Whether your succession plan involves a trade sale, handing it to the family – or selling up in an MBO/MBI, the crucial consideration is how you make the business an attractive proposition to be carried forward.

A myriad of external factors – including red tape/new legislation, the shifting economic backdrop and sector related issues – can substantially influence how much you walk away with.

Irrespective of the above, planning and positioning are critical to derive the best value from the transfer.

If your business has enjoyed sustained success, it will employ highly skilled, motivated, loyal, optimum performers; be seen as a destination employer; continually delight clients whose expectations are forever exceeded; and post year-on-year growth.

However, no matter how successful you are, unless your company has a robust succession plan you will not realise the value you are seeking. To avoid being handcuffed to the business forever, taking the following steps and bear in mind that it takes around three years to groom a business for sale.

1. Appoint a managing director 

This can be an external appointment or someone from within who has the  experience, mental toughness and leadership skills to drive strategic growth and oversee vital day-to-day functions such as sales, recruitment and operations.

Making this appointment enables you to step back from the company and work ‘on’ as opposed to ‘in’ the business. You will know where only you add value as a leader and may initially retain ownership of, for example, quality control innovation.

2. Ensure your management team is up to scratch 

If embarking on the MBO route, ask yourself some tough questions as to whether your management team is up to the job – or if it is time to jettison the underperformers. In our experience of investing in, and developing, management teams in SMEs, we find a lack of ‘commercial nous’ often holds businesses back.

3. Compile ‘How to’ guides   

Nobody knows the company better than you and in the ‘what would happen if you fell under a bus adage,’ it’s vital to ensure every process in the business is documented in a ‘how to’ manual which, dependent upon the nature of your business, can be understood and acted on by everyone from the trainee to the MD. This knowledge is a priceless asset that should be updated as and when required.

4. Demonstrate a strong customer pipeline 

Prospective buyers – whether internal or external – will want to be reassured that the business has a strong pipeline of customers who pay on time and who realise the value of the product or service they receive. Avoid becoming too dependent on one or two large clients for survival – and if you do venture into these waters, ensure that you have long-term contracts which are renegotiated well ahead of expiry. Potential buyers are seeking a picture of permanence and established client relationships that your team are successfully managing on a day-to-day basis.

5. Keep your accounts faultless 

Maintain excellent financial control so a purchaser’s FD can gauge the worth of your concern, its robust internal processes and management reporting. Monthly accounts, debtor days, forecasts for growth in turnover and profitability, as well as the results should be scrupulously recorded and readily accessible at all times.

6. Develop and retain your staff  

The business needs a stable, reliable, motivated workforce that produces peak productivity and minimal costs in terms of attrition, absenteeism and punctuality. For most companies, their greatest assets are their workforce so look after yours and get the best out of people, with decent packages, continuous training and development and a sense of having a stakeholding in the company’s success. Also ensure written contracts, personnel records, all legal compliances and required company policies are up-to-date.

Investing in the necessary grooming will undoubtedly enhance your company’s desirability for prospective purchasers.  While implementing the above steps, also make some time to plan what you are going to do with your time and your life post work. Having spent the past 2-3 decades engrossed in your work, many business owners have failed to achieve a work-life balance and are unprepared for retirement both financially and psychologically.

Establishing a life plan for yourself will go a long way to ensure you enjoy a rewarding, fulfilling and well deserved retirement.

Read more:
Getting your business ready for an exit

A damaging culture of failing to pay invoices on time flourishes across all sectors and at all levels in the supply chain. Often it’s the big players that put the squeeze on SME suppliers – leaving them exposed to potential business failure and job losses.

The new Tory government has unveiled its Enterprise Bill, which at first glance seems to offer some comfort to SMEs on tackling poor payment practices. The bill promises to build on existing measures, including a voluntary code of conduct, to help ensure that these companies are paid on time.

However, I’m sceptical that a voluntary initiative will ever force the hand of those corporates who know that they have the financial clout to withhold payments – in some cases insisting on terms of up to 90 – and even 120 days.

Research from the Institute of Directors (IOD) at the end of 2014 revealed the scale of the problem.

A staggering 66 per cent of the IOD’s SME members who were surveyed reported issues with late payment of invoices while 1 in 8 said their customers had changed payment terms and 28 per cent revealed that they had been forced to delay payment to their own suppliers.

Additional findings highlighted that 13 per cent were prevented from growing their businesses as planned and 10 per cent were forced to reorganise their financing arrangements.

Although 1,700 companies including Admiral Insurance, Vodafone and Tesco, have signed up to the voluntary Prompt Payment Code, the IOD survey shows that failure to pay bills on time is still widespread.

Many SMEs, who are understandably frightened of losing their big customers, will not challenge poor payment practices – and some may even agree to unrealistic terms. In the absence of a law compelling companies to pay on time, there are steps that SMEs can take to help manage late payment:

1. Understand the implications of what being paid late means for your business. Never has the phrase ‘cash is king’ been more important, because if your customers aren’t meeting your stated terms then you will need cash reserves to pay your own suppliers and your staff. Cash flow problems are the reason why some SMEs go under – even if they appear to have a healthy order book.

2. Set your payment terms out clearly and consider including a penalty clause. Some of the businesses we invest in have been on the receiving end of late payment practice and we encourage management teams to be firm and take a fair line with customers. If they are 30 days, chase up payment on the deadline and have a clear process to do so. Never be embarrassed about chasing debt – even from your largest customers. Communication is critical – stay in touch regularly with your clients and most customers will work with you, in my experience.

3. Ensure that your sales team and credit department are joined up. I have heard of over enthusiastic sales people agreeing to unrealistic payment terms in order to clinch a deal. It is vital to communicate the impact of such terms on the overall business.

4. Spread the risk. Having all your eggs in one basket with one major customer makes a business very vulnerable if that business pays late. You might be better off with a number of smaller customers who pay within your terms.

5. Undertake due diligence on new customers. In the excitement of winning a contract you may overlook the need to drill down into that company’s payment ethos. This is particularly true if you are entering new markets as paying late can be the cultural norm in some countries.

6. Consider the effect on your business of a new contract win that involves significant upfront investment in new machinery, technology or staff. Can you afford a sizeable outlay if your new customer refuses to meet your payment terms?

7. Are you prepared to make a tough decision? Ultimately you may decide to go along with late payments from a major client and rearrange your finances accordingly. On the other hand maybe it is better to end your relationship with a company whose delays in paying you are jeopardising everything you have worked so hard for.

The stability of an entire supply chain can be threatened by just one company failing to pay on time so I urge any SME business owner to seek advice if unpaid invoices are keeping them awake at night.

Read more:
Can’t pay, won’t pay – how unpaid invoices damage SMEs

It’s therefore not surprising to see that business growth is firmly on the political agenda as we hurtle towards a general election – with some excellent public funded support available for SMEs.

Finance and skills remain the focus for most companies, and I forecast a hat trick of cost effective opportunities for ambitious SMEs seeking to expand this year.

1. Funding – giving more choice and opening doors

Equity crowdfunding and angel investment continue to gather momentum, providing many innovative SMEs with cash injections when more traditional funders have turned them away. Funding streams such as these enable private investors to collaborate and provide finance for companies across a range of sectors.

These alternative finance options have gained traction as interest rates have stagnated, with many private individuals opting to invest in SME businesses as a way of securing a good ROI.

Not surprisingly, the government is muscling in on the act with the formation of the British Business Bank – a state-owned establishment with over 80 private sector funding partners. The bank was created by the UK government to increase access to credit for SME’s and to provide business advice services.

As the economy recovers, many high street banks have been slow to respond to the growing demand for finance. However, there are now signs that lending levels are once more beginning to rise.

The recent proliferation of alternative funders may be spurring high street banks to become more proactive in terms of business finance. Let us hope that over the course of 2015 their doors will be open wider to those SMEs who have been hit particularly hard by the banks’ tightening their grip on funding.

2. Cash in on Intellectual Property

You could be sitting on tens of thousands of pounds in Intellectual Property (IP) assets so ensuring that you understand the value of your IP makes sound business sense.

The IP Audit Plus programme – part of the government’s Growth Accelerator for small businesses – offers funding of up to £3,000 including VAT for an intellectual property expert to assess the value of a company’s IP collateral.

The audits, which are suitable for all sectors, enable established companies to take a step back and assess where their value lies.

A report last year from the Intellectual Property Office on the IP Audit Plus found that the audits had highlighted new business opportunities in 31% of participating businesses, with 28% stating that they had reaped financial benefits as a direct result of their audit.

In a further business boost, the report demonstrated that IP reviews had opened up new financial support streams such as equity funding (23%) and grant funding (30%).

During the audit, the IP expert, usually a lawyer, examines your brands, copyright, patents and trademarks and also looks into any possible third party infringements.

As well as identifying how you might exploit your IP through licensing or franchising, knowing the value of your IP assets can be critical in valuing your business for a future sale, a management buyout or for an injection of funds from private equity investors.

Apprenticeships – helping to address skills shortages

Many SMEs tell me that struggling to recruit the right staff is one of their biggest business challenges. Yet just 10% of small businesses employ apprentices, according to the Holt Review of Apprenticeships.

In a bid to increase these figures, the government is encouraging small businesses to take on apprentices with its Age 16 – 24 apprenticeship grant of £1,500 per young person – recently amending the criteria to attract a wider range of employers.

With university fees costing up to £9,000 a year, increasing numbers of bright young people are looking to apprenticeships as a step onto the career ladder.

When you employ an apprentice, you have a unique opportunity to train a young person in your ways of working, whilst also addressing a specific skills shortage in your own business and within your sector. An apprentice can also bring a fresh approach and new ideas into the business.

Additionally, retention levels for apprentices tend to be high, with research showing that 67% of apprentices remain with their employer after completing their apprenticeship and progress through the business – even to management level.

SME’s have had a tough few years, but most are optimistic about the future.
According to a recent survey by Western Union Business Solutions International Trade Monitor, 83% of SME’s said that they were ‘very confident’ about the UK’s current economic climate. An improving economy, coupled with a plethora of innovative cost saving opportunities means that 2015 looks set to be a storming year for business growth in the UK.

Read more:
Three ways SME’s can cut costs AND grow

Predications late last year had suggested that they would rise early in 2015, but it seems that it will now be the latter half of the year before any increase is announced.

The Bank of England’s Monetary Policy Committee set the 0.5 per cent rate in March 2009 to help stimulate the UK’s economic recovery – a move which many SMEs have since benefitted from.

A hike in rates is undoubtedly on the cards with the Bank of England’s Governor, Mark Carney, suggesting that the ‘new normal’ rate will be 2.5 per cent by early 2017.

So how would such an increase affect the UK’s 5 million plus SMEs? Rather concerningly, a report from the Institute of Chartered Accountants for England and Wales (ICAEW) revealed that 65 per cent of SMEs had no measures in place to deal with a rise, even though half thought that their turnovers would be hit.

Such complacency is a becoming a major cause of concern amongst industry experts, not least because the current financial situation will change and businesses must be prepared to adapt or they risk failing.

What should SME’s be doing to lessen the financial impact once the rates do rise?

There are three strands for firms to consider – addressing the potential increased cost of their debt, the effect of a decrease in consumer spending and the increased cost of purchasing products and services from suppliers.

Many will have commercial mortgages and other types of debt that will become more expensive once an increase is implemented. Reviewing current borrowing arrangements now with their bank manager, accountant or financial advisor will help them to understand what effect interest rate rises will have.
Undertaking a full financial audit will enable firms to assess their true level of debt and the fluidity of their cash flow – both now and in the medium and long-term. They would be wise to determine if current borrowing facilities still meet the needs of the business. If not, they should look to secure alternative lending now, rather than waiting until the loan costs increase.

Since the financial crash in 2008, many small businesses have found it difficult to access finance from the high street banks and have instead turned to alternative finance providers.

The UK’s economic growth post 2008 has largely been due to a buoyant demand from consumers – and businesses launched after 2008 have yet to experience the impact of an interest rate rise on consumer spending. Economic constraints have adversely affected many householders, but low interest rates have largely offset this pressure and consumers have continued to ‘spend their way out of the recession’. However as rates rise, mortgage costs and other personal loans will increase, negatively impacting on disposable incomes.

The best advice for firms who fear they may struggle is to look now at renegotiating their purchasing agreements – before prices rise. Alternatively, businesses could bulk buy stock, but unless suppliers agree to an immediate purchase and later delivery date, any monetary gain would have to be balanced against the cost of storing the additional products.

Unquestionably, rates will rise, so businesses need to be realistic and honest about how vulnerable they are and act accordingly. It really is a case of “by failing to prepare, you are preparing to fail.”

Image: Audit via Shutterstock

Read more:
What will changes in interest rates mean to SMEs?

It is therefore encouraging to witness how SMEs in the UK are growing and thriving with their numbers reaching a six-year high of 2.16 million in 2013. Many will be companies who rode out the tough times, benefitted from their competitors misfortune – and are enjoying a surge in their market share.

SMEs are the ‘lifeblood’ of the British economy – accounting for over 99 per cent of UK businesses and employing more than 20 million people. As we move forward, I believe, it is vital that the survivors think ahead and set in place the following steps and processes to stay on track some of which are discussed below.

Strategic planning
Good businesses don’t thrive by chance – the key is effective and thorough planning. Business leaders need to think strategically and conduct research to identify the changes in their own sector along with the wider economic, financial and political landscape. As an example, anticipating changes in interest rates or legislation ensures that companies can plan ahead rather than having to deal reactively with them when it happens.

Know your market
Savvy bosses have identified where their business stands in relation to the market and know the direction in which they need to drive it forward. They research competitors and determine what they are doing well – or better – as well as areas in which they are innovating. Knowing what customers want both now, and in the future, is pivotal and dependent upon keeping abreast of trends and industry developments.

Evaluate management teams
Under performing management teams continue to be among the top factors hampering the growth and productivity of SMEs. Continue to review your staff and look at performance review techniques to assist with this. Reward appropriately. If they are failing to pay their way, then release them.

Engage and communicate with employees
It is critical that staff understand the direction the firm is heading and that managers and their teams are engaged with the bigger vision and goals. The role of business leaders is to keep looking forwards, know where they add most value to the company, and keep their teams updated on how the business is performing against its targets.

Set financial measures
Putting in place robust financial measures is often overlooked by many SMEs. Producing regular, up to date financial accounts is crucial to maintaining and growing any business. Detailed accounts provide an effective process by which to measure and evaluate productivity, sales, income, debt, cash collection and staff efficiencies.

Sort out processes and infrastructure
While it is tempting to expand quickly, it can be risky when coming out of a recession to over commit and take on too many orders or contracts that can’t be fulfilled. Many firms have gone to the wall as result of over-trading. The most effective and successful bosses ensure they have the financial resources, staff, technology, production capabilities and infrastructure in place to support a growing business ahead works being carried out.
And finally … innovate

Receptive businesses are open to innovation and adaptable to recognise and change practices that aren’t working. Innovation is critical in both product and service based industries for enhancing customer service and boosting, efficiency, effectiveness and, most importantly, profitability.

Image: SME via Shutterstock

Read more:
Six critical steps for SMEs to survive and thrive

Yet many of those millions of SMEs are successful and if you were to ask owner managers if they are seeking to expand their businesses, the majority would probably say ‘yes’.

What challenges do those ambitious business owners face in making the transition from a small to a large business – and what knowledge and skills do they need to make the move successfully?

For many, stepping up to the next level is a curious mix of conscious planning and organic change, although in my experience, the firms that successfully shift gear do so because they understand that the process is about so much more than simply increasing sales.

Rather, it requires a more considered view on where the areas for expansion are within their sector, and how a business can meet these. For most, this will mean increasing product ranges, or even perhaps diversifying into other areas – a move which may be necessary, but one which can be incredibly risky.

Either way, ambitious plans will not evolve by themselves. The conscious decision to grow requires a significant step change in the mind-set of business owners and a commitment to review and change the company’s operating procedures and its staff.

The key is not to lose sight of what made a company good in the first place, and to balance the success formula with the ability to identify the changes that are required in order to become larger, successful business.

SMEs are the backbone of our economy and the UK is recognised as a breeding ground for entrepreneurship and innovation. These businesses can be adaptable and often far more in tune with the needs of the consumer than many larger corporations. Their internal procedures are more fluid, and as a result, they are agile and can react quickly to a shift in circumstance or a change in demand. Larger businesses can be procedure heavy with lengthy decision making processes – and therefore slower to respond to a changing marketplace.

However, the dynamic entrepreneur with a flair for coming up with new ideas may lack the commercial experience and processes of bigger companies. Indeed, the SME business owner may have deliberately avoided corporate life – perhaps believing that he or she would be a fish out of water in what they perceive to be a more rigid, less creative environment.

To turbo charge growth, the SME business owner or director needs to adopt some of the best practices from the corporate world. There are a number of key areas where changing from an SME mindset is critical; a few of which are detailed below:

· Strategy for Growth

Define a plan that focuses on the areas where there is fast growth and invest sufficient time to review the market and identify your key potential clients.

· Finance

Lack of capital combined with lack of an efficient cash flow management can hold back progress and could also spell financial disaster. A business may need to invest tens of thousands of pounds in new equipment or products to support its plans. And while a substantial new contract win is a boost for any company, delays in being paid can bring it to its knees. Large corporates have financial plans and projections that underpin their businesses. I always advise that SMEs buy in expert financial advice if they don’t have the in house capacity.

· Staff

A typical SME may rely on employees whose roles are interchangeable or perhaps was set up by friends or family members. A business that is seeking to expand has objectively scrutinise the team’s strengths and weaknesses and assess if the right skills are there to support and deliver its strategy. It may mean some tough decisions – I’ve known family businesses who have had to let go of cousins or brothers who are no longer the ‘right fit’ for a more creative company.

· Technology

It is vital that SMEs understand that investment in technology is vital to breaking down barriers to growth. Financial planning should include investment in the necessary technology to win business, produce goods or deliver services, and to ensure outstanding customer service. I know successful small companies that survived – and even grew – during the recession by investing in new technologies that allowed them to do business quicker, smarter and more efficiently.

Research shows that the rise in small businesses reached a five-year peak in March this year. Apparently this was partly boosted by a ‘DIY ethos’ among budding entrepreneurs. As SMEs look to the next five years my advice is “don’t bodge it if you want to grow” – sometimes you may need to bring in outside expertise – professionals who have been there and got the t-shirt. Regardless of how successful you are, I firmly believe that everyone can all still learn something new every day.

Read more:
Why adopting a corporate mind set is key to boosting SME growth

For example, world class manufacturers use precision engineering to produce their goods to a consistent quality – all day, every day. Clearly not every SME is a manufacturer, but they can all aspire to create the same approach to efficiency and attention to detail regardless of their product or service.

An efficient production line relies on planning, organisation and execution of a military-like operation to achieve perfection. All processes are monitored and reviewed, with quality control teams constantly encouraged to seek out ways to improve and innovate. Simply being good is not good enough.

Every business will have a comparable ‘production line’ and so by using this analogy, it is easy to see where the corporate mindset might be applicable to SMEs.

Other areas where smaller businesses can learn from blue chip companies include recruiting the right talent, and recognising the commercial benefits of a recognised, quality brand.

A high performing brand seeks to hire people with real aptitude for the job. Experienced recruiters will do this very strategically with bespoke tests at the interview stage. Once in the job, an employee will have clearly defined goals to achieve, individual plans and timescales, alongside a clear measurement process to assess optimum performance.

Corporations are often skilled in applying the best minds in the organisation to each issue and challenge. The collective memory, experience and skills of teams throughout the business can be harnessed whenever required.

The esteem in which the brand is held by the general public has a positive impact on employee morale, loyalty and pride in the job they do, which in turn feeds back into the organisation, making it a desirable workplace.

Finally, a difficult question for the business owner – are you more of an entrepreneur than a CEO? Do you really have the skills to be the CEO of your own organisation?

Many entrepreneurs can struggle to make the transition to CEO – severely hampering the growth of their business in the process. By the same token, it is very often the case that corporate CEOs do not make very good entrepreneurs – remember that world class companies value aptitude for the job!

Many entrepreneurs I’ve worked with are driven, creative and have an abundance of energy, ambition and passion. However, as the business evolves and grows, it’s often time for them to “step back” and evaluate their contribution and establish exactly where they add value to the long-term picture and goals for the business.

In many cases where entrepreneurs have recognised their limitations I have advised them to bring on board an external MD or CEO to take on responsibilities, including recruitment and strategic growth, whilst entrepreneurs focus on equally critical areas such as innovation.

Google, Heinz, BMW and Lego. Powerful brand names with products that are purchased, used and valued across the globe. Not much in common with the average business you may think but what business worth its salt wants to be – and stay – average?

Read more:
Lessons SMEs can learn from corporates

Richard Branson, said to be amongst the five richest people in the UK, is a case in point. Branson has launched at least 100 companies since 1966. Virgin Records, Virgin Trains and Virgin Airlines are household names, but who remembers his Virgin Cola and Virgin Vodka – both of which sank without trace? Despite the demise of those brands we still hail Branson as an inspirational business role model.

Branson says that recognising mistakes and recovering are essential skills the successful entrepreneur must acquire, and in the restructuring and turnaround market where I operate, my business antennae are tuned into those company bosses who can show me that an underperforming organisation could be worth saving.

Recognising and accepting that a business is in trouble is often the most difficult step. Unfortunately many business owners waste a lot of time grappling with this issue – or may simply be in denial. Either way the business is paralysed through inaction.

Underperformance is a key indicator that a business could do better and is in danger of collapsing completely. If you treat disappointing figures as an ‘unfortunate blip’ and simply a ‘one off’, then you may be setting the scene for a consistent run of poor results.

Taking time to drill down and examine why the business failed to smash its growth targets is vital. Grasp the time as an opportunity to create a strategy for internal turnaround and restructuring. Offer your business the necessary life support it needs – before the oxygen supply runs out and you need to call in the business paramedics.

To really get under the skin of your business and begin the process of turning it from an underperforming one into an outperforming one you need to five simple steps:

1. Ask your senior team for their views on the company performance across a range of areas including operations, planning, sales, marketing and leadership. Make it anonymous and you are likely to get honest feedback

2. Ask your senior team to do the same within their different departments so that you gather views of staff at all levels

3. Use the information to identify and communicate strengths and weakness

4. Set actions, targets and deadlines that address the weaknesses – and stick to them

5. Keep driving for improved performances scores and chart its achievements regularly.

This exercise can throw up some surprises –and don’t expect everyone to agree. However, often a senior management team will show their confidence in the growth potential of the business and will have renewed energy to increase profitability.

As a business leader you will have to be self-aware, recognising and accepting that you may have contributed to the underperformance.

Richard Branson has gone on record to say that at Virgin enterprises staff are empowered to make mistakes – and then learn from them.

If you take a leaf out of Branson’s book you too can bounce back in business. Recognising your mistakes – and how you recover from them – is what counts.

Read more:
Seize the moment to move from underperformer to outperformer

Their aim is either to become one of the firm’s largest stakeholders, or to take the company through to insolvency, and as a secured asset (rather than equity) creditor, potentially make a profit once the price of the assets has been agreed.

In principle, the purchasing of distressed debt offers investors the possibility of spreading their investments across a number of sectors, but whether the markets in the UK will develop enough to provide an amenable platform for this type of investment to flourish, remains to be seen.

Whilst other countries have seen a successfully uptake of distress debt purchasing, the UK has lagged behind, with far fewer companies than expected adopting the model. This lack of activity may have occurred for a number of reasons, including a reluctance by the banks to sell on the debt, constrictions of the financial climate in generating equity to buy the debt – or simply that the ‘supply and demand’ equation has not been met, with the price of the debt being too high for the demand for it.

The model involves investors, or more often, groups of investors, buying up the debt of companies who face an imminent risk of insolvency. The investment can then be managed in two ways – investors retain the secured debt, so that they become stakeholders in the company and can therefore influence how the company is re-structured – something which ordinarily they would not have been afforded the opportunity to do.

Alternatively, they can take the firm through a restructure via in insolvency option. In this scenario, where other shareholders would lose most or all of their investment, as a secured creditor, the distressed debt investors would be one of the first creditors to be repaid, often at a higher rate than their original investment, because of how the asset price is calculated by the appointed Insolvency Practitioner.

Here is a brief overview of the pros and cons of this type of investment:

PROS

• There can be momentous gains to be made.
• An adaptable strategy can mean that either a resale or liquidation both become viable options for a good return.
• Flexible timing – if an investor knows that they want to drive the company towards a restructure, then they can purchase the assets sooner (albeit at a higher price) than investors seeking to liquidate a business. This gives them a greater choice with regards to which firms they choose to invest in.
• There are some outstanding investments to be had – especially in the current climate, where there is an unwillingness of banks to extend credit facilities to many businesses – this limits their cash flow options and can cause financial instability in what is otherwise a strong business.

CONS

• It can be difficult to determine when the asset price has reached its lowest point and is therefore the best time to buy.
• Even a slight overpayment on the price can result in huge losses.
• The market is hugely unpredictable.
• It can be hard to get data on distressed debt investment as many of equity firms who currently monopolise this sector don’t post their figures.
• Many companies will view distress debt investors with hostility, which can make negotiations with them more complex.

It is far from a guaranteed investment – the returns can be high, but so can the risks.

Potentially a company could take the investors to court if they feel that they have breached their remit of investment, and have instead taken a controlling share with a planned mandate of affecting a complete structural reorganisation of the company.

Purchasing the distressed debt of a failing company undoubtedly presents many unique and potentially abundant opportunities for investors who are willing to adopt both a shorter term, higher risk approach via Insolvency, and a longer term strategy of affecting change through restructuring for a future sale or growth.

The general consensus amongst many analysts is that if the purchasing of distressed debt takes off here as well as it has in other countries, it will open up a wealth of investment opportunities that haven’t previously existed in the UK.

Read more:
The highs and lows of purchasing distressed debt

The turnaround and restructuring of a family owned SME can present some particular challenges if the enterprise has been handed down through the generations as if it was merely a legacy project.

The passion, hunger and drive that fuelled the first – and possibly second – generation business can be seriously diluted by succession planning that places inheritance, family loyalty and emotion ahead of profitability.

Companies have to be agile and nimble to stay ahead and the ability to adapt, change and – in some cases – accept failure, can often be a source of conflict when the owners and managers are also relatives.

If a family business is worth saving, I recommend bringing in outside professional experience and expertise to add a fresh dynamic and objective eye to preserve the family asset. When family loyalties lead to a company being in a state of paralysis, no one is necessarily prepared to think the unthinkable.

Turnaround professionals are relentless in drilling down to where the problems lie. Often there are serious issues around the personnel and it needs an outsider to ask the awkward questions. In throwing a lifeline to a family business in distress, experienced external advisors will put the existing management team under extreme scrutiny and inevitably some brutal decisions may have to be made.

Advisors’ solutions may not be what you want to hear, but take them on board and you could transform a failing business into a robust concern which is ripe for a planned and highly profitable sale a few years down the line.

All family enterprises, whether struggling or not, would do well to ask themselves the following:

· Would you employ your son or daughter if they were not related to you?
· Are they in the right role? Do they have a talent for what they do – or could someone else do a better job?
· Is your son, daughter, niece or nephew interested and passionate about the business, or simply there because it is expected of them?
· Every thriving firm needs a ‘dream maker’ – the one with passion, commitment and drive who wants to be there, through thick and thin, from 7am-11pm. Who is yours?
· Who is holding the business back, treading water and biding their time? Is it time to face facts and let them go?

In my experience, some of the most successful family businesses recognise that their nearest and dearest are best served by gaining valuable experience and skills in the wider world. At a later stage, and if appropriate, they can return to the firm equipped with expertise, new ideas – and an appetite and drive to innovate and challenge the status quo.

For others, maybe it is time they left for good. In the adage that you can’t choose your relatives, there is no reason to let family ties determine the success and sustainability of the business which you – or your parents – have poured commitment, energy and expertise into over the past years or decades.

Read more:
The ties that bind when a family business hits crisis point

In fact, you would expect them to scrutinise their numbers even more closely than they would do in the good times when business is buoyant.

My own experience in the turnaround and restructuring market tells me that the reverse is too often the case due to the inability of many MDs to read the bigger picture of what the figures are telling them.

The latest annual Credit Check report by ABN AMRO Commercial Finance, based on research data from 200 accountants reinforces that SMEs struggle to understand what the figures mean – and therefore miss early warning signs that the long term health and sustainability of their businesses is threatened.

More than half (51%) of accountants surveyed believe SMEs do not feel in control of their financial affairs and almost two thirds (64%) report that many of their clients do not set aside enough time to exclusively focus on financial management. Just 15% of clients discuss financial affairs with their accountants on a weekly basis whilst 41% relegate those conversations to a once or twice yearly event.

I suspect a majority of the discussions may only be prompted by a crisis. If, for example, the firm suddenly loses its largest client to a competitor, the impact may not hit the bottom line immediately. In a misguided effort to shore up the gap, the SME may take on new business purely to feed turnover, not profit. If the situation persists over several months, it could spell financial disaster.

A forward thinking SME will have a strategy in place that would safeguard the company against over reliance on a single large client and a financial adviser that will ask all the ‘What if?’ questions in advance.

If professional help and advice is only sought infrequently, the business could be in the red months before the issues are properly identified and addressed.

Sound financial management rests on having experienced, proactive people in place and for the business owner to be asking the right questions – and checking a few critical numbers – on a weekly basis. Some advisors encourage bosses to check their incomings and outgoings on a daily basis – a precaution which is more necessary in sectors such as retail.

Businesses that are large enough to require an audit will have a financial advisor or an FD to spot the danger signs. Smaller companies will not require – nor can they afford – this level of expertise and resource. In my experience, many smaller businesses have accountants who may not be close enough to the company to flag up when:

· Cash flow is tight
· Creditor days are stretched
· Suppliers remove credit from the business
· Sales are diminishing
· Margins are being eroded
· Commissions are taken on for cash not profit
· Staff are leaving
· Competitors are taking market share

The financial health of a business is fundamental to its survival and success. SMEs that remain financially ignorant for prolonged periods will inevitably pay the painful price.

Read more:
Counting the financial cost – why SMEs struggle with figures