Turnaround Director survey
June 13, 2017
In response to an ever changing restructuring market, we wanted to find out what Turnaround Directors had seen and what they thought the future would look like. We surveyed 197 Turnaround Directors to ask them what they think the main causes of distress are, which sectors are keeping them busy and what the future looks like for them. This is what we found.
Consultant/board adviser was the most common role that companies contracted Turnaround Directors for, followed by chief restructuring officer and financial director.
The largest referrer of work was professional advisers (25%) and then private equity houses (14%) and clearing banks (13%). One of the lowest sources of work referrals was lawyers (3%).
The largest proportion of projects worked on by Turnaround Directors were in London (24%) followed by 21% in the Midlands. The UK heat map shows the frequency of projects by region across the UK.
Almost half of projects worked on were with companies with less than £50m turnover, with around 30% in the next largest £200m + bracket.
We asked turnaround directors what the key internal reasons for decline were in the businesses that they’ve worked in over the last 12 months. The top three reasons were management, a failed strategy, and working capital inefficiencies. Poor stakeholder management and companies over-relying on a sector were also cited as contributing factors.
These views correspond with the trends that we’re seeing and the work that we’re doing with our clients. We recently worked with a meat production company where management were brought into the business for one type of strategy, continuing growth of the core business and sales of one type of meat. When this was not successful and management tried to drive growth through entering new markets, they lacked the flexibility and expertise to adapt to change. As a result, when their strategy failed there was no plan B. We were engaged to assist management in the short term and stabilised the immediate cash requirement. We then looked at future options and found a trade buyer to secure the long term future of the business.
We then asked our Turnaround Director Panel what the key external reasons for decline were for in the businesses they have worked with. The top three were a change in policy/approach by an external funder (both lenders & shareholders), the loss of key customer/supply chain breakdown, and a change in regulation e.g. National Living Wage Policy. Other reasons included a change in consumer behaviour and a failed event.
We think that the following changes in regulation and market are key external contributors that could add additional stress to businesses. Companies and their stakeholders that are affected by them need to assess the impact on their business:
National Living Wage will not only increase the cost of pay for lower-paid staff, it could potentially have an unforeseen effect on the cost of pay differentials in a business. If lower paid staff have their wages increased, the differential between the lowest paid and those above narrows. Managers (those paid more than the national minimum wage) may demand an increase as well or seek alternative employment.
Who will it impact? The key sectors impacted are considered to be retail, hospitality and leisure, business services (e.g. facilities management companies) and care homes. However, this is not an exhaustive list and many sectors that pay above NLW now will begin to be impacted by "lower skilled" jobs commanding increasingly similar salaries.
Apprenticeship Levy kicked in in April 2017 which adds 0.5% levy to the total wage bill (for all businesses with >£3m annual wage bill). This additional cost can be mitigated somewhat through businesses taking advantage of funding of 110% of their contribution via the apprenticeship scheme back to take on new labour, but will need to use the notional vouchers within two years of receiving them.
Who will it impact? Employers >£3m wage bill.
Off payroll workers in the ‘gig economy’ refers to organisations where temporary positions are common and filled using independent contractors for short-term engagements. As a result of recent high profile rulings, Uber and Deliveroo, employers are likely to face increasing pressure to employ individuals previously working on a contractor basis.
Who will it impact? Companies such as couriers whose business model is based on self-employed individuals working on a flexible basis.
The market in 2017/2018
For the last question of the survey we asked how Turnaround Directors expected the market to change in 2017 and 2018 and have summarised the key themes in the conclusion section. The result of the EU referendum and the uncertainty it brings for businesses was the most prevalent answer. Changing foreign exchange rates (forex) and rising inflation and the resulting strain this will have on consumer spending were also common responses. Two other recurring themes were the public sector and potential changing regulation and the possible rise in interest rates.
Our view, in the context of the outlook for the market, that the sectors likely to face increasing strain in 2017/18 are food manufacturing, facilities management, recruitment and the retail sector, specifically restaurants.