It is brutal, but many failed businesses suffer the fate they deserve; they are uncompetitive, flawed and badly managed, and in a recession they will die. An estimated 120 small businesses are going bust every day, according to the Federation of Small Businesses.
Others deserve a second chance. These are the businesses with a commercial edge, run by entrepreneurs with real talent, but the business has hit hard times. An entrepreneur facing failure and ruin learns crucial lessons in business survival, but he usually needs help.
Enter the turnaround investor, who lives to breathe life into dying businesses. These investors are often successful entrepreneurs – many have hit a wall at some point in their business careers – and develop a gut feeling for a good or bad business; many would say with rather more skill than most bank managers.
Turnaround investors are typically business angels with a tough management style. They invest money into distressed companies and roll their sleeves up to put right the problems. They talk to clients, suppliers, lenders and staff to persuade them that there are new opportunities for the company at a time when the banks and shareholders generally run for cover.
Their story is that if the business dies, the creditors (people who are owed money) will get nothing. If the creditors allow time for the turnaround, possibly involving an insolvency procedure, they should get some of their money back. It may take years, but there is usually no sweeter choice for a creditor.
Turnaround network Beer and Young represents 1,000 investors who are invited to pick over the numerous struggling companies on their books.
“We look for an investor-backed solution, because if an entrepreneur is determined there is often a way through. There are opportunities for new money from an experienced investor who is prepared to roll his sleeves up to get the business back on track,” commented director Declan Williams.
“Most of our investors are self-made, and they are able to divorce themselves from the emotional side of business. Sometimes they have learned the hard way, and to focus on the fact that a business is there to make money.”
Phil Betts, a specialist in turnaround finance added: “If a company goes bust people will lose their jobs. If there is not enough money we need to think outside the box to refinance the business.”
There is no safe parachute for the entrepreneur who accepts money from a turnaround investor, as the owner may end up with a fraction of the newly restructured and usually slimmed-down company.
The entrepreneur suffers a pay cut, and gone are the little luxuries like the company car, charge card, and the feel-good factor of being the boss.