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George Moore on turnarounds in the UK22/02/2006. Source: AltAssets. 
In this AltAssets interview, turnaround expert George Moore talks about the current state of the UK turnaround business, his approach to saving distressed businesses, and about his work with private equity houses. Moore, a qualified chartered accountant, was one of the founders of UK business recovery consultancy Regenesis. Now he runs his own turnaround business, called resolution inc. He has been the brains behind many successful business recoveries and is also a founding member and a Fellow of the Society of Turnaround Professionals.
Are turnaround professionals in demand at the moment?
'Until about six months ago it was very quiet in the turnaround business and the Society of Turnaround Professionals' membership was by and large not over-busy. Let me put it this way, there were more members able to take on work than not.
Over the past six months that position has changed and now a majority of the membership are fully occupied doing casework. There have been definite signs of more activity.'
What were the main reasons for the slowdown?
'Up until about six months ago and about five years before that the economy was pretty stable, people had learnt to come to terms with low growth and low inflation. Businesses were managing to cope relatively easily. Their sources of finance were comfortable with their performance. There was no major requirement for any form of turnaround activity.'
What are the main reasons for the current increase in turnaround activity?
'The big thing that has changed and has damaged confidence has been the increase in taxes and hidden inflation. Although the measure of inflation has been changed by this government, so that it looks relatively low, people in the street face much higher rates of inflation through increases in community tax and variations in fuel prices as well as through all the other forms of tax that this government has imposed. That obviously slowed down high street activity. It also generally weakened confidence and that has been a growing trend.
Certainly the mood among turnaround professionals is that there will be more activity in 2006 than there was in 2005, especially at the smaller end of the market, at the end that is driven by consumer spending: smaller hotels, privately-owned pubs, small shopping businesses, small retail businesses - all of those have seen increasing pressure.'
In which industry sectors do you see the most turnaround activity at the moment?
'The obvious distress at the moment is in retail. Suppliers to retail are increasingly in trouble too.'
What is your area of specialisation?
'I have specialised in manufacturing businesses, generally small-scale manufacturing businesses because most large-scale manufacturing businesses have left the country. Among small-scale businesses are well-run businesses, which are successful, and the not so well-run businesses, on which I focus.'
What are the main issues you need to tackle to make a business successful?
'Some businesses are not competitive because either their products are out of date or they are too expensive. Some companies are unresponsive to changes in customer demand or the market just moves away and the products are no longer desired or required. In general, distressed situations have to do with management not dealing or being capable to deal with the issues the company faces.
In stable economic times poor management can often survive. Companies are terrifically resilient; they can survive for much longer than most people think. If they have a reasonable size, they can carry on for years. It is when times get tough that they cannot survive because they have not got any depth of resource, financially or managerially to get them through the difficult period.'
How do you approach a new task?
'The first thing I do is look at the cash position. I find out whether there is a business that can be saved. Depending on how bad the situation is, it can be a major effort to secure sufficient funds for some form of the business to carry on trading. You look at the obvious sources: creditors and debtors, you then talk to asset lenders, the bank and the shareholders.
If there is a saveable business, just burdened by too much debt or selling products that are out of date but can be modernised, then the best bet may be to raise new funds from a third party to keep the business going. In this case, there is a lot of negotiation to be done with existing shareholders and lenders.
If you can secure funds the second step is to realise improvements to the business over a period of time and that will probably involve changes in senior management and quite possibly a radical reorganisation of the way the company works. You may not see any major benefits from that until, possibly, three years into the process.
The first step is what many turnaround professionals focus on because it is glamorous and exciting and well paid. You can get in and out relatively quickly but a lot also depends on the second step.'
How do you work with private equity and venture capital firms?
'Many people in private equity are not very interested in turning around underperforming businesses. Turning a business around usually takes disproportionate effort to what they get out of it. There are notable exceptions but so far there are not that many people who commit to turnarounds.
When I am hired by private equity firms, people in the firm usually know me and like my model. The private equity house has to accept my model and let me get on with it - there cannot be two people in charge. Whether I can do the service at zero cost to them or not varies from case to case. Often I at least get their investment back.
Many private equity firms shy away from investing a second round of money into a turnaround that has already failed once. Often the first attempt was not successful because changes made in the company were not radical enough.'
What is your model?
'I start off with a few days of due diligence, talking to customers, talking to suppliers, talking to the management team. I also watch out for pension liabilities. All of this does not give me great insights but it ensures that I am not becoming the chairman of an insolvent business. Delay makes the situation worse. If I think something can be done I usually get appointed within a week or two.
I spend the first couple of months working with the existing management team, getting to know the business better, assessing people's capabilities and also looking at the issues the company is facing. Of course, I also have to help the team deal with the big immediate issues, and this is a good time to get a feel for their level of competence and appetite for the coming changes. I think one needs this time to understand what has gone wrong and so how it can be fixed. Without the period of review solutions are often incomplete.
The model that works for me is that I must be executive chairman because if you do not replace the chairman you are not committed to turning around the business. He should have dealt with the problem. I can cope with six chairmanships at any one time and that works because I can pick good management teams to support me.
I do not take equity because I believe that is controversial. I take fees instead. That allows me to be rude to everybody in the company, and sometimes you have to be rude to everybody. If you have an investment you compromise, you are worried about losing your investment or losing the opportunity for that investment.
I expect to be challenged, but also ultimately supported on decisions I want to make. I always have to keep an open mind because I know little about the specific industries I am working in so I rely a lot on the team for the industry-specific points. I deal with the situation-specific points. I pass my sell-by date in the third or fourth year. I then expect shareholders to appoint someone else to take the company to the next stage. That could be an expert in acquiring new businesses, for example, or a proven expert in corporate sales. At that stage you need a new face because I have become too much of an insider to be really objective.'
What are the main challenges you come across?
'The main challenge is persuading the owner of the company to make the changes at the top level. They are often very reluctant to do this. Generally, because people at the chairman-level are tried and tested people who they have backed in the past. For whatever reason, this particular investment has not done well and the chairman has not made any difference - he has to be replaced. That is a hugely emotional issue.
The next big hurdle is changing the senior management team. Almost certainly you replace the majority of the senior team. You might be left with one or two. On the whole, you want to put your own team in. Often that means promotions in addition to bringing people in from outside. I would generally combine promotions with the appointment of specialists that I have known for a while, specialists in the industry or in functions such as accounting or sales, for example.
One big issue is to restructure the balance sheet. Securing sufficient funds and putting together a new balance sheet and a new equity structure to support the business and incentivise a new management team is critical work in a turnaround.
As you have successfully gone through all these steps, your constant challenge is in the business, making sure that the people who come in are going to be sufficiently radical in what they want to do. You have to develop a plan which will address all the failures identified in the review time and bring a measure of flair and new thinking to the operations. The team do this, I try to make sure their plans are realisable and sufficient to recover the business. The key here is not o accept received wisdom. For example, in construction the general perception is you can never get money upfront. That is not true, you can but you have to know how to go about it. In other cases, in some businesses people will tell you that a certain person is key to the business but when you talk to their customers you find out that he is not that highly regarded.
In these situations an ongoing sore is recovering the management equity from those who have left. There is a lot of delicate negotiation with the investors, the bondholders, if there are any, and the bank as to the terms under which the old management's equity is going to come in. If you do not recover the equity from the old management team you end up with small shareholders who have no involvement in the day-to-day running of the business but whom you need to inform about the business. Also, you have got to find new equity for the management that is coming in. That can only mean dilution.
What are the main reasons why turnarounds sometimes do not succeed?
'Focusing too much on the financial restructuring and not enough on the operational issues is a common mistake. If the incumbent management is not replaced, changes are often not radical enough and implemented too slowly.'
Would you say that in most cases recovering the investment is the best you can do?
'Often it is a huge task to achieve that. However, there are cases where I have achieved returns for my clients. It depends entirely on the business and on how early I am called in.'
What are the trends in the turnaround business?
'If the economy continues to slow there will be more of a requirement for my type of services. Many people predict that the economy will slow in 2006 and although I believe it may slow less than people expect, I also think it will still slow.'
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