TFG | Addressing the fundamental lack of available risk capital that can be applied quickly in a financially distressed business

Explanation of the Components of a Turnaround

It is very important to stress that although turnaround finance is a fundamentally important component of a turnaround, turnarounds can rarely (if ever) be completed by just injecting additional money. Turnaround finance is therefore a crucial part of the cocktail required to affect a viable and sustainable turnaround.

It is intended to illustrate only the key components of a turnaround by the following simple illustration comparing turnarounds to a three legged stool. Without all three legs being firmly in place it is likely that the stool will collapse – meaning that the turnaround will ultimately fail.

Immediate Viability

The key issue in (most) turnarounds is that the business must have viability. This means that there must be a clearly structured business plan to achieve commercial viability by generating immediate operating cash flows and positive EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation).

Without this basic fundamental requirement it is likely that the turnaround will fail – regardless of how solidly the other components have been completed.

It is perhaps obvious to state that unless viability can be demonstrated or proven it will be extremely unlikely that turnaround finance will be raised.

In addition, a prudent principle of assessing the turnaround is to draw up a “bridge” statement to illustrate how the business can be turned around from its current negative EBITDA to the targeted positive EBITDA.

Restructuring and Insolvency

It is normal to have to restructure the company’s balance sheet in a turnaround. The nature of this will vary depending on the characteristics of the turnaround. However, in broad terms this can be done:

• informally – meaning without the formalities of the Insolvency Act procedures;
• formally – meaning carried out via one of the Insolvency Act procedures.

The focus of this article is turnarounds and not insolvency.

However, it is stressed that there are many examples of turnarounds that involve insolvency procedures. For example, Canary Wharf went into administration and 10 years on it is a thriving business. The insolvency procedure (administration) was very successfully used to act as a key component of the turnaround.

Whilst it is recognised that insolvency may not mean that the business completely ceases to trade, it is probably fair to say that using an insolvency procedure in a turnaround is (by its very nature) the very last resort.

A brief summary of these procedures is included in Appendix 4 to this chapter. It is however stressed that restructuring has become a very specialised area which is littered with pitfalls for the layman. Therefore, specialist advice should always be sought.

Turnaround Finance

Turnaround Finance – the topic of this chapter – is a crucial part of turnarounds which are invariably extremely cash hungry.

Management

The fact that the business has experienced difficulties is (almost always) as a result of a flaw in the management team and the business plan. This should be recognised as a “truth”. Therefore, initiating the management changes and revolutionising the company’s business plan are overwhelming important issues. Without this, raising turnaround finance may be impossible.

Summary

Anyone considering structuring a turnaround finance deal must both consider the finance in isolation and must focus on the key issues of: