Banks are facing heavy criticism that only 2% of CBILS applications have been successful so far 4 weeks after the £330 Billion Government backed scheme was announced. What needs to be appreciated is that this is not a free giveaway. Some lenders have complained about the quality of the applications they are receiving; indeed, some are saying they just receive something that to all intents and purpose is a begging letter or email, asking for money. That’s not how it works with banks, any investor, funder, grant or charity provider or even borrowing money off a friend! These are loans and they must be eventually repaid.
To be eligible for the Coronavirus Business Interruption Loan Scheme (CBILS), businesses need to have been trading as viable UK corporate entities pre-crisis for at least 12 months and not operating in certain excluded sectors. For any loan, firms must have a viable proposition, plan and business model.
Common Criteria for Successful CBIL Application
Lenders will all have slightly different requirements that tick the boxes for a successful CBIL application but will have many common criteria which we set out below:
Viability and Historic Financial Statements: Lenders expect evidence of the business’s viability, preferably over the past three years (excluding COVID-19 impact), supported by historic financial statements.
Latest Management Information/Accounts: Providing the latest management information/accounts is beneficial, especially when dealing with your own bank, as it allows them to cross-check figures with cash in the bank.
Affordability: The business must demonstrate its ability to afford the additional debt based on its latest 2019 accounts, ensuring sustainability beyond the pandemic.
Loan Amount Calculation: A detailed breakdown of the loan amount calculation is crucial. Include all relevant details, and be cautious about requesting funding for payments to other finance providers.
Exploring Government Support: Lenders may require confirmation that you’ve explored all available government support, such as the HMRC Furlough Scheme and Local Authority Grants.
3 Year Business Plan (Optional): While not mandatory, providing the company’s latest 3 Year Business Plan can be a significant advantage during the application process.
Supporting Letter: Consider preparing a concise supporting letter that tells the story of your business, highlighting its activities, the impact of the crisis, mitigation measures, and forward-thinking strategies like diversification to address market demands.
So, in essence, currently, a bank would support applications following their normal business processes and the underwriting gates that go with that. If the application meets all of these policies including security, then they will proceed in the normal way, and if it meets all criteria then it will be a normal loan, however, in the absence of the availability of full security, Banks will consider CBILS, but do please keep in view the eligibility is very strict still.
Loan Security and Personal Guarantee
All loans must be eventually repaid. The Government is providing 100% security cover to banks in event of default for loans up to £250k and so in our experience, this should be a natural ceiling for most SME business owners to consider or else, they will have to put up at least a 20% Personal Guarantee in the event of default. Clearly some lenders will ask for much more security, if it is available. Remember, a £250k CBIL over a 5-year term should only cost £4-5k per month depending on the lender but could save your business and help you get through the short-term trading difficulties For borrowing of amounts above £250k up to a £5m lending ceiling, personal guarantees will be asked for. However, they are limited to 20% of the lender’s actual loss. Importantly, your house is not allowed to be taken as support for a guarantee.
Attractive Features of CBIL
With 12 months interest free and no lending fees, CBIL is an attractive source of business funding and potential borrowers should not be deterred by the low application success rate, as CBIL could be a key component to the survival of their business. We at PCW Consulting Group have a 100% success rate for our clients in securing successful CBIL outcomes and have engaged closely with lenders to make sure that we are able to get those great results for our clients.
Seek Assistance for a Successful Application
If you or your accountant would like assistance pulling a suitable package and application together, please contact email@example.com and one of the senior exec team will contact you for a free initial consultation.
In mid-February, two clients canceled transactions that were about to go live. One was a small listed company aiming for a small acquisition, while the other was a Private Equity Investor planning to sell an investee company. Despite operating in different markets, both decisions were influenced by the dramatic fall in global stock markets since February 19, 2020, comparable to the 2008 recession.
Impact on Private Company Valuations
The clients witnessed a significant step change down in private company valuations due to the stock market crash caused by the Coronavirus outbreak. The UK FTSE 100, for example, lost one-third of its value in just one month, leading to a reevaluation of acquisition and sale plans.
Private Equity Investor’s Decision
The Private Equity client had set a target valuation for a sale in late 2019 to achieve its desired cash return on investment. However, with the current market conditions, the target valuation became unattainable. Instead, the client chose to put the sale process on hold and continue growing the company until a favorable exit cash amount can be achieved.
PLC Client’s Dilemma
The PLC client experienced a sharp fall in its share price and quoted market value. This led to a situation where the agreed acquisition price with the seller was at a higher multiple of profits than its own multiple. As a result, proceeding with the acquisition at the pre-agreed price would further reduce the price of the client’s own shares. Consequently, the acquisition process was halted, and a future agreement will depend on the seller’s willingness to adjust the price to reflect the prevailing market values.
A recent high-profile example of the impact of the market crash is the aborted £28 billion of HP by Xerox, – a further reflection of the waves of valuation adjustments hitting the market and there will be further cases to follow in the weeks ahead.
Understanding the Link Between Stock Market Values and Business Value
Many private company owners struggle with link between stock market values and the value of their business. They ask the question – “well nothing has changed with my business – we are still making the same level of profits – why should this affect the price I receive for selling?”
The answer lies in the fact that the stock markets are the main external reference points for company valuations and companies listed on the stock market will have values that move up and down with the movement of the markets. The stock market value is based on a multiple of the company’s most recent profit after tax – it’s price to earnings ratio (‘p/e ratio’). A company with a p/e of 10 pre-crash is most likely now looking at a multiple of 7 based on a 30% fall in market value.
When we look to sell a privately owned property, we can check with the land registry for recent transactions within the locality of the property in order to get a good idea of what our property would sell for. For the private company sale market, only a minority of company sale prices are publicly disclosed, so there is very little price visibility. Therefore, this is why the private company sale market needs to look at the stock market values for businesses operating in the same market sector to get a reference point for valuation.
Stock Market Values as Economic Forecast
Another factor that is very relevant is the fact that stock market values reflect a forecast on what the market expects to happen to the economy in the future. So, you may not be seeing any impact on your trading performance today, but a fall in the stock market if forecasting that there is a risk that your business will see some deterioration in your business in the future. The extent of any impact will be largely dependent on the sector in which your business operates. So, for example, a business in medical supplies should prosper looking ahead, while a third-tier supplier in the motor industry will have a difficult time.
What are the options for sellers?
Given that there has been a large downward adjustment in company valuations, where does that leave the owners of business who a month ago had hopes of exiting through a sale in a few months. For the lucky minority, you may find that events have suddenly made your business more valuable, for example, businesses in the field of medical supplies. However, for the vast majority of business owners, the exit market has been turned upside down and it for these people that this discussion document has been written.
There are many reasons why companies are put on the market for sale.
The most common are as follows:
The owner may be seeking retirement;
For an MBO or MBI the exit is part of the original investment plan to return funds to the buyout funders;
The business may require significant investment and hence a sale of all or part of the business is appropriate to mitigate an owner’s risk;
The owner may feel the market is as good as it is going to get, or even worse, they may feel it could deteriorate;
Key employees may be seeking to retire within a couple of years and could be difficult to replace; or
For large corporates, particular subsidiaries may become non-core through changes in group strategy, or there may be a need for additional cash.
One thing in common, however, is that whatever the driver for the sale, the choice is to either delay the sale or take action to differentiate the business from the long queue of businesses now looking for a buyer in a market where there are a much smaller number of genuine acquirers.
To keep the business thriving, owners must have a robust growth plan to prevent value erosion.
For those considering a sale, previous plans must be reevaluated and adapted to the current market conditions. The exit strategy needs to be realigned, and necessary changes should be implemented to make the business attractive to potential buyers in the new market landscape.
What do the current buyers look like?
Company buy and sell transactions will still happen, but the sentiment of the rationale will have changed. Gone for a period of time will be those buyers that were in the market to buy to find a profitable home for their spare cash resources. In times of market shock, the natural instinct of this type of buyer is to conserve cash and this will leave a big hole in the buyer market. So, what type of buyer will we see more of:
The Bargain Hunter
The Value Seeker
The Trophy Buyer
“We Buy Houses for Cash!” – Understanding the Market
We have all seen the newspaper adverts: “We buy houses for cash!”. These buyers are looking for company vendors that have an urgent need to sell. They fill a need in the market place, so I am not going to be judgemental, but sellers need to be aware that a significant discount will need to be given to this type of buyer – this is of course on top of the existing market price adjustment that everyone needs to adjust to.
The Rise of the Consolidator
The Consolidator will become more active, as much as a way of defence as a way of expansion. It is also a potential win-win for both buyer and seller. The Consolidator is primarily a competitor in some form and its objective is to grow through buying customers and turnover and removing duplication in costs. Once the costs have been removed the buyer enjoys the benefits of the resulting higher profitability and it has taken a competitor and threat to margins out of the market. This synergy upside provides some potential to discuss sharing this improvement in profitably during negotiations. The Consulting Engineering sector is a prime example of this, where there has been a succession of mergers and acquisitions in recent years, primarily to achieve a global presence.
At PCW, our team includes experience of leading successive corporate acquisition consolidation strategies and therefore we understand the mentality and processes employed by corporate buyers in selecting and completing multiple consolidation acquisitions.
Private Equity Value Seekers
This is the time that the Private Equity market will be keen Value Seeker buyers. They seek long term value and when they see a strong market driven valuation adjustment, they will seek to deploy the vast amount of capital they hold in reserve to benefit from next recovery period. The private equity options will vary depending upon the industry the seller business operates in, the quality of the management, the business growth prospects, profitability and cash generation.
Partnering with Private Equity
Private equity buyers will want the business owners/senior management team to retain part of the company and, subject to finding the right partner, is a proven success for an owner wishing to have a partial exit and stay in for the next up-turn. In the current market, there a vast number of PE companies, most choosing in invest by different sector specialisations and time periods for holding investments. It is critical to find the right partner at the start – as you will be stuck with each other for three to five years. At PCW, our people have worked in and around the private equity market for over 30 years and have the experience to guide you to making the right choice.
The Trophy Hunter will always be in the market. Strong brands that have proven to be sustainable throughout time will always be attractive acquisition targets. However, this will have limited impact on the mainstream UK business seller market place. For the majority, an exit to a Consolidator or Value Seeker is likely to be the most successful outcome and a plan should be developed to increase the attractiveness of the business in the eyes of these types of buyer.
Actions to be taken now
For many owners, it is the threat that the business’s performance may deteriorate that starts them thinking about an exit. If this is the case then the exit may come too late to get the best price. In this case, a recovery plan is the first step to take as discussed in:
When exiting a business, it is always important to sell some ‘growth’ to the new owners. An important part of the exit strategy, therefore, is to identify the immediate and medium-term prospects of the business and be able to sell them as benefits. These may include, for example, the following:
Exploiting a new product range;
New geographical markets; or
New legislation supporting growth in a company’s products or services.
It may be beneficial for a company to have realised some upside in these areas by the time of exit to put some substance behind the claims of growth.
Possible threats to a business can have a negative impact on the attractiveness and therefore value of a business, for example:
New and competing technology in a company’s markets;
An adverse change in legislation; or
Consolidation of its customers.
In these circumstances a defence strategy needs to be formulated and implemented without hesitation or the seller will pay the price in negotiations with potential buyers.
As previously stated, a key aspect to an exit strategy is making sure that the business looks like something that trade purchasers or investors would want to invest in. At PCW Consulting we believe the only way of ascertaining this with any certainty is through dedicated research. This involves talking to the relevant trade and financial organisations to clearly understand what they are interested in and why. Consequently, at any one time, PCW’s research analysts have on file thousands of acquisition criteria from businesses that are actively seeking investment opportunities. This results in a thorough analysis of the exit opportunities and will also provide a guide to the valuations that owners could expect on exit.
Key Aspects of the Exit Decision:
The process of identifying the most likely exit route and implementing the changes needed to increase attractiveness to buyers will drive outmany important aspects of the exit decision:
Is there an optimum time to exit?
What is the current estimated exit value?
Does the business currently look sufficiently attractive to potential new owners?
Will the business exit on a rising level of profitability?
For many other owners the timing of the exit is centres around the current valuation, which at the current time will be less than what the owner would like to achieve and therefore a delay in marketing the business may be the right thing to do. In many ways this can act as a catalyst to “re-booting” the future growth of the business and put in place a growth plan which includes the actions described in:
Value improvement objectives
To improve current business values towards desired values requires specific goals to be achieved by either increasing the profits, enhancing the value of the price earnings multiple, balance sheet improvements and management of people.
Some examples of these various methods are detailed below.
Small bolt-on acquisitions
Remove less profitable work
Increase or decrease level of sub-contractors
P/e ratio Enhancement
Reduce reliance on key customers/suppliers
Prove the business has growth opportunities in new markets or products
Legally tie in key employees and intellectual property
Balance Sheet Improvements
Reduce working capital to free up cash for the owners at no cost to the buyer
Review the need for capital expenditure
Generate cash from the sale and lease back of major assets
Any business sale preparation strategy needs the full support of those allocated the responsibility of delivering the targets set. This may be restricted to the owners of a business, but very often involves non-shareholding management. Most owners prefer not to disclose their intentions of exit, whilst others may be more forthcoming. The pros and cons of disclosure need to be weighed up and potentially incentive arrangements put in place to tie management in, but all of these aspects should be discussed with an advisor first.
Implementation of the strategy is not a not a one-off process, and it needs to be reviewed on an ongoing basis to ensure value benefits are being delivered. We, at PCW Consulting Group, have added value to businesses across a broad range of industrial sectors. Our Exec are ready to share their knowledge with you and get straight to the catalysts for your successful growth, putting checks and balances in place to give you the protective governance that you need to help you fulfil your ambitions and achieve the success you deserve.
Every initial meeting with prospective clients starts with a “Company Saleability Test”. This involves a series of questions, which collectively provide an assessment of the areas in the business that need to be addressed before a business is considered to a position to seek a buyer. If you would like to undertake a free and confidential “Company Saleability Test” with a member of our Senior Executive Team, please contact us.
As resilient business owners who have triumphed over past financial crises, including recent challenges like Brexit and COVID-19, the PCW Consulting Group’s Executive Team possesses the expertise to share highly valuable insights.With a wealth of firsthand experience in overcoming various setbacks, we have noticed recurring problems and root causes in businesses of all sizes.
In this knowledge sharing paper, we offer practical guidance to fellow business owners, management teams, and stakeholders. We highlight essential steps to address major business distress and caution against common pitfalls. While macro-economic issues can present challenges, it is crucial for shareholders not to accept them as excuses from their boards and management teams. Instead, use such crises as opportunities to evaluate team performance and make tough decisions if necessary.
Even if your business isn’t currently facing distress, preparing for challenges is essential. We encourage undertaking a thorough strategic review, benchmarking key areas, and asking difficult questions to ensure your business remains strong and well-prepared for any future obstacles.
By gaining insights from our experiences, you can emerge informed and ready to take the necessary actions to improve and fortify your business effectively. Remember, being proactive and strategic is a win-win for business owners, ensuring resilience and success in the face of uncertainty.
Assess the situation intimately but be brutally honest!
Before implementing a successful business protection plan or turnaround, it is essential to understand the current state of the company. In many cases, business troubles can be attributed to ineffective management. Management plays a significant role in the company’s performance, and sometimes their inefficiencies are hidden during prosperous times or under the guidance of a strong leader who is no longer present.
Issues can arise from various factors such as losing a key customer, complacency in protecting market share, or misjudging the capabilities of the management team. True leadership emerges during challenging times, but often, managers are focused on processes rather than winning new contracts or may lack the necessary skills for critical moments.
Owners must be aware that relying solely on the insights and recommendations of their current management team may not yield honest and objective solutions. Genuine people who are passionate about the business and willing to speak truthfully are crucial for turning things around for the greater good.
Using additional funding to solve problems caused by ineffective management is usually futile. It only delays the inevitable and wastes resources. Toxic internal politics and fear can adversely affect employee morale, leading to the departure of talented individuals and ultimately affecting the business’s performance.
To facilitate a turnaround, stakeholders need independent expertise to identify and address the root problems. Engaging with the management team, employees, clients, and suppliers is essential to ascertain the truth and understand the business dynamics. PCW Consulting Group has the experience and knowledge to undertake business reviews at any stage of a company’s journey, whether facing internal or external challenges.
Prioritising Profit and Cash Flow: The Reality of Success
Many management teams prioritsze chasing high turnover and big clients, often overlooking the fact that some of these clients may have low-profit margins and extended payment terms, resulting in cash flow issues. At PCW Consulting Group, our first step is to understand the liquidity of the business.
We listen to the management team but also form our own opinion by meticulously examining the cash inflows and outflows. Through a detailed financial model, we map out the current cash position and forecast the short-term cash flow. This level of precision is essential to quickly address any financial challenges and gain control of the situation.
By focusing on the immediate weeks, months, and quarters, we bring the business back into stability. This micro-level approach ensures there is sufficient cash to sustain operations, providing the turnaround team and stakeholders with the time to plan ahead and strategize effectively.
Streamline the business
Management teams often overlook their business’s core strengths amidst disruptions caused by high growth or ongoing losses. Diversifying and taking on additional product lines may seem tempting but can detract from the original core strengths and operational excellence.
As the downward spiral continues, retaining staff becomes challenging, and the quality of work suffers. Cash flow problems worsen, and morale deteriorates, leading to a cycle of further decline.
During times of trouble, focusing on core business operations and capabilities is crucial for success. Downsizing or retreating may be necessary steps to ensure survival. PCW Consulting Group can help secure various finance solutions or negotiate with suppliers and HMRC to navigate financial challenges.
Improving cash flow and conducting a strategic review are essential priorities. However, introducing new capital is not a sustainable fix; a more comprehensive restructuring may be required.
Selling non-essential assets or refinancing them can free up finance and help rebalance cash flow. It’s crucial to act promptly to avoid formal insolvency procedures and maximise asset value.
When facing severe difficulties, consider ending relationships with non-essential suppliers and employees to save the business. Rigorous and decisive action is vital for survival without causing irreparable harm.
Throughout the process, effective communication is key to protect remaining assets and maintain positive relationships with creditors. By taking prompt and resolute action, businesses can navigate through challenges and secure a stronger future.
Never let a good crisis go to waste!
After successfully turning the business around, PCW is committed to long-term value creation. With an intimate understanding of your business, we work with stakeholders and the management team to develop a new, relevant business plan.
Identifying key team members, we capitalize on the lessons learned to create a stronger and more valuable business. Transitioning from micro-management to a strategic outlook, we focus on tightening processes and pushing for growth.
As we progress forward, let’s explore some post-turnaround subjects to keep in mind.
Re-defining a winning culture
Companies in need of a turnaround usually have a confused or ill-defined culture or have lost their way for whatever reason. We can test this by asking staff to describe the company culture as they perceive it. In failing businesses, or failing management, employees will not be forthcoming, and answers will vary from person to person. You’ll find that no two people share the same description. Especially when a company is charting through stormy waters, it is imperative that the whole team embrace a clear vision, a mission, and a unified culture which will define success.
At the heart of culture are the core values a company embraces. Core values are like the Ten Commandments. They are simple action statements that define the principles the company believes in, not fuzzy declarations that can be reinterpreted at the whim of management.
They should be published and posted throughout the company. If they were developed years ago, then you should revisit them as the management may have lost their way, not lived and breathed them, or perceived them to be no longer relevant. You will need to engage with the staff to write new ones or review and refresh old ones and communicate, communicate, communicate. Employees and clients should understand the company’s commitment to them.
Many companies say they do the right thing, but do they? And do they do it all the time? Core values define corporate culture, and companies without them tend to drift and underperform, so don’t let this sort of omission happen again. Keep communicating the message about what you are and what you hold dear, whether it is through your vision and mission statement or your Ten Commandments, recruit people who mirror them, put them at the core of your existence and keep reinforcing the message.
People, People, People
In any organisation, people are the most crucial component. Investors invest in individuals, not just companies. Having the best people on board not only helps navigate crises but also builds a successful and valuable company in the long run.
When a business deteriorates, it’s often due to ineffective management. Identifying the right team members and making necessary changes are critical during a turnaround. However, evaluating individual performance can be challenging, especially when senior management plays non-productive roles.
Management should be cautious of self-preservation motivations among high earners, which might lead to biased reporting of their performance. It’s essential to consider the entire team and watch out for signs of favoritism or negativity towards others.
PCW Consulting Group offers independent expertise to help with team assessments and shaping a high-performing workforce. The key is to focus on hiring high performers with a track record of success. These employees bring energy, expertise, and a desire for growth to the company.
Retaining valuable employees requires a management team that inspires trust and leads by example. Demonstrating commitment to the staff, clients, and the company’s success is crucial. High performers seek to be part of winning teams and often associate with other successful individuals.
During challenging times, seize the opportunity to offload poor staff and bring in the best talent available. Empower them, reward their achievements, and continuously fuel their drive for success. By building a strong and motivated team, your business can thrive and create a positive upward spiral of success.
Creating a new vision of the future and a new strategic plan
As noted earlier, once a turnaround team has re-discovered and defined the core values, culture, and vision for the future of the business, then the effective strategic planning can begin. It makes no real sense to begin strategic planning before these first steps in saving the business and repointing it in an upward trajectory have been accomplished, other than to have one eye on it, knowing that it will have its moment when it is the next subject matter to be of priority importance. The strategic planning process should include the best management team members, if they exist, or perhaps new ones who will be charged with implementing the plan.
The planning sessions should not be held in secrecy, as the workforce will always find out that management is conducting an important meeting and will become suspicious as to why the meeting is being held. No one likes secret meetings that may define his or her future, and everyone can be sensitive to this after trauma. After the plan is finished, the employees should be promptly informed as to the outcome and how the plan affects their future. Good leadership and communication is essential in relaying that the company has a solid strategic plan now going forward and, quickly and effectively, must let employees buy-in to them and hold open forums for honest Q&A sessions with the owners and new management team.
It’s important to continually instil that need for pace across the business because, without that sense of urgency, desire loses its value.
Whatever you do, do it quickly with unshakeable focus and then keep up the pace!
Speed is more important than perfection in business. Indecision and overthinking betray lack of confidence and hinder progress. Making quick decisions allows companies to execute and achieve results efficiently.
To maximise customer value, respond promptly to their needs with well-thought-out plans and propositions. Quick response time increases the likelihood of positive customer feedback and prevents missed opportunities.
Efficiency and productivity are enhanced when making quick decisions, especially with looming deadlines. Being comfortable with “controlled chaos” and swiftly sieving through clutter to find the essentials is a valuable skill in today’s business world.
Starbucks exemplifies the power of quick decision-making during times of crisis. By closing stores for retraining, they re-focused on their core business and experienced a turnaround.
Maintaining momentum and staying focused on priorities are essential for productivity and successful recovery. Avoid losing pace and continue confronting challenges head-on to ensure ongoing success.
A few final words….
Pulling off a business turnaround takes an intimate, impartial, independent, and forensic understanding of the operations of a business, its customers, its products, sales processes, the capability of its management and staff, and its back-office functions. As the turnaround process should be completed in an intense and rapid time period, stalling or delaying doing something about it can lead to even more losses. Stakeholders should deploy all the armoury available rigorously and at pace, hiring independent support from those who know exactly where to look, know precisely what to do and who are very familiar with rolling up their sleeves and getting their hands dirty. We have all the resources you will need at PCW Consulting Group, and we can provide a one stop shop or work alongside your current advisors. However, you feel comfortable, we will deliver for your best interests.
With the proper support and an understanding of the key steps, you’ll not just be on the road to a successful and permanent business turnaround, but also an exciting transformation and ultimately growth that could perhaps make your company very valuable one day. PCW Consulting Group can then help you again when you want to sell it!
For a no obligation confidential consultation or a general discussion on business strategy, ask to speak to Paul Waldeck on 0800 037 5029 or email firstname.lastname@example.org