotiating short-term
working arrangements and wage reductions. This is an
option when there is reason to believe that activity level
reductions are temporary and will increase.
In the 2008/9 downturn many UK ?rms achieved such
13 icaew.com/cff
Companies have more leverage over their customers
than they may appreciate. Resourcing supply from any
supplier can be unwelcome and costly for a customer as
supplier quali?cation processes may be time consuming
and bureaucratic. So while it is important to maintain
quality and delivery performance a customer may be open
to reasonable pricing support if properly approached. Just
in time supply (JIT) and single sourcing are not uncommon
in business and a company may be an important supply
chain partner. A customer may also want to keep
competitive tension in the supply chain so will not willingly
see a valued supplier fail.
The auto industry is a prime example of JIT practice.
Auto assemblers do not want to see supply chain disruption
as non-availability of a £100 part could close a £10m per
day production line. The company may have critical dies
and moulds, removal of which could be problematic. In
the aerospace industry supply chain companies are closely
monitored for quality and traceability. Supplier change is
not an overnight decision. In such cases scope exists for
price movement and should be carefully negotiated so that
long-term relationships are not damaged.
SUPPORTING MANAGEMENT
IN COMMUNICATIONS AND
STAKEHOLDER MANAGEMENT
EMPLOYEES AND EMPLOYEE
REPRESENTATIVES
Controlling the content of external communication starts
with controlling communication internally. Once a CRO
or turnaround manager is appointed employees will be
contacted by customers, suppliers and service providers
assessing their risk and exposure. Ensuring the right
message gets back is important. From the outset a clear
message should be communicated internally and advice
on how to ?eld calls should be given. The message should
be objective and factual. Employees should be made aware
that inaccurate gossip or alarmist talk can be detrimental to
the recovery process and could fall into the wrong hands,
particularly competitors seeking advantage. Wherever
possible, internal communication should be face to face
and ?ltered down the organisation through the normal line
management route. Line management should be informed
ahead of union representatives to demonstrate that
management are in control of the process and to avoid
misleading interpretations. The core message should be:
‘We have issues that have been identi?ed, are manageable
and are being managed. With your continued support we
will resolve them’.
MAJOR CREDITORS AND CREDIT INSURERS
Early communication to all creditors should be made as
quickly as practical, especially to individual major and
critical suppliers. No news is bad news in the early days
of a CRO appointment. Maintaining supplier con?dence,
credit lines and supply chain performance is essential.
Where a supplier has credit insurance the insurer should
be included in the dialogue. It is the insurer and not the
supplier who has the vested debt risk interest in avoiding
insolvency.
Suppliers want the turnaround to succeed in order to
get paid and retain a customer. They also want to minimise
their risk by not increasing exposure and where possible
reducing it. Pressure for early repayment of overdue
amounts should be resisted without the quid pro quo
of continued supply on normal terms while reducing
the overdue level to normal terms over time and as
funds permit.
Communicating the message that threats of legal action
and supplier holds may force an unnecessary insolvency
event should be carefully handled. Normally when a CRO
is appointed there is already a history of missed promises.
Reasonable payment plans should be negotiated. Payment
plans should be achievable but equally they must be
adhered to.
In order to concentrate on the major creditors it is
sound policy to keep smaller creditors up to date. The
80/20 rule often applies to the creditors’ ledger structure.
The 80% of small creditors making up 20% of the liabilities
are time consuming to manage and more likely to seek
court action. It is better to concentrate time and resource
on the critical larger suppliers than dissipate efforts in
controlling the smaller suppliers with less vested interest
in the company’s survival and less experience of recovery
from distressed situations.
As the trade creditor payment situation improves and
there is a positive story to tell it will be time to address
the whole supplier base with more accurate information
of progress. A professionally staged supplier presentation
event is a practical way of demonstrating progress and
restoring the whole supplier base to normal credit terms.
However, this should not be undertaken while certain
suppliers remain hostile. Negotiations with less supportive
suppliers should be on a one-to-one basis.
KEY CUSTOMERS
It is very easy in the early stages of a turnaround to be
diverted from customer support by pressing crises on the
cash and supplier fronts. However, a turnaround cannot be
achieved without customers and early communication can
hold customer loyalty while a clearer picture emerges. As
the turnaround progresses, customer con?dence translates
GUIDELINE
14 Turnarounds
EXAMPLE 8
In a turnaround and restructuring of a signi?cant publicly
quoted company involving a debt to equity swap and
new capital increase, the notice periods for extraordinary
meetings to authorise shareholder dilution imposed
time constraints that affected operational and cash ?ow
issues. Minority shareholder groups were hostile to the
proposed dilution and attempted to frustrate the process
to improve their terms. The delays increased liquidity
pressure and threatened to derail the turnaround plan.
The CRO commissioned an independent fairness report
to determine a reasonable valuation of the share price
for the proposed capital change and led the subsequent
discussions that resulted in shareholder acceptance.
into reliable sales forecasts which become the basis on
which a credible business plan can be built. A CRO needs
to engage with customers to understand the market drivers
of the plan upon which he will restructure the business and
negotiate with funders.
Customers may also be contributors to the problem
by deferring payment. Overdue accounts should be
aggressively chased to improve liquidity. Opportunities for
customer support by early payment discount or fast pay
programmes should also be sought. This is not uncommon
in industries where supply chain disruption could result in
costly line shut downs and lost production.
LANDLORDS
Landlords are key stakeholders, particularly in the retail
sector. English law lease agreements are heavily biased in
the lessor’s favour with onerous termination clauses and
upwards-only rent reviews. In turnarounds with a large
leasehold estate, exiting from onerous lease obligations has
historically met strong resistance from landlords. As rental
payments are traditionally quarterly in advance they have
a signi?cant adverse cash ?ow effect and landlords may be
quick to seek court redress for late payments. Relief from
leasehold contracts on properties surplus to requirements
will depend on negotiating leverage. Early communication
should begin to avoid provoking a court payment order
and to seek a possible reduction in rent, a new lessee, or
to sublet the property. Where onerous leases are a major
issue and landlords are reluctant to seek commercial
compromise the threat of, or use of, a pre-pack or formal
administration may lead to a more balanced commercial
compromise.
PENSION TRUSTEES
Many companies have closed their de?ned bene?t pension
schemes in favour of de?ned contribution schemes where
the liability for future pensions is passed to the insurer.
However, there may be residual pension liabilities under
closed de?ned bene?t schemes or a section, usually for
EXAMPLE 7
On a major international auto parts supplier assignment
the US parent was demanding loan repayments from
its European subsidiaries to meet short-term US needs,
which would have forced the European subsidiaries
into administration. By approaching two major US auto
manufacturers a fast pay programme was initiated for
the parent that enabled the European subsidiaries to
be restructured outside of formal process. The US auto
manufacturers bene?ted as their European factories would
have been at risk if the supplier’s European subsidiaries
had ?led for insolvency.
senior executives, may still be a de?ned bene?t scheme.
Pension liabilities are subject to regular actuarial valuations
and shortfalls are generally the unsecured liability of the
company. Trustees have certain rights and obligations
to seek contributions to redress shortfalls arising from
valuations which may also be provoked by a sale or closure
of all or part of a company. These contributions may have
a signi?cant effect on cash ?ow and future pro?tability.
In some cases resort to administration or pre-pack may
be required for all of the business or perhaps an affected
subsidiary. Early appreciation of the pension obligations
is necessary and, being a complex area and subject to
evolving legislation and practice, specialist advice should
be taken.
DIRECTORS AND DIRECTORS’ LIABILITIES
Directors have statutory obligations and potential liabilities
when a company is nearing or in the zone of insolvency. To
be effective a CRO, who is likely to be a de facto or shadow
director, must maintain the con?dence and support of
all the directors. From the outset the CRO should ensure
that the directors are fully appraised by appropriate legal
counsel of their responsibilities and duties. In order to
protect his personal interests the CRO should monitor
the directors’ actions and ensure signi?cant decisions are
properly discussed at board level and properly recorded
in the minutes. Regular communication with the directors
is needed to ensure the appropriate level of corporate
governance is adhered to.
SHAREHOLDERS
While shareholders in a distressed company often have less
?nancial leverage than secured debt and less commercial
leverage than trade creditors they do have statutory rights
that effect changes in the composition of the board and
the capital structure. If a company is a public company
these are also governed by stock exchange rules.
15 icaew.com/cff
Changes in capital structures will require shareholder
approval and meetings called with proper notice. This can
dictate both the form and pace of the turnaround. They
also have powers of appointment of directors and their
interests cannot be ignored.
In private companies the directors and shareholders are
often the same people. They may have a con?ict of interest
in protecting their ?nancial interests as shareholders and
performing their duties to other stakeholders as directors.
A CRO needs to monitor this ?ne line carefully and with
legal guidance to ensure that all stakeholders’ interests are
correctly managed.
FUNDERS
Banks are the most common source of funds and normally
have the important negotiating leverage of being
secured funders. However, as capital structures become
more complex so too does the communication and
management of interests. In the simplest form a company
will have one bank and re?nancing discussions are
relatively straightforward. Whatever the level of complexity
the success or otherwise of discussions with funders will
depend on the provision of regular, accurate and credible
?nancial information.
In more complex cases there may be different layers of
debt with senior and junior debt having different rankings
and security. Debt may have been syndicated across a
group of banks and while communication will normally be
through an agent bank, standstill agreements and waivers
may require majority agreement and restructuring may
require unanimous consent. The lenders’ interests are not
always aligned and discussions can be time consuming.
Minority hold outs to maximise leverage can endanger
the turnaround process. It is essential that the process of
discussion and the need for ever more ?nancial information
does not detract a CRO from the process of running the
business and managing the operational turnaround.
Demands on time need to be carefully managed and
responsibilities delegated and monitored effectively.
The negotiation process of the ?nancial restructuring,
particularly leveraging off the threat of insolvency, is
addressed in Negotiating the ?nancial restructuring. These
negotiations are fundamental in ensuring the company
can emerge from its distressed position with a level of
debt on its balance sheet that operational cash ?ows of
the restructured operations can support. For this reason
a turnaround is a combination of success in stabilising a
business and charting a credible recovery, and negotiating
a funding structure that does not impose excessive
leverage on the emerging business. The more successful
the operational turnaround process is then the easier
it will be to negotiate an acceptable level of debt with
the funders. It is in their business interest to lend to
pro?table companies.
ESTABLISHING THE FORECASTS
AND BUSINESS PLAN
THE SHORT-TERM SURVIVAL AND
RECOVERY PLAN
At the outset the emphasis is on liquidity, avoiding
insolvency triggers, communications to critical stakeholders
and short-term cost control. The turnaround manager
must act quickly and take the leadership role in establishing
short-term actions and delegating responsibilities for
action. There is normally not time for a formal planning
process so a series of quick ?xes should be documented
and regularly reported against. This should be daily at ?rst
and moving to less frequent action and follow-up meetings
as circumstances permit. All senior management should
be involved and by conference call for remote executives
if necessary. The short-term cash forecast will be the driver
of the actions. The issues raised and the performance of
management in resolving them will highlight key problem
areas and problem people. The process itself will buy time
for a more in-depth assessment of the business issues and
serve as a basis upon which to formulate a longer-term
business plan.
THE BUSINESS PLAN
Most companies have a budget and planning process and
some have a strategic planning process. These processes
should be used as a basis of reassessing the current
strategies and operating plans and creating a revised
?nancial plan which will serve as the primary document in
negotiating ?nancial restructuring with the stakeholders.
As existing plans have invariably been missed there will
be doubt over the effectiveness of the planning process
and its relevance to current circumstances. A common
de?ciency of plans is that they have been prepared at
too remote a level from the operational management.
They can be over optimistic and without buy-in from the
operating personnel. Accordingly there can be a lack of
ownership from the people responsible for achievement
and a corresponding likelihood that targets will be missed.
The turnaround manager must avoid this pitfall and
ensure that the new plan is constructed from the bottom
up and not the top down; from operating departments’
reasoned input and not from the ?nance department
or managing director’s wish list. It must be based on
reliable external market data, achievable market shares
and supportable gross margins. Operating costs should
be zero-based and all unnecessary costs eliminated.
GUIDELINE
16 Turnarounds
Restructuring costs for disposals and redundancy
programmes should be built in. Cash ?ow forecasts should
be on a receipts and payments basis and highlight major
exceptional items. From this plan funding parameters can
be established which will serve as the basis for negotiating
re?nancing alternatives. Plans should cover a ?ve year time
horizon with the ?rst two years monthly and following
years quarterly, particularly if the business has a seasonal
nature.
VALUATIONS AND INDEPENDENT
BUSINESS REVIEWS
It is probable that as part of the negotiating process
existing or potential funders will require independent
assessment of asset values and of the viability of the
business plan from reputable business valuation companies
and reporting accountants. Consideration should be given
to the timing of such assessments as they add expense to
the process at a time when costs are under scrutiny and
cash availability tight.
Asset valuation may be required as part of the lenders’
assessment of liquidation value described in the next
section. They can be on a break-up basis and a going
concern basis, the former being part of the liquidation
value.
Independent business reviews (IBRs) may be requested
by senior lenders at a later stage in the turnaround
process when the business plan has been completed
and re?nancing negotiations have started. These
are normally carried out by ?rms of accountants or
turnaround specialists.
EXAMPLE 9
On an assignment of a golf club and chalet development
a bank lender with £750,000 of secured loans and
overdrafts called in the overdraft while the development
was still in process. An independent valuation of £1.7m
gave suf?cient comfort for the bank to maintain the facility
while alternative funding was sought. Administration
was avoided.
EXAMPLE 10
On an assignment of a large international quoted
company the syndicate members requested an IBR
covering both the break-up value in administration
and the business plan which had a proposed debt to
equity swap and payment-in-kind (PIK) note component
in the debt restructuring, the PIK note entitling the
holders to receive deferred payment when certain future
performance criteria were met. The company business
plan forecast a full recovery for the syndicate over an
eight-year period compared to a possible 30% recovery in
administration. The IBR forecast a possible 35% recovery
in administration and a 90% probability of full recovery
over time. The conclusion in the IBR was critical to
acceptance of the plan by the various syndicate members
who required an independent appraisal for their respective
credit committees.
TAXATION ISSUES
While taxation may not be uppermost in the minds
when trying to turn around a business almost any group
reorganisation will have a tax effect on the business and an
evaluation of the impact of the tax affairs of the business
may become important in deciding the best route to take.
For example, if tax losses cannot be used by a restructured
business this will have a material impact on its future cash
?ow. Tax losses may generally be preserved outside of
insolvency but lost in an insolvency or change of business.
The turnaround manager should seek advice from tax
specialists before embarking upon a ?nancial restructuring.
A restructuring involving forgiveness of debt, disposal of all
or part of a business, or a debt to equity swap may have a
tax impact and the turnaround manager should never be
faced with a situation where he discovers late in the day
that his proposed restructuring, that would otherwise have
succeeded, has been undermined by lack of consideration
of tax issues and their effect on cash balances early on in
the process.
Taxation issues that may arise in a turnaround situation
include:
• potential corporation tax charge on any buy back of
debt at a discounted amount as the difference between
the face value of the loan and amount paid may be
treated as pro?t if there is no change of control of the
company;
• potential tax on capital gains following the sale of assets
or business segments;
• stamp duty that may be payable if the company’s
restructuring involves the converting of debt into some
form of equity;
• loss of all or part of carry forward tax losses; and
• VAT on sale of assets including goodwill.
17 icaew.com/cff
NEGOTIATING THE FINANCIAL
RESTRUCTURING
LEVERAGING OFF ENTERPRISE VALUE
PRESERVATION
In order to achieve any turnaround that requires the
consent of creditors, the turnaround manager will need
to convey the bene?cial impact of the creditors’ support.
Central to this will be his demonstration that preserving
the value of the business through supporting the
turnaround will result in higher returns in the longer
run than in the shorter term through the sale of
individual assets.
MANAGING THE DIFFERENT LEVELS IN
THE CAPITAL STRUCTURE
A ?nancial restructuring with a company’s debt being
compromised will fundamentally change the net asset
value of the business. The approach adopted should be
fair and re?ect the sacri?ce that creditors have to make.
Shareholders cannot expect to retain their existing
economic interest and control intact when the holders
of debts with greater security over the company and its
assets are sacri?cing that position in order to save the
business. Ultimately any ?nancial restructuring is likely
to involve either a delay in or reduction to the amount
returned to creditors and can also involve them taking that
return perhaps in equity, PIK notes or convertible loans
through their assumption of formal or partial control of
the business. While shareholders may be unhappy at their
dilution and disenfranchisement, it will more likely result
in a better chance of recovery of their investment if it
re?ects the economic reality that the turnaround manager
was initially faced with and his turnaround plan seeks
to address.
ALTERNATIVES TO CONSENSUAL
RESTRUCTURING
A consensual approach to restructuring of a company’s
business and assets, such as a debt for equity swap or a
buy back debt by a company, is generally preferred as it is
usually quicker, cheaper and avoids the perceived stigma of
a formal insolvency process.
However, the turnaround manager may ?nd that a
consensual approach is not achievable due to continued
creditor pressure and therefore in the UK a process under
the Insolvency Act 1986 or the Companies Act 2006
will need to be considered. This may occur in situations
where the company’s cash ?ow is insuf?cient to service
even restructured debt or where the company’s creditor
population is large and complex and creditors are not
minded to support a proposed consensual restructuring. In
cross-border situations, the processes and issues will differ
from those in the UK.
ADMINISTRATION
Administration, or the threat of it, is increasingly
intertwined with turnaround where creditor pressure or
onerous liabilities cannot be consensually resolved. In the
event that a company is insolvent or is about to become
insolvent, an Administrator can be appointed under the
provisions of the Insolvency Act 1986 to manage its affairs.
The company and its assets are placed under the control of
an Administrator and the protection of the court with the
rights of unsecured creditors frozen until the Administrator
produces his recommendations on how to deal with the
company’s affairs and assets. The options are to continue
trading the business while seeking a buyer, to close the
business and seek a buyer or alternatively if no buyer
emerges, to sell off the assets of the business for the bene?t
of the creditors.
Administrators can be appointed either out of court by
the company, its directors or by the holder of a qualifying
?oating charge or by the court upon application of the
company or its directors (or one or more of its creditors,
the holder of a qualifying ?oating charge or an appointed
liquidator).
The statutory purposes of an administration are:
• to attempt the rescue of the company as a going
concern;
• in the event that the point above is not possible, to
achieve a better result for the creditors as a whole than
would otherwise be achievable in a liquidation; or
• when the above are not reasonably practicable, to realise
the assets for the bene?t of one or more of the secured
or preferential creditors.
Where a rescue of the company itself cannot be
achieved the Administrator’s efforts would be directed
towards maximising the return to creditors from a sale of
the business and its assets as a going concern in whole
or in part. This could take the form of a sale following a
marketing campaign in which the business is offered for
sale. During the marketing campaign the business may
continue to trade if there are suf?cient funds to cover
operations or it may be closed.
CVAs, SCHEMES OF ARRANGEMENT
AND PRE-PACKS
A CVA is a process under the Insolvency Act 1986 in
which a company does not need to be insolvent to use
these provisions. It is managed under the control of
an insolvency practitioner, and creditors are treated in
GUIDELINE
18 Turnarounds
accordance with the provisions of the Insolvency Act 1986.
CVAs may only offer enhanced returns to one group of
creditors in speci?c circumstances if 75% by value of
debt of all voting creditors, excluding secured creditors
unless they have valued their security, consent to the
CVA proposal. CVAs are usually considered as a viable
alternative in any restructuring situation, particularly as a
means to cram down dissenting creditors due to the 75%
voting requirement for approval of the CVA. There are no
unsecured creditor or shareholder class issues involved in
CVAs and they are usually quicker, simpler and cheaper to
implement than a scheme of arrangement (a Scheme), and
they do not involve the same degree of court involvement.
A Scheme is a court driven process pursuant to the
Companies Act 2006 and is normally used only where the
company’s business and structure is large and complex.
As noted above, creditor classes are determined by their
economic stake in the business and a Scheme can treat
different creditor classes differently. A Scheme can bind
creditors and shareholders who have no economic interest
in the company’s assets and is typically used in ?nancial
services businesses such as insurers and lenders.
Pre-packs attempt to avoid the perceived negative
stigma of a lengthy insolvency process and are considered
to be potentially the best way to extract value from a
business when the risk of damage to reputation and loss of
customers and key staff through negative publicity is high.
Pre-packs allow time for due diligence to be undertaken in
advance while causing minimal disruption to the business.
Pre-packs can be seen as a controversial approach and
great care must be taken to consider the transaction
carefully to ensure that creditors’ interests are not harmed
by the sale. As the business and assets are not usually
openly marketed, there is a risk that the best price has not
been obtained. Administrators have a duty to maximise
returns to creditors and need to be satis?ed that any
pre-pack represents the best, or indeed only, deal available
to creditors in the circumstances. Accordingly care should
be taken to justify valuations by independent means
where possible.
PENSIONS AND LEASES
As part of his assessment of the company’s liabilities, the
turnaround manager will have identi?ed whether the
company has a de?ned bene?t pension scheme and/
or a large number of leases. In these situations, special
consideration will need to be given to any proposed
restructuring of the company and its business and the
turnaround manager will need to communicate with these
stakeholders from the outset.
Should the company’s de?ned bene?t pension scheme
have a large de?cit, it is common for this amount to
represent a considerable part of the total amount of
unsecured creditors. The company has various obligations
to the trustees of the pension scheme, including a
requirement to keep the trustees informed of the
company’s situation. In the UK, the Pensions Regulator
and the Pension Protection Fund have numerous legislative
powers in this situation and will need to be consulted in
relation to the company’s proposed restructuring.
In the UK the Nortel ruling in the High Court in 2010
created uncertainty in relation to whether or not a pension
scheme de?ciency should be treated as an expense of
an insolvency process, thereby ranking ahead even of
the administration fees, or as an ordinary unsecured
creditor. Accordingly, this will have an impact both on
the willingness of an insolvency practitioner to accept an
appointment if payment of fees is in doubt and on the
return to unsecured creditors. Both the likely amount and
its priority must be considered by the turnaround manager
when formulating his restructuring plan.
Should the company have excessive and/or onerous
leases, consideration needs to be given to how these will
be dealt with as part of the overall restructuring. In certain
situations, the formal restructuring processes available may
assist with the disposal of surplus leases at terms acceptable
to the affected landlords or may also allow the company to
vary onerous rent level or payment terms under continuing
leases. The CVAs of large retail groups during the 2008-
2010 recession are examples of how CVAs can be used
to deal with onerous leases. However, landlords can be
reluctant to compromise their legal rights unless there are
overwhelming commercial bene?ts to themselves.
MANAGING HOLD OUTS
A hold out is a situation where a minority group of
creditors, normally of a speci?c type or class, have suf?cient
rights to block restructuring proposals that the company
or an of?ce-holder is attempting to put into effect through
the restructuring method being adopted. The purpose of
this approach is to extract concessions from the proposed
settlement with creditors that are not re?ective of their
relative economic interests. A turnaround manager will be
keen to avoid such collective obstruction to his turnaround
plans. It will be important to obtain legal advice early on in
the process where a complex restructuring is contemplated
so that he can be aware of the relative positions that
different creditor groups may take – or the potential
grounds on which he can challenge such collective action,
if necessary by resorting to the courts. Various options to
cram down hold outs may be considered and resorting
to CVAs, pre-packs or schemes of arrangement can be
required to achieve a settlement. Sometimes merely the
threat of such action can be suf?cient to secure agreement.
19 icaew.com/cff
EXITING THE LEADERSHIP
ROLE
A CRO’S ROLE SHOULD EVAPORATE
WITH TIME
It is not possible to forecast exactly when a CRO should
leave an assignment. In practice it will become self-evident
as the new management structure demonstrates its ability
to perform and hit plan targets. In the event that the
company is disposed of as part of the turnaround, it will
be probably when the disposal is complete and the buyer
takes control. It is normal that the need for supervision
will also reduce from full time to part time as the
business recovers.
CHOOSING THE EXIT DATE
Company internal management may wish to expedite
the exit date for both cost and independence reasons.
However, the concerns of other stakeholders should be
taken into consideration. Customer con?dence may be
eroded by too early an exit. Management credibility may
not have been suf?ciently restored for suppliers to maintain
credit lines. Above all the con?dence of funders needs to
be maintained. Not all turnaround recoveries go exactly
to plan. Signi?cant deviations may need renegotiations of
?nance terms.
MAINTAINING A MENTORING AND
MONITORING ROLE
Having built up knowledge of the business and gained
the con?dence of internal and external stakeholders,
shareholders or boards may request that the turnaround
manager maintains contact either in a non-executive
director role or as an external adviser. This may also be a
requirement of the ?nancial restructuring terms.
EXAMPLE 11
At a subsidiary of a US auto supplier the US parent
terminated the CRO against advice once an upturn in
performance had started and a new managing director
installed. The new management team could not maintain
hard won customer con?dence and key contracts were
lost. The CRO returned within a year but only to put the
company into liquidation.
MANAGING INTERNATIONAL
AND CROSS-BORDER ISSUES
Business is global and so too is business distress. Many
large businesses and SMEs in the UK have overseas
subsidiaries which can be dependent on intercompany
trading. Turnaround managers can be faced with
immediate insolvency issues in other jurisdictions where
insolvency laws and directors’ liabilities are different
from the UK. Knowledge of distress moves quickly and
a turnaround manager could be faced with a potential
insolvency ?ling of a subsidiary which could have
signi?cant knock-on effects throughout the group.
Recognising the dangers and acting quickly to seek
competent local advice is necessary.
INSOLVENCY TRIGGERS AND DIRECTORS’
LIABILITIES IN KEY JURISDICTIONS
In most jurisdictions the most pressing insolvency trigger
is a lack of liquidity. In some it may be a balance sheet test
of insolvency in which asset and liability valuations may
be unclear and subjective. And because directors’ liabilities
can be perceived as more onerous than in the UK, local
directors may dash to the courts to ?le for insolvency when
alternative actions could prevent this.
When taking an appointment in an international group
a CRO should make an immediate assessment of subsidiary
insolvency risk and put into place measures to control and
monitor the situation.
EXAMPLE 12
In an assignment of a distressed international group
with its continental European subsidiaries managed from
Brussels, the local managing director made a decision
to ?le for Belgian insolvency because of personal liability
concerns raised by his own legal adviser. The UK-based
CRO paid an immediate visit to Brussels and, acting
under the corporate legal counsel’s advice, relieved the
managing director of his position. The ?ling was averted
and in due course the European subsidiaries disposed of
to an Italian buyer.
GUIDELINE
20 Turnarounds
MANAGING CASH IN A CROSS-BORDER
TURNAROUND
Critical to the management of overseas subsidiaries is
the management of cash in each subsidiary. Although
larger companies with centralised treasury functions may
have daily cash sweeps channelling cash balances into a
centrally controlled account it is more normal for most
subsidiaries to have their own banking facilities and control
of cash. At an early date these subsidiaries should be
incorporated into the 13 week cash ?ow reporting regime.
It is human nature for local ?nance managers to protect
the local company position. Reports may understate
cash availability or headroom. Third-party payments may
be made from available funds ahead of intercompany
payments denying a fellow subsidiary with a more pressing
cash need. Monitoring the use of intercompany funds for
the optimum group need requires regular reporting and
regular checking, if possible by having internet access to
subsidiary bank accounts.
RISKS AND REWARDS
FEE STRUCTURE AND BILLING
ARRANGEMENTS FOR NEAR INSOLVENT
CLIENTS
Getting assignments is one challenge. Getting paid is
another. By de?nition a distressed company has many
con?icting and pressing cash needs. A method of assuring
payment is fundamental because without it a professional
becomes a ?nancial stakeholder and objectivity will be
eroded. Most CROs and restructuring ?rms require a
deposit equating to two or three weeks’ estimated fees to
be paid in advance of starting work with weekly billings
for immediate payment so that the deposit covers any
outstanding fees. To ensure transparency the fees should
be built into the 13 week cash forecast. Stakeholders
usually recognise the bene?t of professional advice to their
position and willingly accept the arrangements as if they
were payroll obligations in their own organisations.
EXAMPLE 13
On an assignment involving 15 subsidiaries in nine
European companies the UK-based treasurer and CRO
chaired daily cash conference calls monitoring cash usage
and sanctioning payments above a pre-determined
minimum threshold. By husbanding scarce cash resources
the group avoided an unintended insolvency trigger in
any of the subsidiaries while a longer-term strategy and
plan was determined.
SUCCESS FEES
Company owners and directors often promote the concept
of success fees as it clearly aligns the turnaround manager’s
interests with their own. How much and when they are
activated will depend on the nature of the assignment.
It is preferable that they do not constitute the major
percentage of total fees. They should be capable of clear
de?nition and measurement, and where possible easily
recognisable milestones in the turnaround process. Once
a turnaround is achieved a CRO has little negotiating
leverage in claiming disputed amounts. Possible milestones
are: return to cash positive operations, return to
pro?tability over a three-month aggregate period, disposal
of a subsidiary, securing a re?nancing agreement, and exit
from a bank work-out.
EQUITY STAKES
In larger companies this may be considered where the
amount is insigni?cant to the total equity and stakeholder
interests are not compromised by a lack of objectivity. In
some smaller assignments, where the business would not
ordinarily be able to afford the reasonable fee level of a
turnaround manager, giving an equity stake may be the
only way a company can engage a turnaround professional
and save the company from bankruptcy. This is especially
relevant to private companies where the interests of both
the shareholders and the turnaround manager can be
aligned to saving the business. Such arrangements should
be transparent to other signi?cant stakeholders to ensure
the integrity of the process is not undermined when it
inevitably becomes known.
SUMMARY AND
CONCLUSIONS
Effective turnaround management involves a combination
of operational and ?nancial skills and an appreciation
of the legal issues affecting directors’ liability and the
insolvency process. It requires the experience to inspire
con?dence in management, the integrity to command
trust and respect among all stakeholders and the tenacity
to persevere to reconcile often con?icting objectives. It is
a team effort involving internal management and external
advisers focused on the objective of enterprise value
preservation.
The start is controlling liquidity to achieve a stable base
to allow time to determine the viable core business and
develop a credible business plan. Implementation of the
plan and negotiation with the stakeholders using whatever
leverage exists follows, during which time an appropriate
management team can be established to take the business
forward, and a funding structure can be negotiated which
the new business model can support from operational
cash ?ows.
Turnaround and restructuring is evolving towards
consensual restructuring as a preference over formal
insolvency where value can be preserved, while leveraging
negotiated concessions off the threat of insolvency or by
using available processes to avoid onerous legacy costs.
It can often be a ?ne judgement line between ?ling for
insolvency to seek protection from pressing creditors, or
attempting a turnaround and ?nancial restructuring in an
environment of creditor pressure and legal threats and
counter threats.
Legislation and process are evolving too, attempting
to effect an optimum balance between creditor and
debtor interests. The legislation provides the framework
in which the turnaround is effected. It is the professional
team’s management of the stakeholders’ often con?icting
objectives that determines the optimum process and the
optimum result.
While customers and key employees are liable to leave
after a ?ling taking goodwill with them, rescue outside
of formal process driven by competent turnaround
professionals will, where a viable core business exists,
afford the better solution to the bene?t of all stakeholders.
It is also a more ef?cient process of value preservation and
use of capital for society in general.
21 icaew.com/cff
AUTHORS
Alan Tilley
Principal
Bryan, Mansell & Tilley LLP
T +44 (0)20 3178 4902
E [email protected]
David Bryan
Principal
Bryan, Mansell & Tilley LLP
T +44 (0)20 3178 4902
E [email protected]
David Bryan is a founding principal of Bryan, Mansell and Tilley LLP and an
experienced hands-on senior ?nancial manager with extensive experience
working with international and UK companies in restructuring and
improvement. He has operated at CFO level in large and SME companies in
the UK, US and Continental Europe and has many years experience with public
and private equity owned businesses. Industry experience includes automotive
supply and commercial vehicle manufacture, industrial systems and services.
David is on the board of TMA UK and TMA Europe.
Alan Tilley is a founding principal of Bryan, Mansell and Tilley LLP. He has
signi?cant expertise in turnaround and restructuring, managing the complex
issues in preserving enterprise value while operating in the zone of insolvency.
He is a frequent speaker on cross-border European restructuring and has written
several articles on the subject. He is the 2008 recipient of the TMA International
Chairman’s award for outstanding service to the international turnaround and
restructuring profession and won the Turnaround Practitioner of the Year award
at the 2010 insolvency and restructuring awards for BM&T’s work on La Seda
de Barcelona. Alan is VP of International Relations for TMA worldwide.
BM&T is an organisation of senior
turnaround management professionals
headed by David Bryan, John Mansell
and Alan Tilley. With a combined 30
years of experience in turnaround
and restructuring of underperforming
businesses the three principals were
previously senior professionals in Glass
Europe, a division of US based Glass
& Associates, a pioneer in the ?eld of
turnaround management.
In Europe the principals of BM&T
and our German and other European
associates have successfully completed
more than 50 engagements with
companies ranging from €10m to
€1.5bn, in all major industry sectors.
BM&T is af?liated with Conway
MacKenzie in the US and Gila & Co
in Spain.
BM&T provides a range of
turnaround management and
performance improvement services to
clients in a variety of industry sectors.
These include ?nancial restructuring,
operations improvement, interim
crisis management, operational due
diligence, viability assessment, working
capital improvement and business
plan preparation.
BM&T has the cultural
sensitivities, linguistic capabilities
and understanding of local, national
and international issues to operate
effectively in local and cross-border
crisis situations. The value we add
is experience.
22 Turnarounds
Stephen Cork
Senior Partner
Cork Gully LLP
T +44 (0)20 7268 2150
E [email protected]
Stephen quali?ed in 1993 and became a partner in a top 10 accountancy
practice the following year. In 2000, he joined a professional and ?nancial
services group and became head of restructuring and recovery. He became a
board director of this group in 2005.
Stephen left to lead Cork Gully LLP as Managing Partner. He has advised
companies ranging from owner-managed businesses, main listed publicly
quoted companies on the recovery strategies available, both at a board level as
well as to their ?nanciers.
Built on a solid heritage, we are a
specialist advisory ?rm bringing
clarity to complex restructuring,
recovery and insolvency issues.
We demonstrate our commitment
to our clients through the delivery
of innovative solutions to achieve
the best possible outcome in often
challenging circumstances.
As trusted advisers, we strive for
the highest standards in every aspect
of our work, continually revising and
improving our offer while adopting
best working practices. We have
built on the core values of the ?rm
established over a century ago and
which remain relevant today.
As an independent ?rm we are
responsive, agile and rarely affected
by con?icts of interest. Our clients
have complete con?dence in our
ability to engage and act on their
behalf promptly on an extensive
range of issues.
ICAEW CORPORATE FINANCE FACULTY
The Corporate Finance Faculty is the largest network of professionals involved in corporate ?nance. It includes more than 5,000
members and more than 70 member organisations. They are drawn from major professional services groups, specialist advisory ?rms,
companies, banks, private equity houses, law ?rms, brokers and consultants.
The faculty was established by ICAEW in 1997. It is a centre of professional excellence in corporate ?nance, contributing to
consultations by international organisations, governments, regulators and other professional bodies.
The faculty supports continuing professional development (CPD) by providing a wide range of services, events and publications to
its members, including its award-winning magazine Corporate Financier. The faculty initiated the development of the ?rst international
Corporate Finance quali?cation (including the ‘CF’ designation) for practitioners, which was launched in April 2005.
Katie Moffitt
Director
Cork Gully LLP
T +44 (0)20 7268 2150
E [email protected]
Katie has over 13 years restructuring experience, beginning her insolvency
career in 1998 in Australia and continuing in the industry since moving to the
UK in 2003. She is a quali?ed Insolvency Practitioner, Chartered Accountant
and a member of the Institute of Chartered Accountants of England and Wales.
She joined the restructuring team at Cork Gully LLP in 2010 and has continued
to work on a wide range of pre insolvency advisory engagements and formal
insolvency appointments.
23 icaew.com/cff
ICAEW is a professional membership organisation, supporting over 136,000
chartered accountants around the world. Through our technical knowledge,
skills and expertise, we provide insight and leadership to the global
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Our members provide financial knowledge and guidance based on the
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Because of us, people can do business with confidence.
Corporate Finance Faculty
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icaew.com/cff
© ICAEW XXXXXXXXXX 04/11
doc_785572151.pdf
Presentation explain best practice guideline turnarounds authors david bryan.
BUSINESS WITH CONFIDENCE icaew.com/cff
BEST-PRACTICE GUIDELINE
TURNAROUNDS
Authors: David Bryan and Alan Tilley, Bryan, Mansell & Tilley LLP
Stephen Cork and Katie Moffitt, Cork Gully LLP
May 2011 Issue 53
In association with
02 Turnarounds
CONTENTS
03 icaew.com/cff
04 Introduction
05 Scope and de?nition of a turnaround
06 Basic requirements for a successful turnaround
of a distressed business
07 Managing the immediate liquidity crisis
08 Assessing business viability and enterprise value
10 Managing the business operations during the
turnaround process
13 Supporting management in communications
and stakeholder management
15 Establishing the forecasts and business plan
17 Negotiating the ?nancial restructuring
19 Exiting the leadership role
19 Managing international and cross-border issues
20 Risks and rewards
20 Summary and conclusions
05 Figure 1: The Decline Curve
05 Figure 2: The Turnaround
09 Figure 3: The Value Break
11 Table 1: 13 Week Cash?ow Forecast
© Bryan, Mansell & Tilley and Cork Gully 2011
The views expressed herein are not necessarily shared by the Corporate Finance
Faculty or by ICAEW. Guidelines are published without responsibility on the part of
the publishers or the authors for loss occasioned in any person acting or refraining
from acting as a result of any view expressed herein.
ISBN 978-0-85760-265-8
GUIDELINE
INTRODUCTION
EVOLUTION OF TURNAROUND PRACTICE
The legislation governing the protection of creditor and
debtor interests in corporate distress is still evolving. It
varies from jurisdiction to jurisdiction and this impacts
on turnaround and restructuring practice in international
cases; an increasing issue in a global economy.
Different legislation in different countries is also
impacting the evolution of the turnaround process as
professionals move from country to country and challenge
accepted local practice. In the UK, the growth in US
investment banks in London has led to the import of
concepts rooted in the US bankruptcy process where it
has been more appropriate to give failed entrepreneurial
activity a second chance.
The 1979 US Bankruptcy Code facilitated the process
known as ‘debtor in possession’. Management was given
the chance to reorganise the business and restructure the
balance sheet under court supervision while managing
day-to-day operations protected from creditors by
an automatic stay. During the 1980s a new group of
professionals emerged in the US, skilled in helping
management to navigate through the complexities of
managing in this ‘zone of insolvency’ (see Scope and
de?nition of a turnaround). These became known as
turnaround managers and the role of chief restructuring
of?cer evolved later to describe this activity.
TURNAROUND MANAGERS AND CHIEF
RESTRUCTURING OFFICERS
In the UK, change managers or ‘company doctors’
took over ailing businesses as chief executives and were
statutory directors. But as companies slimmed down and
?attened their management structure a need developed
for executives with speci?c skill sets to work on an interim
basis to drive change. This could be change by a speci?c
project in a solvent company or, where it involved a major
redirection of effort to prevent decline becoming corporate
failure, change in the zone of insolvency (see page 5) to
prevent an insolvency ?ling.
Following the Insolvency Act 1986 and the introduction
of licensed insolvency practitioners it became convenient
to distinguish professionals engaged in corporate rescue
ahead of formal process from insolvency practitioners and
the term ‘turnaround manager’ evolved. As turnaround
management boutiques from the US established
a presence in the UK the more formal title of chief
restructuring of?cer (CRO) became prevalent. Banks would
often make the appointment of a CRO a condition of a
standstill agreement and while it has no statutory de?nition
the term became recognised as an important element
of corporate rescue.
GOOD PRACTICE IN THE UK
Turnaround managers or CROs normally have a
background in senior operational management with
a corporate organisation, or ?nancial services with a
professional services organisation or bank, during which
time they would have developed the experience to
negotiate and manage stakeholder expectations under
extreme ?nancial pressure and to tight deadlines. Regular
educational events and annual conferences are run by
two membership organisations: Turnaround Management
Association UK (TMA-UK) and the Institute for Turnaround
(IFT), both of which promote high ethical standards and
codes of practice.
DIRECTORSHIPS, SHADOW DIRECTORS
AND RESPONSIBILITIES AND LIABILITIES
Neither the position of turnaround manager nor CRO
has precise legal de?nition in the UK. Accordingly the
terms of engagement and duties must be de?ned in an
engagement letter which should be clear on scope and
reporting responsibility. Whenever possible this should be
a direct report to the chairman or board of directors to
ensure the turnaround manager has the requisite authority.
The position is not consultancy or advisory. It is by
necessity hands on and, therefore, is an executive role. It
is not necessary to be a statutory director to perform the
function and is best avoided so as to exhibit a degree of
independence to external stakeholders and a disassociation
with directors’ past actions. However, it is likely that acting
in an executive and leadership capacity will be interpreted
as acting as a shadow director and subject to the same
duties, responsibilities and potential liabilities as a statutory
director. A shadow director is a person in accordance
with whose directions or instructions the directors of a
company are accustomed to act. A person is not deemed
to be a shadow director if it is clear that he is acting in a
professional advisory capacity only.
A turnaround manager or CRO should conduct himself
within the statutory duties of a director and as if he was a
director, while maintaining a position of independence and
objectivity to all stakeholders.
As a company enters the zone of insolvency the
directors’ responsibilities move from protecting
shareholders’ interests to a duty to protect the interests of
creditors. In a potential liquidation if turnaround efforts
fail, a director or shadow director may be held personally
liable for civil damages for wrongful or fraudulent trading,
or criminal damages for fraud misconduct or falsi?cation
of accounts. A turnaround manager working in the zone of
04 Turnarounds
insolvency must acquaint himself thoroughly with the legal
implications of his actions and ensure that his decisions
are both properly documented and capable of defence.
He should act with integrity and transparency at all times.
He should ensure his actions maintain enterprise value and
do not damage the interests of all or any one group of
creditors. In this way he should avoid the potential risks of
subsequent legal action. In any event acting with integrity
and transparency with all stakeholders will enhance rather
than undermine the chance of a successful outcome. It is
not just an ethical approach to turnaround but the most
practical one.
SCOPE AND DEFINITION OF
A TURNAROUND
POINT ON THE DECLINE CURVE AND THE
ZONE OF INSOLVENCY
Companies are dynamic. They are either moving forward
or backwards against competition. When moving
backwards management has the opportunity to change
policies to reverse the trend. When management fails
to address the issues and falls into a state of denial they
embark on the decline curve (see ?gures 1 and 2). They
may institute a change of direction from internal action
while they have the liquidity to manage the necessary
changes to management and policy. Or they may continue
down the decline curve until their ?nancial position
makes them vulnerable to an external shock such as loss
of a major customer or contract. At such time they are
likely to be in the zone of insolvency and under liquidity
pressure. Turnaround management actions discussed
in this guideline relate to turnaround management at
this point of decline. As this will be a point of extreme
creditor pressure, turnaround with consensual creditor
support and turnaround by leveraging concessions under
threat or other near insolvency-related processes become
intertwined and these issues are considered below.
WARNING SIGNS
In an entrepreneurial society there will always be business
failures. What is essential is a mechanism to rehabilitate
failing companies to preserve as much value as possible.
As live companies are inherently worth more than dead
companies early recognition of failure means earlier
turnaround action and increased chances of success.
However, management can be the last to recognise
the symptoms, or action the remedies, and remain in
denial until it is too late. Recognising the symptoms
from outside is less easy to achieve but nonetheless
there are telltale signs.
There are two basic approaches to evaluating risk of
business failure: the statistical approach and the intuitive
approach. The former depends on the availability of
accurate and timely data and uses statistical analysis
of liquidity, pro?tability and gearing to evaluate the
likelihood of an insolvency event against a benchmark
of historic data. It is more relevant to larger publicly
traded companies with complex capital structures where
information is in the public domain than small- to medium-
sized companies.
The intuitive approach is more familiar to readers
of ?nancial statements and observers of business and
management. While based on the same factors as the
statistical approach it relies on reader judgement over
statistical evidence. The ?nancial symptoms are those of
declining pro?tability, declining sales and margins all of
which lead to liquidity pressure, inventory build-up and
collection and aging problems on receivables. As the
process continues the company begins to miss forecasts,
both pro?t and cash. Funding headroom diminishes and
covenants come under threat. Supplier payments get
extended leading to production scheduling problems.
05 icaew.com/cff
Figure 2: The Turnaround
Time
L
i
q
u
i
d
i
t
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Figure 1: The Decline Curve
At this stage the company is in the vicious circle of decline
with ef?ciencies, quality and service levels declining and
customers defecting.
This becomes a key de?ning moment; if new
management changes are made which can arrest the
decline the company may navigate its way to safety. If
management remains in denial a liquidity crisis becomes
almost inevitable. However, it is often preceded by
desperate measures to hide or sidestep the problem. In
the ?nal stage of decline ?nancial statement irregularities
or failed merger or disposal attempts are not uncommon.
While senior management, preferably chief executive,
change is needed the better internal managers desert the
sinking ship. Unfortunately only when external pressure
is brought to bear is it likely that a turnaround manager
is appointed. Often this only occurs when the company’s
bank relationships are transferred from the normal
relationship managers to a work-out department. Work-
out departments are comprised of experts in distressed
situations and it is their role to maximise the bank’s
recovery from a distressed business. It is regrettable that
turnaround managers are appointed later than they would
like to be. Thus the norm on appointment is entering a
liquidity crisis.
LIQUIDITY TRIGGERS
Companies do not fail though lack of pro?ts. They fail
through lack of cash. A company should consider ?ling
for insolvency if it is unable to pay its debts as they fall
due in the normal course of business. In practice there is
often a degree of latitude to this de?nition and businesses
have been known to limp along, living from hand to
mouth until a critical payment cannot be met which
makes continued trading impossible. Such an event could
be insuf?cient funds to meet payroll, insuf?cient funds to
secure delivery of a critical component or the interruption
of utilities. It may also be triggered by a creditor
petitioning for a winding-up order or a bank withdrawing
facilities for breach of covenant. For a turnaround manager,
having visibility and effective control of the cash ?ow is the
critical ?rst stage in any assignment.
BASIC REQUIREMENTS FOR A
SUCCESSFUL TURNAROUND
OF A DISTRESSED BUSINESS
Not all distressed businesses can or should be saved.
From the outset the turnaround manager must make the
decision whether turnaround or break up in formal process
is appropriate.
SHORT-TERM LIQUIDITY
A turnaround manager cannot produce cash from thin air
but he can make a reasoned assessment of the immediate
cash requirement and availability. Depending on the size
of the company and the complexity of the business it may
take one week to one month to determine a plan of action
and a dependable cash ?ow forecast to support it. The ?rst
step is to rigorously analyse the cash control and to impose
a strict discipline over collections, payments and purchase
ordering, if necessary taking over direct management of
these functions. Surprisingly, distressed companies can
have cash management delegated at too low a level,
with non-urgent payments continuing due to lack of
supervision. Establishing proper priorities over payments
can conserve scarce cash resources buying time for longer-
term solutions to be sought.
VIABLE CORE BUSINESS
Having assessed the ability to survive at least while a
survival and recovery plan is prepared, an assessment of
business viability should be made. Is there value in the
goodwill of the business over and above the realisable
value of the assets? This is considered in more detail
below but mindful of the possibility of wrongful trading
a turnaround manager must assess whether the business
has the products or services that meet a market demand
and can support a valid revenue stream to produce an
operating surplus. If not then administration or liquidation
may be the appropriate route.
CREDIBLE MANAGEMENT TEAM
From the outset of appointment of a turnaround manager
the incumbent management team will be associated with
the business problems. Often they will have lost supplier
con?dence by breaking payment commitments, and
customer con?dence through quality or delivery issues.
The turnaround manager must bridge the credibility gap
at the outset. Whom to make redundant, when and how
is a matter of judgement. Turnaround is a team effort and
management have the product knowledge and customer
contacts that are essential for business success. This
knowledge must be retained. Harnessing and controlling
those attributes while demonstrating leadership in the
turnaround to all stakeholders is required.
The turnaround process will take time and the rebuilding
of the management team will also take time. Directors
may be shareholders with controlling positions or have
service contracts with expensive termination clauses
that cannot be met from cash ?ow. As the turnaround
process progresses the turnaround manager must win the
con?dence of those members of the management team
required for the future business while retaining credibility
GUIDELINE
06 Turnarounds
with external stakeholders whose support will be needed
to achieve success. Those members of the management
team discredited beyond redemption or otherwise surplus
to requirements must be removed as and when liquidity
permits.
FUNDABLE BUSINESS PLAN
Having established business viability, suf?cient liquidity
to prepare a survival and recovery plan, and established
management control over the operations the emphasis
moves to the preparation of a business plan that is both
credible and fundable; credible in that the revenues and
margins are based on a realistic assessment of the state
of the overall market and of the business’s competitive
position, and fundable in that the level of debt of the
ongoing business can be serviced by realistic operating
pro?ts and cash ?ows.
In tandem with the preparation of the plan the
turnaround manager must continue to ensure control
over the operations and ?nances of the business and to
consider the tactical approach to stakeholder negotiations.
Concessions and support will often be required and the
turnaround manager must assess the strength of his
leverage before beginning negotiations.
MANAGING THE IMMEDIATE
LIQUIDITY CRISIS
ESTABLISHING IMMEDIATE CONTROL
OVER TREASURY MANAGEMENT
Almost the ?rst step a turnaround manager must take is
to establish the exact liquidity position of the business.
This will require immediate access to bank statements and
internal cash ?ow forecasts. There will be pressure from
creditors (many already overdue) as well as pressure to
meet key payments: payroll, utilities and rent. From the
start it is imperative that executive control is assumed over
cash management. On large assignments this may be done
by parachuting in a dedicated cash manager. In other
assignments, where there is a capable accounting function,
control can be achieved by delegation and tight daily
management. Whatever the solution, in the ?rst days of an
assignment, visible and effective control of cash availability
by the turnaround manager is essential if an insolvency
trigger is to be avoided. As soon as practical after averting
an immediate crisis a more formal process of cash ?ow
forecasting and management must be implemented.
PRIORITISING KEY PAYMENTS
Payment pressure will come from those creditors with
the tightest credit control functions, the most aggressive
collection procedures and the most leverage. Threats to
take legal action will occur. However, the use of scarce
liquidity to meet the most aggressive collectors may not
be the optimum use of funds. First call on cash must be
payroll and as this is usually the biggest single obligation
and occurs only at the end of the month this must be
factored into cash ?ow as the number one priority and
with a built-in safety margin. A business cannot run
without power or telephones so these must also be given
priority. A check must be made to ensure that any court
orders and legal threats are handled. If a court judgment
has not been made the creditor should be contacted and
an understanding of revised payment terms reached.
Depending on the critical nature of the vendor this could
be a deferred payment plan progressively reducing the
total outstanding but tied to a continuation of supply.
A turnaround manager brings credibility to the process
but must be frank and accurate. Payment promises
and plans must be achievable and achieved to preserve
credibility. As con?dence is restored the immediate
pressure eases. However, con?dence restored can be
quickly lost if payment plans are missed or communication
is lost. It is better to communicate bad news changes to
plan than not to communicate.
IDENTIFYING ‘LOW HANGING FRUIT’
In many companies cash collection is delegated at too
low a management level and regarded as a chore or an
embarrassment by senior management. It is commonplace
for companies in the zone of insolvency to have signi?cant
overdue debtors. Payment delays may be due to warranty
issues, contract completion issues, settlement disputes or
just customer payment delays. Intense senior management
attention needs to be focused on resolving disputes and
issues to collect in all outstanding debts and then keeping
on top of cash collection.
Invoices should be promptly raised and sent to expedite
due dates.
EXAMPLE 1
At an auto parts supplier in Germany and Portugal
an outstanding debt of over €500,000 from a major
manufacturer in Mexico was one year overdue because
of confusion over VAT applicability on shipments from
Portugal to Mexico. By research and determined follow
up with the various tax authorities in both countries the
matter was agreed to the customer’s satisfaction and
the cash received. This was one of a number of overdue
accounts which together were making the difference
between solvency and an insolvency ?ling.
07 icaew.com/cff
Excess inventories can be sold off even at a discount
if this improves liquidity. Work in process may have
accumulated due to production parts shortages.
Likewise other surplus assets may exist that can be
turned into cash. This can be scrap inventory, excess
motor vehicles, surplus plant and equipment, non-critical
subsidiaries or branch operations, or surplus real estate. It
may be necessary to take less than book value to generate
much needed cash but this may be a loss worth taking to
save the company.
CONTROLLING SUBSIDIARIES’ CASH
MANAGEMENT
Groups that do not have centralised treasury management
require speci?c attention as cash records and access to
bank accounts may be delegated to the subsidiary. There
is a risk that a liquidity event could happen unbeknown
to the parent company. More common is the hiding of
cash availability at the subsidiary level and the inef?cient
use of cash to pay suppliers on due date ahead of
greater priorities elsewhere in the group. Direct control
over subsidiary cash management should be instituted
immediately.
Subsidiaries may also have undisclosed funding
headroom.
EXAMPLE 2
Invoicing of large contracts was handled by a remote
department ignorant of liquidity pressures at head of?ce.
Invoices would take many days to raise and despatch. By
expediting the process, over 30 days of cash ?ow bene?t
was achieved.
EXAMPLE 3
At a major international capital goods manufacturer more
than a month’s production of machines worth over €3m
was held awaiting critical parts from overdue vendors thus
creating a vicious circle of adverse cash ?ow. By cutting
production schedules and diverting resulting cash savings
to ?nish and dispatch the held units, positive cash ?ow
was restored and production rebalanced within available
cash resources. In time, production levels were increased
as cash availability permitted and pro?tability restored.
EXAMPLE 4
At the same international manufacturer it was necessary to
dispose of the French and Spanish subsidiaries to generate
much needed cash to enable the US parent to continue
operations while its own disposal to a Korean investor was
negotiated.
GUIDELINE
ASSESSING BUSINESS
VIABILITY AND ENTERPRISE
VALUE
Having addressed the capabilities and competencies of
the management team and getting a sense of the cash
available, the turnaround manager must consider whether
the business or parts of it have viability. The risk of further
erosion of creditors’ value and of the directors’ ?duciary
duties to both secured and unsecured creditors of the
business should also be evaluated.
An initial view has to be taken: whether the strategy is
to return the business to generating average earnings in
the medium term or whether the focus should be an exit
through a sale where speci?c cash and earnings strategies
will be applied to enhance the sale value.
LIQUIDATION ANALYSIS AND BREAK-UP
VALUE
The turnaround manager will need to prepare an analysis
of the company’s business and assets. An estimate of
the outcome for each class of creditor on both a going
concern basis and a break-up basis is required to inform his
discussions with management of stakeholder groups.
Initially an assessment of the company’s latest balance
sheet, management accounts and asset registers must
be undertaken and it should be established whether the
company’s records are up to date. Where specialist assets
exist it is recommended an expert valuation agent is
instructed to report on the value of the company’s business
and assets on a going concern and break-up basis. The
valuation analysis will distinguish between the assets that
are owned and encumbered and provide a considered
estimate of the value of intangible assets such as goodwill,
intellectual property and trademarks.
The turnaround manager will also need to determine
the liabilities of the company, ensuring that all secured,
unsecured, contingent and prospective claims are
identi?ed. This will require the assistance of management
as it will be necessary to determine liabilities owing under
employee contracts including pensions, landlord claims,
08 Turnarounds
EXAMPLE 5
On an international assignment for a US company in
breach of covenant and under bank work-out department
supervision, it was noted that the French subsidiary with
an intercompany liability of over US$5m had unused
factoring facilities of US$3m. By using the facility to
the maximum much needed cash was up-streamed to
the parent.
hire purchase and rental or contract hires, as well as normal
trade creditors.
Once armed with the values of the assets and liabilities
of the company, the turnaround manager will prepare an
estimated outcome statement showing the likely outcome
for all classes of creditors and will help him determine
whether there is any potential value in the goodwill of
the business, whether it can be preserved, and therefore
whether a turnaround approach is appropriate.
VALUE BREAK FOR SECURED AND
UNSECURED LENDERS
In a restructuring in insolvency, the value that will be
returned to creditors after the costs of the restructuring
process will be distributed in accordance with the statutory
order of priority. Broadly, secured creditors receive the ?rst
distribution, and then unsecured creditors.
The return that each class of creditor receives will be
dependent upon the value of the business and/or its
assets – and how far this can be allocated to creditors in
their order of priority. The point where the cash runs out
is known as the ‘value break’ (see ?gure 3). Those creditor
groups that are underwater ie, where the security that
they hold, if any, entitles them to receive little or no value
for their existing exposure, are unlikely to support an
insolvency-based restructuring of the business. In all cases,
therefore, the creditors with highest ranking security will
need to be supportive of any restructuring proposals that
the turnaround manager puts forward and be comfortable
that there are no signi?cant risks to their position.
SUBSIDIARIES AND NON-CORE
OPERATIONS
Businesses are structured in many ways with situations
varying from a single to a multitude of statutory
entities owning the various parts of the business. These
sometimes, but not always, fall into discrete operating
business units. In approaching the turnaround situation,
the turnaround manager will need a knowledge of what
commercial processes are undertaken within each entity,
and how integrated these functions are, or have to be,
for the group. Shutting down a loss-making entity whose
continued operation is essential to the wider operations
and future pro?tability of the rest of the group should
clearly be avoided!
In simpler group structures there may, however, be
quick wins that the turnaround manager can achieve.
Underperforming, non-essential divisions that are held in
discrete statutory entities but are a drain on the remainder
of the group are obvious candidates to be placed into
an insolvency process such as liquidation, allowing the
turnaround manager to focus on the rest of the business
which can be saved. Again, existing management is
important in obtaining the detailed knowledge required
to make these assessments but so are the company’s legal
advisers who will be able to advise on which entities hold
title to speci?c essential assets and which entities hold the
lucrative contracts that are to be continued by the business
once it has been turned around.
09 icaew.com/cff
Figure 3: The Value Break
£1m
£3m
£6m
£2m
£10m
£12m
£10m
Value of
business/assets
Shortfall to
creditors
Assets vs
Costs & liabilities
in order of priority*
‘Value Break’
?Cost of restructuring (professional fees etc)
?Amounts loaned under ?xed charge
(restricted to secured assets)
?Amounts loaned under ?oating charge
?Shortfall to ?oating charge holder – ‘hair cut’
Secured creditors
Unsecured creditors –
‘out of the money’
* Preferential debts, as de?ned under the Insolvency Act 1986, have been excluded for simplicity. Additionally, in an insolvency, the Insolvency Act 1986 provides that up to £600,000 would be
given to unsecured creditors by way of a preferential debt known as the prescribed part – a ring fenced portion of assets taken from the assets subject to ?oating charge. Again, for simplicity,
this has not been shown.
GUIDELINE
10 Turnarounds
DEFINING THE OPTIMUM CORE BUSINESS
In many turnaround situations the solution adopted will
involve the restructured business focusing on its market
sectors and customers where pro?tability can quickly
be achieved. Forming a view on this will also drive
the structural mechanics of how the business is to be
restructured and the changes to the underlying entities
within the group that need to occur.
REASSESSING THE VALUE BREAK AND
SELECTING THE OPTIMUM PROCESS
Having decided upon the viability of the industry and
the company’s potential position within it once turned
around, a reassessment of the value break and whether
this can be enhanced for creditors or shareholders should
be undertaken. If the costs of the restructuring detract
from the value that can be gained through an insolvency
process then that route should be taken. However, if a
restructuring can be economically undertaken that will
enhance value and push the value break lower down the
order of priority so that more creditors are ‘in the money’,
this route should be followed.
More than one possible way of restructuring the business
to achieve the turnaround will exist and, depending upon
the particular circumstances of the company or companies
involved, all possible methods should be explored and
evaluated by the turnaround manager so that he can bring
into effect his turnaround plan.
CONSENSUAL RESTRUCTURING
Where a broad consensus exists, or can be created, a
consensual approach to a restructuring is often preferable
to a formal insolvency-related approach which usually
impairs the value of goodwill. A consensual restructuring
avoids the costs and stigma of an insolvency process and
the resultant detrimental impact on the business which
the turnaround manager is attempting to save. Entering
a formal insolvency process can typically lead to adverse
press coverage which may in turn drive a change in
customers’ attitudes, and also causes uncertainty for staff,
whose retention and performance may be critical to the
success and survival of the business.
CVAs, SCHEMES OF ARRANGEMENT
AND PRE-PACKS
In assessing business viability and an optimum solution,
the possibility of using these processes should be part
of the evaluation process (see Negotiating the ?nancial
restructuring).
Company Voluntary Arrangements (CVAs) can be
used by a near insolvent company to help reduce and
reschedule payments to its creditors without entering
formal insolvency. A CVA takes place between the company
and its creditors and can be tailored to suit speci?c
circumstances ie, in order to effect compromises and
settlements with a particular creditor or class of creditors.
Typically the terms of CVAs can last for three to ?ve years.
A scheme of arrangement (Scheme) is a compromise or
arrangement between the company and its creditors (or
any class of them) and/or its shareholders (or any class of
them). A Scheme is similar to a CVA; however, it is not an
insolvency process under the Insolvency Act 1986 as it is
proposed by the company under the Companies Act 2006
and requires court sanction.
A pre-pack is a situation where a deal for the sale of a
company’s business and/or assets is negotiated before
insolvency and the sale is completed immediately following
an insolvency appointment. Pre-packs often involve
the sale of the business back to the existing owners or
management. This route is commonly used where the
owners and directors of a business are closely associated
with it and where a speedy transaction is needed to keep
continuity of service to customers and suppliers. Pre-
packs can be contentious and liable to challenge if the
objective is to avoid creditor liability by undervaluation
of the assets transferred to the new venture. Accordingly
care and objectivity, preferably by third parties, should be
taken over business and asset valuations. Pre-packs are not
appropriate where greater value would be achievable for
the creditors in a normal administration.
MANAGING THE BUSINESS
OPERATIONS DURING THE
TURNAROUND PROCESS
THE ROLE OF MANAGEMENT AND
EMPLOYEES
Managing a turnaround is a team effort. A turnaround
manager brings focus, priorities, experience, credibility,
leadership and energy to the process. He takes the
leadership role in managing stakeholder expectations. The
management team continues to manage the day-to-day
business and manage the employees. However, with the
poor performance occurring on their watch, there may
have been functional discord in the team. Identifying that
dysfunction and remedying it is a priority. This may be
simply by changing emphasis in priorities or having to
remove a disruptive in?uence.
A criticism sometimes levelled at turnarounds as
opposed to the more abrupt removal of management
teams that occurs in most insolvency processes is that the
management team which caused the problem still remains.
11 icaew.com/cff 11
In reality in a turnaround the management structure and
team on the departure of the CRO is not the same as the
team on his arrival. The change is evolutionary rather than
revolutionary so that the CRO can preserve the best and
release the non-performers progressively while retaining
essential skills and business knowledge.
CASH FLOW AND TREASURY
MANAGEMENT – 13 WEEK CASH FLOWS
Gaining control of cash ?ow and treasury management
is the immediate priority for survival. Continuous
management of it thereafter is critical. The 13 week
cash ?ow is an essential tool in this process and should be
managed at a senior level, monitored by the CRO and be
understood by everyone in the management team who
has an in?uence on maximising receipts and collections
and committing expenditure and payments.
Table 1 shows a basic receipts and payment format.
Each line should be supported by an appropriate level of
detail and delegated accountability. The report should be
updated weekly and discussed at the beginning of each
week at senior level under the CRO’s direction. Renewed
priorities should be established. The past week’s actual
performance should be analysed and investigated.
SALES (£000s) (Note 1)
Customer / Product / Channel A (Note 2)
Customer / Product / Channel B
Etc – analysis compacted for simplicity
TOTAL SALES
3,859 4,483 (624)
1,979 2,167 (188)
8,771 8,388 383
14,610 15,038 (428)
4,762 4,573
2,269 2,230
9,616 9,368
16,647 16,171
4,376 4,167 4,596 4,773
2,094 2,068 2,036 2,096
7,605 7,768 7,644 7,621
14,075 14,004 14,275 14,490
54,643
26,425
106,920
187,988
INFLOW (£000)
Customer / Product / Channel A (Note 2)
Customer / Product / Channel B
Etc – analysis compacted for simplicity
TOTAL INFLOW
OUTFLOW (£000)
Suppliers
Utilities
Payroll
Capex
Closure / Relocation expenses (excl payroll)
VAT & Sales taxes
Corporate taxes
Debt service
Lease payments
Interest
Etc – analysis compacted for simplicity
TOTAL OUTFLOW
29,230 29,275 (45)
765 1,147 (381)
1,775 2,669 (895)
648 1,306 (658)
215 262 (47)
535 568 (34)
61 47 14
0 0 0
596 436 160
19 83 (64)
2,004 1,825 179
35,847 37,618 (1,771)
12,743 4,840
379 270
1,824 1,932
134 1,303
1,799 203
558 524
970 697
0 0
87 274
0 0
2,126 1,921
20,620 11,964
10,676 5,085 4,762 23,711
330 323 412 355
2,840 56 391 9,923
2,074 173 163 223
2,680 38 0 0
980 392 361 697
2 53 112 2
0 0 0 0
113 146 98 111
0 3 0 19
2,386 2,151 2,668 3,267
22,081 8,419 8,967 38,308
146,518
4,888
47,142
9,005
13,484
6,939
3,953
0
1,567
71
35,948
269,513
NET INFLOW / (OUTFLOW)
Opening Balance
Closing Balance
(14,274) (12,749) (1,525)
89.3%
(13,500) (13,500) 0
(27,774) (26,249) (1,525)
(7,012) (1,880)
(27,774) (34,786)
(34,786) (36,666)
(18,999) 204 9,170 3,042
(36,947) (55,946) (55,743) (46,573)
(55,946) (55,743) (46,573) (43,531)
(15,757)
(27,774)
(43,531)
Facility
Headroom + / (-)
(50,000) (50,000) 0
22,226 23,751 (1,525)
(50,000) (50,000)
15,214 13,334
(50,000) (50,000) (50,000) (50,000)
(5,946) (5,743) 3,427 6,469
(50,000)
6,469
Notes:
1. Sales forecasts are included as a reality check to ensure that cash in?ows are not out of line with sales over time.
2. Analysis should be appropriate to the business and its cash ?ows. This may be by customer, by product, by distribution channel etc. Sales receipts from factoring should be identi?ed separately.
3. The forecast shows that cash will remain within facilities for the 13 weeks as a whole but action to delay payments or accelerate recipts will need to be taken in weeks 35 & 36.
6,097 4,864 1,233
1,832 592 1,240
13,644 19,413 (5,768)
21,573 24,869 (3,296)
2,537 6,401
900 568
10,171 3,115
13,608 10,084
1,988 3,594 4,454 8,159
361 364 3,130 6,675
733 4,664 10,553 26,515
3,082 8,622 18,137 41,350
62,613
37,270
153,874
253,757
Week 25
Actual Fcast Var +/(-)
FORECAST
26 27 35 36 37 38
13 Week
TOTAL
Table 1:
13 Week Cash?ow Forecast Date xxxxx (Week 26)
Forecast accuracy:
(Note 3) (Note 3)
GUIDELINE
12 Turnarounds
concessions with bene?t to the employees in job retention
and the company in retaining essential skills while
conserving cash.
Other overheads that should be cut or deferred while
the turnaround is progressed are those not required
for immediate bene?t to revenue generation such as
advertising and marketing, business rates on surplus
properties, property maintenance, and non-essential travel.
However, such measures come with their own dangers
attached and while a CRO needs to make dif?cult decisions
a degree of judgement is required not to do irreparable
damage to the business.
In manufacturing businesses materials often represent a
signi?cant cost. Reducing material cost is a more long-
term process but cost reduction task groups should be put
into action. Areas to be considered are supplier change,
material substitution, design change and process change.
Additionally a CRO should consider dropping low margin
products from a range to reduce unpro?table activity. Care
should be taken to ensure that decisions are taken on the
variable cost basis and not the fully absorbed cost basis
which will just leave ?xed overheads to be recovered on
other product lines.
PERFORMANCE ENHANCEMENT –
MARKETING AND TOP LINE MANAGEMENT
While it is not unknown to plan or effect a turnaround by
increasing prices or sales volumes it is normally unrealistic
to plan a turnaround on short-term revenue increases. But
the top line performance needs as much attention as the
cost base. Preserving present revenue levels is essential
to cash generation and a return to pro?tability. In the
longer-term having a credible marketing plan that supports
business growth is important in attracting new funders.
Again, ensure the plan is based on credible market data
and achievable market shares. The ‘hockey stick’ revenue
forecast, where revenues grow slowly at ?rst and then
shoot up, is dif?cult to sell to doubting stakeholders and
potential funders.
The CRO will quickly initiate or undertake a competitive
analysis of the company’s product lines and where possible
seek selective price increases. External resistance is to be
expected. Internal resistance should be tested by factual
evidence. Sales departments can be reluctant to raise prices
but, if the evidence supports a price rise, resistance can be
tempered by incentivising incremental sales and margins.
EXAMPLE 6
On an assignment in Germany a 10% wage reduction
was achieved as part of a broader recovery plan with the
essential cooperation of union representatives.
Too often this is neglected and shortfalls are rolled
forward into the future. Moving the goalposts is weak
and ineffective management. Percentage accuracy of
weekly performance should be measured and underlying
causes investigated and remedied. Anything less than
consistent 95% accuracy levels will cause too high a level
of unpredictability and risk tripping an insolvency trigger.
FINANCIAL AND NON-FINANCIAL
PERFORMANCE INDICATOR REPORTING
Once control is established over cash the CRO will
concentrate on ensuring that timely and accurate reports
of all essential ?nancial and operating performance data
are received. The survival of the business will depend
on continued order intake and improved operational
ef?ciencies. The critical quality of the cash ?ow reporting
will depend on the accuracy of sales forecasts and
production forecasts. Working capital levels will depend
on the accuracy of production schedules and resource
allocation. Key information should be available on a
frequent and regular basis. The CRO should be aware of
the factors affecting the normal rhythm of the business.
In this way activity and actions can be prioritised. In the
short-term survival and achievement of a stable platform
results from immediate knowledge of where the leaks
are so they can be attended to ?rst. Without stability and
con?dence in the forecasts a CRO cannot command the
necessary credibility to engage effectively with stakeholders
and negotiate with any certainty of deliverability.
PERFORMANCE ENHANCEMENT –
COST REDUCTION
Turnaround is not just about cutting costs and
restructuring balance sheet debt. However, cost reduction
is the most practical way to improve the bottom line in
the short term. In most companies the largest costs are
employee costs but redundancy programmes are cash
intensive and disruptive. Nevertheless, they are usually
the easiest way to cost reduction as control is in the hands
of management. They should be implemented as soon
as cash availability allows and should be done with due
regard to contractual and legal requirements. Subject to
obligations to adhere to consultation periods the process
should be as quick and clean as possible to remove
uncertainty for those not affected, allowing the remaining
employees to put the upheaval of redundancy behind
them and concentrate on the future.
It may be possible to reduce costs by engaging with
employee representatives and negotiating short-term
working arrangements and wage reductions. This is an
option when there is reason to believe that activity level
reductions are temporary and will increase.
In the 2008/9 downturn many UK ?rms achieved such
13 icaew.com/cff
Companies have more leverage over their customers
than they may appreciate. Resourcing supply from any
supplier can be unwelcome and costly for a customer as
supplier quali?cation processes may be time consuming
and bureaucratic. So while it is important to maintain
quality and delivery performance a customer may be open
to reasonable pricing support if properly approached. Just
in time supply (JIT) and single sourcing are not uncommon
in business and a company may be an important supply
chain partner. A customer may also want to keep
competitive tension in the supply chain so will not willingly
see a valued supplier fail.
The auto industry is a prime example of JIT practice.
Auto assemblers do not want to see supply chain disruption
as non-availability of a £100 part could close a £10m per
day production line. The company may have critical dies
and moulds, removal of which could be problematic. In
the aerospace industry supply chain companies are closely
monitored for quality and traceability. Supplier change is
not an overnight decision. In such cases scope exists for
price movement and should be carefully negotiated so that
long-term relationships are not damaged.
SUPPORTING MANAGEMENT
IN COMMUNICATIONS AND
STAKEHOLDER MANAGEMENT
EMPLOYEES AND EMPLOYEE
REPRESENTATIVES
Controlling the content of external communication starts
with controlling communication internally. Once a CRO
or turnaround manager is appointed employees will be
contacted by customers, suppliers and service providers
assessing their risk and exposure. Ensuring the right
message gets back is important. From the outset a clear
message should be communicated internally and advice
on how to ?eld calls should be given. The message should
be objective and factual. Employees should be made aware
that inaccurate gossip or alarmist talk can be detrimental to
the recovery process and could fall into the wrong hands,
particularly competitors seeking advantage. Wherever
possible, internal communication should be face to face
and ?ltered down the organisation through the normal line
management route. Line management should be informed
ahead of union representatives to demonstrate that
management are in control of the process and to avoid
misleading interpretations. The core message should be:
‘We have issues that have been identi?ed, are manageable
and are being managed. With your continued support we
will resolve them’.
MAJOR CREDITORS AND CREDIT INSURERS
Early communication to all creditors should be made as
quickly as practical, especially to individual major and
critical suppliers. No news is bad news in the early days
of a CRO appointment. Maintaining supplier con?dence,
credit lines and supply chain performance is essential.
Where a supplier has credit insurance the insurer should
be included in the dialogue. It is the insurer and not the
supplier who has the vested debt risk interest in avoiding
insolvency.
Suppliers want the turnaround to succeed in order to
get paid and retain a customer. They also want to minimise
their risk by not increasing exposure and where possible
reducing it. Pressure for early repayment of overdue
amounts should be resisted without the quid pro quo
of continued supply on normal terms while reducing
the overdue level to normal terms over time and as
funds permit.
Communicating the message that threats of legal action
and supplier holds may force an unnecessary insolvency
event should be carefully handled. Normally when a CRO
is appointed there is already a history of missed promises.
Reasonable payment plans should be negotiated. Payment
plans should be achievable but equally they must be
adhered to.
In order to concentrate on the major creditors it is
sound policy to keep smaller creditors up to date. The
80/20 rule often applies to the creditors’ ledger structure.
The 80% of small creditors making up 20% of the liabilities
are time consuming to manage and more likely to seek
court action. It is better to concentrate time and resource
on the critical larger suppliers than dissipate efforts in
controlling the smaller suppliers with less vested interest
in the company’s survival and less experience of recovery
from distressed situations.
As the trade creditor payment situation improves and
there is a positive story to tell it will be time to address
the whole supplier base with more accurate information
of progress. A professionally staged supplier presentation
event is a practical way of demonstrating progress and
restoring the whole supplier base to normal credit terms.
However, this should not be undertaken while certain
suppliers remain hostile. Negotiations with less supportive
suppliers should be on a one-to-one basis.
KEY CUSTOMERS
It is very easy in the early stages of a turnaround to be
diverted from customer support by pressing crises on the
cash and supplier fronts. However, a turnaround cannot be
achieved without customers and early communication can
hold customer loyalty while a clearer picture emerges. As
the turnaround progresses, customer con?dence translates
GUIDELINE
14 Turnarounds
EXAMPLE 8
In a turnaround and restructuring of a signi?cant publicly
quoted company involving a debt to equity swap and
new capital increase, the notice periods for extraordinary
meetings to authorise shareholder dilution imposed
time constraints that affected operational and cash ?ow
issues. Minority shareholder groups were hostile to the
proposed dilution and attempted to frustrate the process
to improve their terms. The delays increased liquidity
pressure and threatened to derail the turnaround plan.
The CRO commissioned an independent fairness report
to determine a reasonable valuation of the share price
for the proposed capital change and led the subsequent
discussions that resulted in shareholder acceptance.
into reliable sales forecasts which become the basis on
which a credible business plan can be built. A CRO needs
to engage with customers to understand the market drivers
of the plan upon which he will restructure the business and
negotiate with funders.
Customers may also be contributors to the problem
by deferring payment. Overdue accounts should be
aggressively chased to improve liquidity. Opportunities for
customer support by early payment discount or fast pay
programmes should also be sought. This is not uncommon
in industries where supply chain disruption could result in
costly line shut downs and lost production.
LANDLORDS
Landlords are key stakeholders, particularly in the retail
sector. English law lease agreements are heavily biased in
the lessor’s favour with onerous termination clauses and
upwards-only rent reviews. In turnarounds with a large
leasehold estate, exiting from onerous lease obligations has
historically met strong resistance from landlords. As rental
payments are traditionally quarterly in advance they have
a signi?cant adverse cash ?ow effect and landlords may be
quick to seek court redress for late payments. Relief from
leasehold contracts on properties surplus to requirements
will depend on negotiating leverage. Early communication
should begin to avoid provoking a court payment order
and to seek a possible reduction in rent, a new lessee, or
to sublet the property. Where onerous leases are a major
issue and landlords are reluctant to seek commercial
compromise the threat of, or use of, a pre-pack or formal
administration may lead to a more balanced commercial
compromise.
PENSION TRUSTEES
Many companies have closed their de?ned bene?t pension
schemes in favour of de?ned contribution schemes where
the liability for future pensions is passed to the insurer.
However, there may be residual pension liabilities under
closed de?ned bene?t schemes or a section, usually for
EXAMPLE 7
On a major international auto parts supplier assignment
the US parent was demanding loan repayments from
its European subsidiaries to meet short-term US needs,
which would have forced the European subsidiaries
into administration. By approaching two major US auto
manufacturers a fast pay programme was initiated for
the parent that enabled the European subsidiaries to
be restructured outside of formal process. The US auto
manufacturers bene?ted as their European factories would
have been at risk if the supplier’s European subsidiaries
had ?led for insolvency.
senior executives, may still be a de?ned bene?t scheme.
Pension liabilities are subject to regular actuarial valuations
and shortfalls are generally the unsecured liability of the
company. Trustees have certain rights and obligations
to seek contributions to redress shortfalls arising from
valuations which may also be provoked by a sale or closure
of all or part of a company. These contributions may have
a signi?cant effect on cash ?ow and future pro?tability.
In some cases resort to administration or pre-pack may
be required for all of the business or perhaps an affected
subsidiary. Early appreciation of the pension obligations
is necessary and, being a complex area and subject to
evolving legislation and practice, specialist advice should
be taken.
DIRECTORS AND DIRECTORS’ LIABILITIES
Directors have statutory obligations and potential liabilities
when a company is nearing or in the zone of insolvency. To
be effective a CRO, who is likely to be a de facto or shadow
director, must maintain the con?dence and support of
all the directors. From the outset the CRO should ensure
that the directors are fully appraised by appropriate legal
counsel of their responsibilities and duties. In order to
protect his personal interests the CRO should monitor
the directors’ actions and ensure signi?cant decisions are
properly discussed at board level and properly recorded
in the minutes. Regular communication with the directors
is needed to ensure the appropriate level of corporate
governance is adhered to.
SHAREHOLDERS
While shareholders in a distressed company often have less
?nancial leverage than secured debt and less commercial
leverage than trade creditors they do have statutory rights
that effect changes in the composition of the board and
the capital structure. If a company is a public company
these are also governed by stock exchange rules.
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Changes in capital structures will require shareholder
approval and meetings called with proper notice. This can
dictate both the form and pace of the turnaround. They
also have powers of appointment of directors and their
interests cannot be ignored.
In private companies the directors and shareholders are
often the same people. They may have a con?ict of interest
in protecting their ?nancial interests as shareholders and
performing their duties to other stakeholders as directors.
A CRO needs to monitor this ?ne line carefully and with
legal guidance to ensure that all stakeholders’ interests are
correctly managed.
FUNDERS
Banks are the most common source of funds and normally
have the important negotiating leverage of being
secured funders. However, as capital structures become
more complex so too does the communication and
management of interests. In the simplest form a company
will have one bank and re?nancing discussions are
relatively straightforward. Whatever the level of complexity
the success or otherwise of discussions with funders will
depend on the provision of regular, accurate and credible
?nancial information.
In more complex cases there may be different layers of
debt with senior and junior debt having different rankings
and security. Debt may have been syndicated across a
group of banks and while communication will normally be
through an agent bank, standstill agreements and waivers
may require majority agreement and restructuring may
require unanimous consent. The lenders’ interests are not
always aligned and discussions can be time consuming.
Minority hold outs to maximise leverage can endanger
the turnaround process. It is essential that the process of
discussion and the need for ever more ?nancial information
does not detract a CRO from the process of running the
business and managing the operational turnaround.
Demands on time need to be carefully managed and
responsibilities delegated and monitored effectively.
The negotiation process of the ?nancial restructuring,
particularly leveraging off the threat of insolvency, is
addressed in Negotiating the ?nancial restructuring. These
negotiations are fundamental in ensuring the company
can emerge from its distressed position with a level of
debt on its balance sheet that operational cash ?ows of
the restructured operations can support. For this reason
a turnaround is a combination of success in stabilising a
business and charting a credible recovery, and negotiating
a funding structure that does not impose excessive
leverage on the emerging business. The more successful
the operational turnaround process is then the easier
it will be to negotiate an acceptable level of debt with
the funders. It is in their business interest to lend to
pro?table companies.
ESTABLISHING THE FORECASTS
AND BUSINESS PLAN
THE SHORT-TERM SURVIVAL AND
RECOVERY PLAN
At the outset the emphasis is on liquidity, avoiding
insolvency triggers, communications to critical stakeholders
and short-term cost control. The turnaround manager
must act quickly and take the leadership role in establishing
short-term actions and delegating responsibilities for
action. There is normally not time for a formal planning
process so a series of quick ?xes should be documented
and regularly reported against. This should be daily at ?rst
and moving to less frequent action and follow-up meetings
as circumstances permit. All senior management should
be involved and by conference call for remote executives
if necessary. The short-term cash forecast will be the driver
of the actions. The issues raised and the performance of
management in resolving them will highlight key problem
areas and problem people. The process itself will buy time
for a more in-depth assessment of the business issues and
serve as a basis upon which to formulate a longer-term
business plan.
THE BUSINESS PLAN
Most companies have a budget and planning process and
some have a strategic planning process. These processes
should be used as a basis of reassessing the current
strategies and operating plans and creating a revised
?nancial plan which will serve as the primary document in
negotiating ?nancial restructuring with the stakeholders.
As existing plans have invariably been missed there will
be doubt over the effectiveness of the planning process
and its relevance to current circumstances. A common
de?ciency of plans is that they have been prepared at
too remote a level from the operational management.
They can be over optimistic and without buy-in from the
operating personnel. Accordingly there can be a lack of
ownership from the people responsible for achievement
and a corresponding likelihood that targets will be missed.
The turnaround manager must avoid this pitfall and
ensure that the new plan is constructed from the bottom
up and not the top down; from operating departments’
reasoned input and not from the ?nance department
or managing director’s wish list. It must be based on
reliable external market data, achievable market shares
and supportable gross margins. Operating costs should
be zero-based and all unnecessary costs eliminated.
GUIDELINE
16 Turnarounds
Restructuring costs for disposals and redundancy
programmes should be built in. Cash ?ow forecasts should
be on a receipts and payments basis and highlight major
exceptional items. From this plan funding parameters can
be established which will serve as the basis for negotiating
re?nancing alternatives. Plans should cover a ?ve year time
horizon with the ?rst two years monthly and following
years quarterly, particularly if the business has a seasonal
nature.
VALUATIONS AND INDEPENDENT
BUSINESS REVIEWS
It is probable that as part of the negotiating process
existing or potential funders will require independent
assessment of asset values and of the viability of the
business plan from reputable business valuation companies
and reporting accountants. Consideration should be given
to the timing of such assessments as they add expense to
the process at a time when costs are under scrutiny and
cash availability tight.
Asset valuation may be required as part of the lenders’
assessment of liquidation value described in the next
section. They can be on a break-up basis and a going
concern basis, the former being part of the liquidation
value.
Independent business reviews (IBRs) may be requested
by senior lenders at a later stage in the turnaround
process when the business plan has been completed
and re?nancing negotiations have started. These
are normally carried out by ?rms of accountants or
turnaround specialists.
EXAMPLE 9
On an assignment of a golf club and chalet development
a bank lender with £750,000 of secured loans and
overdrafts called in the overdraft while the development
was still in process. An independent valuation of £1.7m
gave suf?cient comfort for the bank to maintain the facility
while alternative funding was sought. Administration
was avoided.
EXAMPLE 10
On an assignment of a large international quoted
company the syndicate members requested an IBR
covering both the break-up value in administration
and the business plan which had a proposed debt to
equity swap and payment-in-kind (PIK) note component
in the debt restructuring, the PIK note entitling the
holders to receive deferred payment when certain future
performance criteria were met. The company business
plan forecast a full recovery for the syndicate over an
eight-year period compared to a possible 30% recovery in
administration. The IBR forecast a possible 35% recovery
in administration and a 90% probability of full recovery
over time. The conclusion in the IBR was critical to
acceptance of the plan by the various syndicate members
who required an independent appraisal for their respective
credit committees.
TAXATION ISSUES
While taxation may not be uppermost in the minds
when trying to turn around a business almost any group
reorganisation will have a tax effect on the business and an
evaluation of the impact of the tax affairs of the business
may become important in deciding the best route to take.
For example, if tax losses cannot be used by a restructured
business this will have a material impact on its future cash
?ow. Tax losses may generally be preserved outside of
insolvency but lost in an insolvency or change of business.
The turnaround manager should seek advice from tax
specialists before embarking upon a ?nancial restructuring.
A restructuring involving forgiveness of debt, disposal of all
or part of a business, or a debt to equity swap may have a
tax impact and the turnaround manager should never be
faced with a situation where he discovers late in the day
that his proposed restructuring, that would otherwise have
succeeded, has been undermined by lack of consideration
of tax issues and their effect on cash balances early on in
the process.
Taxation issues that may arise in a turnaround situation
include:
• potential corporation tax charge on any buy back of
debt at a discounted amount as the difference between
the face value of the loan and amount paid may be
treated as pro?t if there is no change of control of the
company;
• potential tax on capital gains following the sale of assets
or business segments;
• stamp duty that may be payable if the company’s
restructuring involves the converting of debt into some
form of equity;
• loss of all or part of carry forward tax losses; and
• VAT on sale of assets including goodwill.
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NEGOTIATING THE FINANCIAL
RESTRUCTURING
LEVERAGING OFF ENTERPRISE VALUE
PRESERVATION
In order to achieve any turnaround that requires the
consent of creditors, the turnaround manager will need
to convey the bene?cial impact of the creditors’ support.
Central to this will be his demonstration that preserving
the value of the business through supporting the
turnaround will result in higher returns in the longer
run than in the shorter term through the sale of
individual assets.
MANAGING THE DIFFERENT LEVELS IN
THE CAPITAL STRUCTURE
A ?nancial restructuring with a company’s debt being
compromised will fundamentally change the net asset
value of the business. The approach adopted should be
fair and re?ect the sacri?ce that creditors have to make.
Shareholders cannot expect to retain their existing
economic interest and control intact when the holders
of debts with greater security over the company and its
assets are sacri?cing that position in order to save the
business. Ultimately any ?nancial restructuring is likely
to involve either a delay in or reduction to the amount
returned to creditors and can also involve them taking that
return perhaps in equity, PIK notes or convertible loans
through their assumption of formal or partial control of
the business. While shareholders may be unhappy at their
dilution and disenfranchisement, it will more likely result
in a better chance of recovery of their investment if it
re?ects the economic reality that the turnaround manager
was initially faced with and his turnaround plan seeks
to address.
ALTERNATIVES TO CONSENSUAL
RESTRUCTURING
A consensual approach to restructuring of a company’s
business and assets, such as a debt for equity swap or a
buy back debt by a company, is generally preferred as it is
usually quicker, cheaper and avoids the perceived stigma of
a formal insolvency process.
However, the turnaround manager may ?nd that a
consensual approach is not achievable due to continued
creditor pressure and therefore in the UK a process under
the Insolvency Act 1986 or the Companies Act 2006
will need to be considered. This may occur in situations
where the company’s cash ?ow is insuf?cient to service
even restructured debt or where the company’s creditor
population is large and complex and creditors are not
minded to support a proposed consensual restructuring. In
cross-border situations, the processes and issues will differ
from those in the UK.
ADMINISTRATION
Administration, or the threat of it, is increasingly
intertwined with turnaround where creditor pressure or
onerous liabilities cannot be consensually resolved. In the
event that a company is insolvent or is about to become
insolvent, an Administrator can be appointed under the
provisions of the Insolvency Act 1986 to manage its affairs.
The company and its assets are placed under the control of
an Administrator and the protection of the court with the
rights of unsecured creditors frozen until the Administrator
produces his recommendations on how to deal with the
company’s affairs and assets. The options are to continue
trading the business while seeking a buyer, to close the
business and seek a buyer or alternatively if no buyer
emerges, to sell off the assets of the business for the bene?t
of the creditors.
Administrators can be appointed either out of court by
the company, its directors or by the holder of a qualifying
?oating charge or by the court upon application of the
company or its directors (or one or more of its creditors,
the holder of a qualifying ?oating charge or an appointed
liquidator).
The statutory purposes of an administration are:
• to attempt the rescue of the company as a going
concern;
• in the event that the point above is not possible, to
achieve a better result for the creditors as a whole than
would otherwise be achievable in a liquidation; or
• when the above are not reasonably practicable, to realise
the assets for the bene?t of one or more of the secured
or preferential creditors.
Where a rescue of the company itself cannot be
achieved the Administrator’s efforts would be directed
towards maximising the return to creditors from a sale of
the business and its assets as a going concern in whole
or in part. This could take the form of a sale following a
marketing campaign in which the business is offered for
sale. During the marketing campaign the business may
continue to trade if there are suf?cient funds to cover
operations or it may be closed.
CVAs, SCHEMES OF ARRANGEMENT
AND PRE-PACKS
A CVA is a process under the Insolvency Act 1986 in
which a company does not need to be insolvent to use
these provisions. It is managed under the control of
an insolvency practitioner, and creditors are treated in
GUIDELINE
18 Turnarounds
accordance with the provisions of the Insolvency Act 1986.
CVAs may only offer enhanced returns to one group of
creditors in speci?c circumstances if 75% by value of
debt of all voting creditors, excluding secured creditors
unless they have valued their security, consent to the
CVA proposal. CVAs are usually considered as a viable
alternative in any restructuring situation, particularly as a
means to cram down dissenting creditors due to the 75%
voting requirement for approval of the CVA. There are no
unsecured creditor or shareholder class issues involved in
CVAs and they are usually quicker, simpler and cheaper to
implement than a scheme of arrangement (a Scheme), and
they do not involve the same degree of court involvement.
A Scheme is a court driven process pursuant to the
Companies Act 2006 and is normally used only where the
company’s business and structure is large and complex.
As noted above, creditor classes are determined by their
economic stake in the business and a Scheme can treat
different creditor classes differently. A Scheme can bind
creditors and shareholders who have no economic interest
in the company’s assets and is typically used in ?nancial
services businesses such as insurers and lenders.
Pre-packs attempt to avoid the perceived negative
stigma of a lengthy insolvency process and are considered
to be potentially the best way to extract value from a
business when the risk of damage to reputation and loss of
customers and key staff through negative publicity is high.
Pre-packs allow time for due diligence to be undertaken in
advance while causing minimal disruption to the business.
Pre-packs can be seen as a controversial approach and
great care must be taken to consider the transaction
carefully to ensure that creditors’ interests are not harmed
by the sale. As the business and assets are not usually
openly marketed, there is a risk that the best price has not
been obtained. Administrators have a duty to maximise
returns to creditors and need to be satis?ed that any
pre-pack represents the best, or indeed only, deal available
to creditors in the circumstances. Accordingly care should
be taken to justify valuations by independent means
where possible.
PENSIONS AND LEASES
As part of his assessment of the company’s liabilities, the
turnaround manager will have identi?ed whether the
company has a de?ned bene?t pension scheme and/
or a large number of leases. In these situations, special
consideration will need to be given to any proposed
restructuring of the company and its business and the
turnaround manager will need to communicate with these
stakeholders from the outset.
Should the company’s de?ned bene?t pension scheme
have a large de?cit, it is common for this amount to
represent a considerable part of the total amount of
unsecured creditors. The company has various obligations
to the trustees of the pension scheme, including a
requirement to keep the trustees informed of the
company’s situation. In the UK, the Pensions Regulator
and the Pension Protection Fund have numerous legislative
powers in this situation and will need to be consulted in
relation to the company’s proposed restructuring.
In the UK the Nortel ruling in the High Court in 2010
created uncertainty in relation to whether or not a pension
scheme de?ciency should be treated as an expense of
an insolvency process, thereby ranking ahead even of
the administration fees, or as an ordinary unsecured
creditor. Accordingly, this will have an impact both on
the willingness of an insolvency practitioner to accept an
appointment if payment of fees is in doubt and on the
return to unsecured creditors. Both the likely amount and
its priority must be considered by the turnaround manager
when formulating his restructuring plan.
Should the company have excessive and/or onerous
leases, consideration needs to be given to how these will
be dealt with as part of the overall restructuring. In certain
situations, the formal restructuring processes available may
assist with the disposal of surplus leases at terms acceptable
to the affected landlords or may also allow the company to
vary onerous rent level or payment terms under continuing
leases. The CVAs of large retail groups during the 2008-
2010 recession are examples of how CVAs can be used
to deal with onerous leases. However, landlords can be
reluctant to compromise their legal rights unless there are
overwhelming commercial bene?ts to themselves.
MANAGING HOLD OUTS
A hold out is a situation where a minority group of
creditors, normally of a speci?c type or class, have suf?cient
rights to block restructuring proposals that the company
or an of?ce-holder is attempting to put into effect through
the restructuring method being adopted. The purpose of
this approach is to extract concessions from the proposed
settlement with creditors that are not re?ective of their
relative economic interests. A turnaround manager will be
keen to avoid such collective obstruction to his turnaround
plans. It will be important to obtain legal advice early on in
the process where a complex restructuring is contemplated
so that he can be aware of the relative positions that
different creditor groups may take – or the potential
grounds on which he can challenge such collective action,
if necessary by resorting to the courts. Various options to
cram down hold outs may be considered and resorting
to CVAs, pre-packs or schemes of arrangement can be
required to achieve a settlement. Sometimes merely the
threat of such action can be suf?cient to secure agreement.
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EXITING THE LEADERSHIP
ROLE
A CRO’S ROLE SHOULD EVAPORATE
WITH TIME
It is not possible to forecast exactly when a CRO should
leave an assignment. In practice it will become self-evident
as the new management structure demonstrates its ability
to perform and hit plan targets. In the event that the
company is disposed of as part of the turnaround, it will
be probably when the disposal is complete and the buyer
takes control. It is normal that the need for supervision
will also reduce from full time to part time as the
business recovers.
CHOOSING THE EXIT DATE
Company internal management may wish to expedite
the exit date for both cost and independence reasons.
However, the concerns of other stakeholders should be
taken into consideration. Customer con?dence may be
eroded by too early an exit. Management credibility may
not have been suf?ciently restored for suppliers to maintain
credit lines. Above all the con?dence of funders needs to
be maintained. Not all turnaround recoveries go exactly
to plan. Signi?cant deviations may need renegotiations of
?nance terms.
MAINTAINING A MENTORING AND
MONITORING ROLE
Having built up knowledge of the business and gained
the con?dence of internal and external stakeholders,
shareholders or boards may request that the turnaround
manager maintains contact either in a non-executive
director role or as an external adviser. This may also be a
requirement of the ?nancial restructuring terms.
EXAMPLE 11
At a subsidiary of a US auto supplier the US parent
terminated the CRO against advice once an upturn in
performance had started and a new managing director
installed. The new management team could not maintain
hard won customer con?dence and key contracts were
lost. The CRO returned within a year but only to put the
company into liquidation.
MANAGING INTERNATIONAL
AND CROSS-BORDER ISSUES
Business is global and so too is business distress. Many
large businesses and SMEs in the UK have overseas
subsidiaries which can be dependent on intercompany
trading. Turnaround managers can be faced with
immediate insolvency issues in other jurisdictions where
insolvency laws and directors’ liabilities are different
from the UK. Knowledge of distress moves quickly and
a turnaround manager could be faced with a potential
insolvency ?ling of a subsidiary which could have
signi?cant knock-on effects throughout the group.
Recognising the dangers and acting quickly to seek
competent local advice is necessary.
INSOLVENCY TRIGGERS AND DIRECTORS’
LIABILITIES IN KEY JURISDICTIONS
In most jurisdictions the most pressing insolvency trigger
is a lack of liquidity. In some it may be a balance sheet test
of insolvency in which asset and liability valuations may
be unclear and subjective. And because directors’ liabilities
can be perceived as more onerous than in the UK, local
directors may dash to the courts to ?le for insolvency when
alternative actions could prevent this.
When taking an appointment in an international group
a CRO should make an immediate assessment of subsidiary
insolvency risk and put into place measures to control and
monitor the situation.
EXAMPLE 12
In an assignment of a distressed international group
with its continental European subsidiaries managed from
Brussels, the local managing director made a decision
to ?le for Belgian insolvency because of personal liability
concerns raised by his own legal adviser. The UK-based
CRO paid an immediate visit to Brussels and, acting
under the corporate legal counsel’s advice, relieved the
managing director of his position. The ?ling was averted
and in due course the European subsidiaries disposed of
to an Italian buyer.
GUIDELINE
20 Turnarounds
MANAGING CASH IN A CROSS-BORDER
TURNAROUND
Critical to the management of overseas subsidiaries is
the management of cash in each subsidiary. Although
larger companies with centralised treasury functions may
have daily cash sweeps channelling cash balances into a
centrally controlled account it is more normal for most
subsidiaries to have their own banking facilities and control
of cash. At an early date these subsidiaries should be
incorporated into the 13 week cash ?ow reporting regime.
It is human nature for local ?nance managers to protect
the local company position. Reports may understate
cash availability or headroom. Third-party payments may
be made from available funds ahead of intercompany
payments denying a fellow subsidiary with a more pressing
cash need. Monitoring the use of intercompany funds for
the optimum group need requires regular reporting and
regular checking, if possible by having internet access to
subsidiary bank accounts.
RISKS AND REWARDS
FEE STRUCTURE AND BILLING
ARRANGEMENTS FOR NEAR INSOLVENT
CLIENTS
Getting assignments is one challenge. Getting paid is
another. By de?nition a distressed company has many
con?icting and pressing cash needs. A method of assuring
payment is fundamental because without it a professional
becomes a ?nancial stakeholder and objectivity will be
eroded. Most CROs and restructuring ?rms require a
deposit equating to two or three weeks’ estimated fees to
be paid in advance of starting work with weekly billings
for immediate payment so that the deposit covers any
outstanding fees. To ensure transparency the fees should
be built into the 13 week cash forecast. Stakeholders
usually recognise the bene?t of professional advice to their
position and willingly accept the arrangements as if they
were payroll obligations in their own organisations.
EXAMPLE 13
On an assignment involving 15 subsidiaries in nine
European companies the UK-based treasurer and CRO
chaired daily cash conference calls monitoring cash usage
and sanctioning payments above a pre-determined
minimum threshold. By husbanding scarce cash resources
the group avoided an unintended insolvency trigger in
any of the subsidiaries while a longer-term strategy and
plan was determined.
SUCCESS FEES
Company owners and directors often promote the concept
of success fees as it clearly aligns the turnaround manager’s
interests with their own. How much and when they are
activated will depend on the nature of the assignment.
It is preferable that they do not constitute the major
percentage of total fees. They should be capable of clear
de?nition and measurement, and where possible easily
recognisable milestones in the turnaround process. Once
a turnaround is achieved a CRO has little negotiating
leverage in claiming disputed amounts. Possible milestones
are: return to cash positive operations, return to
pro?tability over a three-month aggregate period, disposal
of a subsidiary, securing a re?nancing agreement, and exit
from a bank work-out.
EQUITY STAKES
In larger companies this may be considered where the
amount is insigni?cant to the total equity and stakeholder
interests are not compromised by a lack of objectivity. In
some smaller assignments, where the business would not
ordinarily be able to afford the reasonable fee level of a
turnaround manager, giving an equity stake may be the
only way a company can engage a turnaround professional
and save the company from bankruptcy. This is especially
relevant to private companies where the interests of both
the shareholders and the turnaround manager can be
aligned to saving the business. Such arrangements should
be transparent to other signi?cant stakeholders to ensure
the integrity of the process is not undermined when it
inevitably becomes known.
SUMMARY AND
CONCLUSIONS
Effective turnaround management involves a combination
of operational and ?nancial skills and an appreciation
of the legal issues affecting directors’ liability and the
insolvency process. It requires the experience to inspire
con?dence in management, the integrity to command
trust and respect among all stakeholders and the tenacity
to persevere to reconcile often con?icting objectives. It is
a team effort involving internal management and external
advisers focused on the objective of enterprise value
preservation.
The start is controlling liquidity to achieve a stable base
to allow time to determine the viable core business and
develop a credible business plan. Implementation of the
plan and negotiation with the stakeholders using whatever
leverage exists follows, during which time an appropriate
management team can be established to take the business
forward, and a funding structure can be negotiated which
the new business model can support from operational
cash ?ows.
Turnaround and restructuring is evolving towards
consensual restructuring as a preference over formal
insolvency where value can be preserved, while leveraging
negotiated concessions off the threat of insolvency or by
using available processes to avoid onerous legacy costs.
It can often be a ?ne judgement line between ?ling for
insolvency to seek protection from pressing creditors, or
attempting a turnaround and ?nancial restructuring in an
environment of creditor pressure and legal threats and
counter threats.
Legislation and process are evolving too, attempting
to effect an optimum balance between creditor and
debtor interests. The legislation provides the framework
in which the turnaround is effected. It is the professional
team’s management of the stakeholders’ often con?icting
objectives that determines the optimum process and the
optimum result.
While customers and key employees are liable to leave
after a ?ling taking goodwill with them, rescue outside
of formal process driven by competent turnaround
professionals will, where a viable core business exists,
afford the better solution to the bene?t of all stakeholders.
It is also a more ef?cient process of value preservation and
use of capital for society in general.
21 icaew.com/cff
AUTHORS
Alan Tilley
Principal
Bryan, Mansell & Tilley LLP
T +44 (0)20 3178 4902
E [email protected]
David Bryan
Principal
Bryan, Mansell & Tilley LLP
T +44 (0)20 3178 4902
E [email protected]
David Bryan is a founding principal of Bryan, Mansell and Tilley LLP and an
experienced hands-on senior ?nancial manager with extensive experience
working with international and UK companies in restructuring and
improvement. He has operated at CFO level in large and SME companies in
the UK, US and Continental Europe and has many years experience with public
and private equity owned businesses. Industry experience includes automotive
supply and commercial vehicle manufacture, industrial systems and services.
David is on the board of TMA UK and TMA Europe.
Alan Tilley is a founding principal of Bryan, Mansell and Tilley LLP. He has
signi?cant expertise in turnaround and restructuring, managing the complex
issues in preserving enterprise value while operating in the zone of insolvency.
He is a frequent speaker on cross-border European restructuring and has written
several articles on the subject. He is the 2008 recipient of the TMA International
Chairman’s award for outstanding service to the international turnaround and
restructuring profession and won the Turnaround Practitioner of the Year award
at the 2010 insolvency and restructuring awards for BM&T’s work on La Seda
de Barcelona. Alan is VP of International Relations for TMA worldwide.
BM&T is an organisation of senior
turnaround management professionals
headed by David Bryan, John Mansell
and Alan Tilley. With a combined 30
years of experience in turnaround
and restructuring of underperforming
businesses the three principals were
previously senior professionals in Glass
Europe, a division of US based Glass
& Associates, a pioneer in the ?eld of
turnaround management.
In Europe the principals of BM&T
and our German and other European
associates have successfully completed
more than 50 engagements with
companies ranging from €10m to
€1.5bn, in all major industry sectors.
BM&T is af?liated with Conway
MacKenzie in the US and Gila & Co
in Spain.
BM&T provides a range of
turnaround management and
performance improvement services to
clients in a variety of industry sectors.
These include ?nancial restructuring,
operations improvement, interim
crisis management, operational due
diligence, viability assessment, working
capital improvement and business
plan preparation.
BM&T has the cultural
sensitivities, linguistic capabilities
and understanding of local, national
and international issues to operate
effectively in local and cross-border
crisis situations. The value we add
is experience.
22 Turnarounds
Stephen Cork
Senior Partner
Cork Gully LLP
T +44 (0)20 7268 2150
E [email protected]
Stephen quali?ed in 1993 and became a partner in a top 10 accountancy
practice the following year. In 2000, he joined a professional and ?nancial
services group and became head of restructuring and recovery. He became a
board director of this group in 2005.
Stephen left to lead Cork Gully LLP as Managing Partner. He has advised
companies ranging from owner-managed businesses, main listed publicly
quoted companies on the recovery strategies available, both at a board level as
well as to their ?nanciers.
Built on a solid heritage, we are a
specialist advisory ?rm bringing
clarity to complex restructuring,
recovery and insolvency issues.
We demonstrate our commitment
to our clients through the delivery
of innovative solutions to achieve
the best possible outcome in often
challenging circumstances.
As trusted advisers, we strive for
the highest standards in every aspect
of our work, continually revising and
improving our offer while adopting
best working practices. We have
built on the core values of the ?rm
established over a century ago and
which remain relevant today.
As an independent ?rm we are
responsive, agile and rarely affected
by con?icts of interest. Our clients
have complete con?dence in our
ability to engage and act on their
behalf promptly on an extensive
range of issues.
ICAEW CORPORATE FINANCE FACULTY
The Corporate Finance Faculty is the largest network of professionals involved in corporate ?nance. It includes more than 5,000
members and more than 70 member organisations. They are drawn from major professional services groups, specialist advisory ?rms,
companies, banks, private equity houses, law ?rms, brokers and consultants.
The faculty was established by ICAEW in 1997. It is a centre of professional excellence in corporate ?nance, contributing to
consultations by international organisations, governments, regulators and other professional bodies.
The faculty supports continuing professional development (CPD) by providing a wide range of services, events and publications to
its members, including its award-winning magazine Corporate Financier. The faculty initiated the development of the ?rst international
Corporate Finance quali?cation (including the ‘CF’ designation) for practitioners, which was launched in April 2005.
Katie Moffitt
Director
Cork Gully LLP
T +44 (0)20 7268 2150
E [email protected]
Katie has over 13 years restructuring experience, beginning her insolvency
career in 1998 in Australia and continuing in the industry since moving to the
UK in 2003. She is a quali?ed Insolvency Practitioner, Chartered Accountant
and a member of the Institute of Chartered Accountants of England and Wales.
She joined the restructuring team at Cork Gully LLP in 2010 and has continued
to work on a wide range of pre insolvency advisory engagements and formal
insolvency appointments.
23 icaew.com/cff
ICAEW is a professional membership organisation, supporting over 136,000
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