The twilight zone


Few business owners ever expect to find themselves in the twilight zone battling to save their business, to keep it out of administration or to quickly find a new partner.

In these days of benign interest rates it is seldom a sharp uptick in borrowing costs that causes a business to stumble. Much more often an event is the trigger and the key to survival will be how management reacts to the storm that can quickly engulf the business.

Whatever the trigger event, finding a viable solution takes time and it always requires cash.

At such times cash rapidly becomes the key commodity. Cash flow forecasts and the assumptions that drive them need to be reviewed and challenged. This is not just a finance function, the whole management team need to be involved. Many of the best mitigation ideas and actions will come from people not directly responsible for a functional area. It’s difficult to see the trees in one’s own wood.

Almost certainly product line and individual customer gross margins will not be as well understood as they should be. I once had a trading subsidiary which everyone told me was generating good positive EBITDA but in reality, when the actual activity volume was considered, was trading at a significant monthly loss. Management had not reacted to the impact of reduced customer volumes and was unaware of the true trading performance.

This is also a time for action. If the mindset is “do as we have always done” then you need to change the leadership. It is not that the past leadership is necessarily “bad”, it is just not human to expect fresh thinking from leadership which has become “settled” in the “way things are done around here”. The business model will need a review and an outsider brings a fresh perspective to the challenges and potential ways forward.

If cash is one vital commodity, time is the other. It takes time to work the problem, develop a way forward and execute it.

Picking a strategy, and sticking with it means no loss of focus on the drive to deliver the chosen transaction. However tempting a later alternative solution may seem, particularly an option inconceivable when the storm first broke, time spent exploring and evaluating it can prove a costly distraction. A rescue investor’s initial enthusiasm can become tempered by delay and the business may not have the resources or time to respond to multiple due diligence requests.

A trade buyer will nearly always pay a strategic premium above an analyst’s economic valuation. But decision making in an acquiring corporation often requires multi-level approval and probably main Board sanction. Many a “done deal” has come unstuck when the acquiring main Board look dispassionately at the downside risks inherent in the acquisition; particularly if year 1 investment and new management systems are required.

Tips to survive the twilight zone:

  • Establish a core team. Select advisors. You cannot solve this problem alone
  • Know your cash position. Have a rolling 13 week cash flow (ideally with the first 4 weeks showing daily flows). Update every day and consider the question of "going concern"
  • Buy time. Identify cash mitigation actions, assign responsibility and track delivery of every cash generative idea
  • Check and challenge the assumptions driving the business’s forecasting model. Particularly sales revenue/volume/timings, GM%, investment and overheads
  • Decide on a strategy (sell, rescue investor, new finance). Stick with it. Focus on tasks that deliver that goal
  • Develop plans B, C and D…. Experience shows that the first solution, however attractive, is rarely ever concluded
  • Turn off the taps. Make sure all spend is fully controlled
  • Take decisions. The business still needs to be run
  • Talk regularly with your funders and their advisors

The core team needs to meet every day and an evening update note can help keep stakeholders advised of key activity progress.

Beware summit fever. It is all too easy to become focused on the delivery of a transaction that might in the end no longer be the best value outcome.

But also beware looking for greener grass. There just may not be a better deal out there than the one you have got.