Distressed businesses are almost becoming common place. And as more and more businesses ‘turn themselves around’ we see many myths pertaining to turnaround and transformation that ultimately can see businesses come unstuck all over again.
1. Equity transaction can fix my debt problems
It is difficult to effect an equity transaction until debt issues are resolved or at least stabilised. New equity investors in a business (excluding hedge funds) typically seek stable investment situations and are reluctant to fund and facilitate the resolution of debt issues and a turnaround in the period immediately after making an investment. Put simply, new equity investors would like to see a debt issues sorted and a turnaround underway or at least materially progressed before committing to a transaction.
2. Fixing my balance sheet = business turnaround
No, fixing a balance sheet is financial restructuring. While financial restructuring is often necessary to provide a platform for a turnaround to occur, it generally involves debt and equity transactions to improve leverage, gearing and liquidity. This is distinct from turnaround activities which are focused on improving the underlying operations and profitability of a company.
3. A turnaround is able to be achieved while management do their “day jobs”
Possible, but very hard! Most people’s natural (default) tendency is to do the tasks that they are most comfortable and familiar with as a priority, and will often search for opportunities and reasons not to deal with the confronting issues of a turnaround. Making a turnaround happen typically requires a dedicated person either internal or external to the business who has enough “bandwith” to tackle the relevant issues.
4. Private equity is coming to the rescue!
A private equity transactions is often hoped for as a “magic bullet” solution to the precarious financial position of a company. However, each year there are only a handful of private equity transactions in Australia in the turnaround space.
Some important realities to keep in mind are:
- Private equity houses have a deal rate of around 1-2 per 100 companies they conduct due diligence in relation to.
- Even if a company has progressed to detailed negotiations with a private equity provider, there is still only a limited prospect that a transaction will take place.
- Turnaround is a niche area of the private equity market and there are only a handful number of operators willing to consider a turnaround situation.
In view of this limited deal flow, private equity investors shouldn’t be relied upon to solve the problems of a business ie make sure you have another option(s) to fix the company’s predicament.
5. Banks just want to appoint Administrators/Receivers
Main stream lenders generally recognise that value and goodwill are destroyed in an insolvency and therefore commercially this will generally provide a lesser return for them comparative to a turnaround taking place. Further, if financiers want to exit a customer relationship, it is ideal for them if this occurs through a refinance or sale, again this provides the best commercial outcome.
6. ATO will write off their interest and penalties
The tax office has very tight regulations in relation to situations where interest and penalties are written off. Example scenarios are personal hardship or a natural disaster. Interest and penalties will not be forgiven simply because of historical trading losses or to assist with facilitating a turnaround ie they won’t write off debt because they are nice guys!
If you’re undergoing business distress and would like a no obligation, confidential discussion about turnaround management and executive solutions, please contact me at svertullo@integralfinancial.net.auÂ