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Published 18 October 2012 04:18, Updated 18 October 2012 04:35
Simon Mair knows all too well how quickly things can change in business. After setting up a national equipment hire company, Australian Industrial Rental, in 2007, which grew 60 per cent a year for two years courtesy of the burgeoning mining sector, taking on $10 million in debt, things started to unravel. “For the first half of 2009, we were still growing at about 60 per cent,” AIR chief executive Mair says. “Then the claws of the financial crisis dug in and by the third quarter it was pretty obvious we were going backwards.” Eight months after AIR opened a branch in Mount Isa, Queensland, 23 mines closed. “Maintenance budgets were cut from $900 million to $100 million almost overnight,” Mair says. “Everyone clamped up and we just limped along.”
This pattern was replicated in every market and by the end of 2009, the company was behind revenue targets by 50 per cent and faced the possibility of not being able to pay debts or tax bills. “Monthly losses led us to the realisation that we needed help,” he says. “We could handle a few losses but once they became prolonged, it reached the point where we couldn’t make payments to the Australian Taxation Office or the banks.”
By January 2010, AIR was in debt to seven banks, six in arrears and its total gearing level was more than 1300 per cent. The principal bank was owed more than 40 per cent of the total debt and because of non-payment and breaches of its trading account, AIR was in the bank’s workout section and a week away from having administrators appointed. It marked the start of an very stressful 18 months for Mair.
“We were under considerable pressure from our financiers and it was frustrating because we didn’t have the capacity in-house to stem the losses and frankly we didn’t know what to do,” he says. “That’s when we got turnaround specialists Vantage Performance involved.”
Vantage director Steve Hogan and executive Harsh Shah spent the first week working 20-hour days with Mair and his senior management team, analysing the business.
The process identified two key operational issues that needed to be addressed.
“We needed to implement a robust cash flow management system and even more importantly we needed to focus our business on regional markets because that’s where our real strength lay,” Mair says. “On that basis we put together a plan to present to our funders to show how we would methodically make the required changes.”
After some initial resistance, the financiers bought the plan. “It wasn’t that difficult to sell the plan to the banks in the end because if they wound us up they would have lost of a lot more money,” Mair says. “Some of them were tough but because the disposal value of our assets was less than they were owed, they saw this was the best way forward.”
After negotiating a payment plan with creditors and securing a two-month repayment holiday with the lead banker, Vantage and Mair set about making the required changes. The company immediately closed its Sydney operations and shelved plans to open a branch in Brisbane. Assets were redeployed from metropolitan NSW to regional Queensland and while some jobs were lost, the company made some strategic hires. “We needed a full-time accounting resource in head office and we needed additional staff at Mount Isa to bolster our ability to generate more sales,” Mair says.
Vantage’s Hogan micro-managed cash flow on behalf of the business and managed the refinancing arrangements as well as all supplier negotiations.
“If they couldn’t afford to pay a particular bill that week, it was crucial to communicate with the creditor,” Hogan says. “Too often businesses with cash flow crises put their head in the sand and avoid talking. We suggest over-communicating to keep creditors in the loop, because if you level with them and explain it won’t be paid today but it will be next week it’s amazing what can be tolerated.”
Without the constant cash flow cloud looming over his head, Mair was able to concentrate on the business itself. “Not being bogged down in those details freed me up look after business development and staff motivation to help get us back on track,” Mair says.
The strategy to focus only on opportunities in the regional mining sector proved a winner and helped AIR survive not only its cash crisis but aided its grow. After six months Vantage was no longer required to work with AIR on an intensive basis and by September last year the value of the business had grown from $9.7 million to $15.5 million.
“The outlook now is excellent,” Mair says. “We have made every branch profitable, paid out all of our residual debt, we’ve opened a branch in Mackay and have plans to open other branches to continue to diversify the markets in which we offer our services.”
The lessons the experience taught Mair were hard-fought. “It took its toll and really tested a number of relationships,” he says. “The main thing we took from the experience is to be more cautious with debt but it also forced me to sit back and consider what would be the most effective use of my time to short-circuit any potential problems in the future.”
If aspects of AIR’s experience sound familiar, it is not surprising. Restructuring is de rigeur now. The financial crisis was the impetus for AIR’s dilemma but other factors are having a similar effect on other businesses. The rise of online shopping, the rising Australian dollar, falling commodity prices and the slowdown in China are causing some headaches.
“Significant restructuring is under way in earnest,” Vantage Performance managing director Michael Fingland says. “Basically there is no industry where restructuring isn’t happening at the moment. Certain industries are in worse shape than others but across the board lots of work is being done behind the scenes.”
Myer, David Jones and Fortescue Metals Group are some of the most high-profile listed companies that have undergone restructuring recently. Fingland says it’s a different ball game for small and medium enterprises. “Because of their size and reputation, bigger companies can restructure their balance sheet more quickly,” he says. “Smaller businesses have to work harder because raising additional equity or debt is much harder.”
A company must meet six criteria to turn around any business in genuine financial stress, Fingland says, (check your eligibility at “Six criteria for a successful turnaround”). “Every management team needs to consider those factors to determine whether a restructure can be successful,” he insists. Financial distress prompts most restructures but it isn’t the only reason to rejig operations. “Basically, there are two types of restructures,” Fingland says. “There is financial restructuring, which centres around reducing debt and getting the balance sheet into good health, and there are operational restructures, which focus on the cogs of the business and improving earnings.”
Both of these issues need attention in most businesses that require reorganisation but Finland says some companies might need only one or the other. “The starting point for most restructures is to get debt and cash flow into a stable position and you then have time to move to operational issues,” he says.
Reorganising the way a business operates always starts with a strategic review. “The key is to unlock how the business got into difficulty, which requires pulling it apart to determine which parts are working and which aren’t,” Fingland says. The problem may be anything from brand confusion to insufficient sales to inefficient systems to unruly costs or unprofitable divisions. By identifying the source of problems or potential problems, management can devise and implement a plan to rectify the situation.
The goal for any operational restructure is to improve earnings by increasing top-line sales growth and cutting costs. A review is worthwhile even for businesses not in distress. “The idea is you work out what you’re really good at and then streamline the business around that,” Fingland says. “The key is to identify where you make money, devote your focus to that area and then jettison the non-core or unprofitable parts of the business.”
This exercise has led the managing director of Blocks Global, Paul Wilson, to shift his business many times; from a digital agency, to a software company for marketers, to a software business focused on the retail and property markets. Wilson founded Square Circle Triangle in 2000 as a digital marketing agency but soon grew tired of project-based income and the stress that entailed. “By 2004, we recognised that digital and marketing services was a cluttered market, project driven with tight margins,” Wilson says. “We realised that maintaining strong and sustainable growth would be difficult, so we wanted to create some [intellectual property] and an annuity income stream.”
In 2005, the business launched Blocks, a content management solution it built specifically for marketers and underwent a restructuring to support the new product. It continued to offer some agency services but overhauled its working processes and systems.
The catch was that servicing the software sales took much longer than Wilson had anticipated. “Instead of selling the model several times easily, the service component meant it was never going to be scalable,” he says. “It required too much support.”
Last year Wilson re-evaluated his offering again. “We were still generalists in that we were targeting many markets with our software and agency services model,” he says. “Scaling was still an issue, as we were trying to be everything to everyone.”
Wilson then established an advisory board of four individuals with a range of industry experience. “We were suffering from not being able to see the trees from the forest, so it was hard to get real clarity around the business,” he says. “The board ensured we had outside perspective in considering the best way to capitalise what we had already created.”
After doing some internal workshops and research and engaging former chief marketing officer for GE AustraliaJodie Leonard to do some analysis, retail and property development were identified as the two best market segments for the company’s existing offering.
“It was an ‘a ha’ moment,” Wilson says. “As a small business, you take any business you get through the door so you tend not to specialise in one domain. Thinking about a focus on retail felt like all the cards were falling into place.”
Using their internal software and digital marketing expertise they developed a product that retailers can use in stores. “It enables retailers to bring all the components that make online shopping enjoyable – such as the touch screen and interactive elements – into their shops,” he says. “Recent challenges with the economy and online trading has made retail particularly receptive to new opportunities to combat these factors.”
Late last year the business launched Blocks Global for the retail industry and set about changing its operations to support it.
“We had to change everything about the way we work,” Wilson says. “We had to become more agile, build better structures around internal processes, build a customer support function and re-evaluate our billing system and all the mechanics that support the business.”
The next step is capital raising, for which the business has engaged EAC Advisory Partners to help. “To grow in the way and at the speed we want, we need external investment,” Wilson says. It means more change is under way. “It’s a specialist job to clean up the balance sheet, remodel the business structure, develop partnership agreements and set up investor relations.”
Two years ago, the founder and executive chairman of listed software company TechnologyOne, Adrian Di Marco, restructured his business to get ready for cloud computing. The project cost $250 million and was a considerable undertaking, which Di Marco says all restructures should be.
“They are big decisions, because ideally you need a big and ambitious agenda that will deliver major change to undergo a restructure,” he says. “Achieving small incremental benefits is not enough.”
Di Marco says knowing when to restructure, and how to execute the plan, is an essential component of a chief executive’s job.
“As a leader, you need to be able to recognise when it is time to introduce better practices, seek different synergies and bring in new thinking. There is always resistance immediately because people feel threatened by change but the chief executive’s role is to get people on board and bring them along.”
Notwithstanding an executive’s best efforts, Di Marco says good people will still leave. “Generally you lose 10 to 15 per cent of staff with any restructure and as part of that you have to be prepared to lose some of your good people.”
It’s part of the reason Di Marco says cost savings are not enough to justify the upheaval that a restructure triggers.
“You can save money with a restructure because you can implement more efficient processes and systems and cut headcount but those savings should not be the primary driver,” he says. “The driver should be to bring in new efficiencies, new ideas, new blood and new processes to underpin the change.”