Businesses fail every day of the week – estimates suggest that in a normal year, about fifty companies will go into liquidation every business day. That’s a waste of entrepreneurial talent, resources and jobs – it’s also the reason that business rescue matters. As a business deteriorates, its problems start to mount and it starts to consume cash. But business failures are less likely to happen if caught early. And company doctors are experts at living by the mantra, ‘cash is king’ – they are quick to identify the weak spots and stop the rot.

Who works as a company doctor?

Also known as corporate recovery specialists, company doctors come from an array of backgrounds. They might be company chief executives, or independent company executives providing specific skills within a turnaround team. A turnaround professional could also be a specialist adviser, or perhaps a senior representative from a stakeholder in a business, like institutional investors, bankers, venture capitalists or asset lenders.

Experienced company doctor Bill Price, a founder member of the Society of Turnaround Professionals (STP), distinguishes the company doctor from the insolvency practitioner. ‘It’s not the same thing, it’s the opposite of insolvency, which we’re trying to avoid!’ he laughs. ‘Most of us just stumble into it, having done a good job and got money back for the long-term capital provider. Having done a good job, the likes of 3i or Lloyds will ask, “can you do the same thing here?”’

There are also differences among corporate recovery specialists. Some are generalists, untied to any particular industry. Price, who has worked across a raft of industries, is usually brought in when there are management issues. But most company doctors are used when the problems besetting a business are industry ones. They have experience within an industry, like software or engineering, and bring their expertise to bear for the benefit of the company.

Who needs a company doctor?

The simple answer is any ‘distressed’ business. But it is often the directors that are the last to face up to the need for outside help. Directors of distressed companies have a tendency to exacerbate the company’s own problems rather than face up to them. They might start to act fraudulently, make more and more errors, or the board might just be plain negligent. All of this breeds a lack of confidence from the shareholders towards management

Many chief executives go through the same processes as the dying – anger, denial, depression and then acceptance of the company’s fate. It is only at this last stage that the business will call in the company doctor, unless forced to do so by a lender or major shareholder. Which is a shame. Because companies that call on a specialist in the early stages have a better chance of survival.

Five reasons why businesses fail

Mark Blayney of the Turnaround Management Association is also managing director of Creative Strategy, a business turnaround consultancy. He has identified five main factors behind a business failure – management problems, strategic challenges, lack of financial control, lack of operational control and ‘big projects’.

Management problems could entail an autocratic boss who is ignoring other directors trying to point out that things aren’t going well. There are also boardroom disputes that lead to ‘civil war’, or family companies that are run in the family’s, and not the business’, interest.

Strategic challenges include changes in the market or from customers, or changes in technology that necessitate investment. Failures arise when the company has failed to keep abreast of changes.

Lack of financial control can include cash being tied up in excess stock or debtors, or costings that have become out of date so the company doesn’t really know what margin it is making on its products.

Losing control of staff or lack of up-to-date machinery covers the operational issues. And ‘big projects’ are events that eat up management time and cash, like acquisitions, introducing new computer systems or launching new products.

More company distress signals

Another distress signal that might worry investors could be directors that are running a business without a business plan, flying by the seat of their collective pants. Operating as mavericks, they can often misjudge their markets.

Finally, excessive debt means a company has no margin for error with its credit over- extended and poor relationships with lenders. Some companies grow too quickly, boosting sales but ignoring the effects of growth on the balance sheet. Gearing up the company too highly can leave little room for manoeuvre. Any one of these scenarios could require the services of an experienced company doctor.

The company doctor’s first steps

In effect, a company doctor is a high level interim manager. He financially restructures a distressed company. On arrival, he’ll identify what one doctor called the ‘pressure points’ of the business – its immediate cashflow. The company doctor needs to find out what money needs collecting and paying out from debtors and creditors and the size and scope of the business’ assets. He’ll talk to creditors and perhaps restructure payments.

All of this scrutiny could occasionally necessitate a touch of boardroom bloodletting, which is one of the main reasons struggling boards choose to keep their heads in the sand. Company doctors are not averse to overhauling group accounting systems if they’ve been poorly managed. And they won’t balk at selling assets to pay off creditors but leave a viable business in place.

The turnaround specialist also has to decide if a market still exists for the company. Has demand gone away for good? Has the business succumbed to cheaper overseas competition?

Advantage of a fresh eye<

Often company doctors have distinct advantages over existing management. They enter the company with a fresh eye and the gift of objectivity. They can spot problems and think of solutions that an insider might not fathom. Moreover, company doctors can avoid ‘politics’ and make unpopular decisions without losing too much sleep over it.

In essence, experience in a crisis is what the company doctor is paid for. One good analogy is the emergency room doctor, whose talent lies in making critical decisions quickly to stem the bleeding. More than likely surrounded by angry creditors, frightened employees and a nervous board, the turnaround specialist must be able to hold his nerve.

A lender’s or shareholder’s poodle?

Why do boards fear company doctors? ‘Frequently, management changes are associated with management failure,’ points out Bill Price. ‘It’s the company doctor’s job to make hard choices before the receivers come in. Also, there’s a tendency for management to delay bad news. Often the first that the bank knows about a problem at a company is when the overdraft doesn’t move, or when the company starts bouncing cheques! It is then that the stakeholder has to take pretty firm action or the bank’s confidence disappears.’

George Moore is a director at turnaround specialists Regenesis Partners. He says that ‘companies rarely ask us or come to us, because we have a reputation for being fairly ruthless! It’s usually the lender or the shareholder that comes to us.’

If you drive it, you control it

Paradoxically, if a distressed company were to approach a doctor earlier in the process, directors would stand a better chance of surviving any cull. ‘Approach us earlier before the rescue becomes more challenging,’ explains Moore, ‘because we’re not going to bite the hand that feeds us. It is better this way, because we then act as interim managers working for you.’

When the company doctor comes in, he’ll want paying. If sent in by the bank, you could be facing an aggressive stance on fees. Banks often want an equity fee if the business is cash generative with good management, rather than just taking cash. This could be as high as 48 per cent of the company’s shares.

Other banks are more benign, preferring to keep the company alive so that they can lend more to it in the future. They’ll eschew equity and fees to keep you alive as a profitable customer.

Finding a company doctor

The Society of Turnaround Professionals is the professional body set up in the autumn of 2000. It was established with significant support from the Association of Business Recovery Professionals to recruit, monitor and regulate turnaround practitioners. Its formation was supported and encouraged by the Government, by clearing banks and other financiers, by private equity investors and by leading accountancy firms.

Another useful body is the Turnaround Management Association, an American trade association that has set up a UK chapter. As there are no qualifications for entry, TMA members tend to be people who wish to provide services to turnaround cases, like lawyers, financiers and asset lenders. These are the main company doctor bodies, but you might also consider professional business advisers. For instance Icon Business Solutions, which is part of the Icon Global Group, helps small and medium-sized businesses in the areas of “Time, Team and Money”.

Icon has a hands-on style of advising, helping businesses help themselves by improving their planning and skills. The group helps bosses look at their own business from a new perspective. ‘It holistically analyses the whole business, and sometimes it hurts [the entrepreneur]. But we’re in it for the long term, and several advisers have even joined the company boards,’ says Icon’s Phil Jones.

The Icon belief is that, although entrepreneurs are often confident about their particular business, they might lack knowledge about business systems, accurate accounting or marketing expertise. As Jones explains, ‘we’re advisers, mentors and facilitators, and turnaround can be a part of what we do.’

Case Study — Reversing a 67 per cent drop in sales

AIM-quoted Avionic Services is an air traffic control systems innovator that looks to have turned the corner under experienced company doctor Bill Price. This business has been through some tough times in the wake of the knock-on effects of 9/11 and the Iraq liberation, culminating in figures for the year to 30 June 2003. These revealed massive losses of £3.36 million on a 67 per cent drop in sales to a smidgen over £1 million.

Price joined the board as a director in June 2003. He had worked across a host of industries and had recently led the turnaround of a Gateshead-based supplier of electronic information and security systems for the defence and transport markets. Crucially, Price also had good links with the City and with a number of the group’s institutional investors.

When Thomas Glucklich stepped down as chairman in July 2003, it was no surprise to find Price taking his place. Last November, he assumed the role of chief executive as well.

Price was instrumental in implementing a number of cost-cutting programmes across the company, which included a cull in staff numbers from 39 to 29. This reduction, along with other measures, took annualised administrative expenses 29 per cent lower in the half to December 2003. The recovery in the business, which had really kick-started with a £1.2 million deal announced in June 2003 to provide air traffic control systems for a new control tower at Bahrain International Airport, was now underway.

Over the past 12 months, the firm has snared contracted orders worth a total of between £6.2 million and £6.3 million. This compares against £1.02 million sales for the whole of the financial year to June 2003. In his latest bit of good news for investors, Price announced the award of Flight Inspection Approval by the Civil Aviation Authority (CAA), a great move breaking a UK monopoly on flight inspection.

‘It has taken an investment of over £1 million and over four years to research and develop new Flight Inspection equipment and then complete the CAA’s rigorous approval procedures,’ beamed Price.