With global competition increasing, UK manufacturers are under real pressure. According to Cambridge Econometrics there are 2.4 million manufacturing companies in the UK generating approximately £385bn worth of gross output. This underlines the importance of giving real alternatives to those firms experiencing difficulties, other than being forced into insolvency.
Until recently, directors of struggling companies had only limited scope to facilitate the survival of their businesses. They could seek their creditors’ approval for some formal recovery proposals, but such arrangements too often relied upon unrealistically optimistic future sales projections and did not address underlying problems.
Time and again such businesses re-hash and re-issue unrealistic business plans. While failure to deliver eventually loses all credibility for management, the practice is often used just to secure a small respite from insolvency.
Alternatively, businesses that appeared to be unable to address a self-managed turnaround, could ask their bank to appoint a receiver. This process sometimes helped preserve the firm’s ‘going concern’ value but was often criticised for failing to take into account the position of ordinary creditors.
Unscrupulous directors, with the connivance of a handful of rogue insolvency accountants, simply sold their businesses back to themselves for a fraction of their worth. This practice is less common today but still survives.
The Enterprise Act 2003 allowed directors to appoint an administrator to help resolve the company’s problems. With the temporary benefit of legal protection from creditors’ claims, it is the administrators’ primary duty to seek to save the business itself. This entails much more than looking for new lenders prepared to advance funds against assets.
A properly conducted process will also advocate a sustainable restructuring programme to address such areas as sales and marketing, new product development, manufacturing efficiency, general overheads, working capital management, and non-core asset disposals.
This is probably the best opportunity the organisation has to address structural weaknesses in both management and operations and is an absolutely critical phase.
It is only when a rigorous assessment concludes that these initiatives will not be enough to save the company, that the administrator should consider selling the core business. This should be done through a considered and transparent process designed to extract optimum value for all of the company’s creditors. Depressingly, it is frequently the case that news of an administrator’s appointment is almost immediately followed by news of a cut-price sale, often back to the original directors.
Such sales, commonly known as ‘pre-packs’ or ‘accelerated M&A’, are often justified on the basis that exposure of the business to the market would immediately erode value, or on the assumption that no-one, other than the directors, would wish to invest in the business.
Not surprisingly, ordinary creditors are increasingly concerned over the abuse of pre-packs, as this practice and all the evidence suggests that a quick business sale without any essential revision of the failing business model will simply delay the inevitable.
It’s up to insolvency practitioners to be appropriately skilled and not be fooled into the easy option. They also need to ask questions such as why should existing management, who have failed repeatedly to deliver in the past, now be in a position to deliver after the sale? And could a pre-pack contribute to the inevitable downward spiral of this business?
Outside acquirers are often supportive of existing management, and frequently hire skilled manufacturing turnaround advisers to offset management weaknesses and give the business a new lease of life — this is where a multi-disciplinary accountancy specialist usually comes into play.
So, is the sale of a manufacturing business out of administration proceedings invariably bad news, and are there no circumstances that warrant a quick deal? Emphatically not. But the business should be widely and creatively marketed and the price negotiation fair and transparent. Most importantly, the appointed insolvency practitioner should be using his or her business skills and acumen to resolve the underlying business problems before accepting the first deal on the table.
So, next time you read triumphant headlines concerning the ‘rescue’ of a business from insolvency, ask yourself whether real value has been preserved or created, or whether a hurried and questionable deal has simply carved up the value between the participants at the cost of everyone else. Our manufacturing heritage needs to be protected, not exploited.
Kim Stubbs leads accountancy specialist BDO Stoy Hayward’s manufacturing performance improvement team
Selling a business out of administration must be creative and the price negotiation fair and transparent to give struggling companies a chance, says Kim Stubbs.