K2's Turnaround Update | Edition 1
Tony Groom
Hands-on director and investor in companies with huge growth potential that have undervalued intangible assets.
Welcome to the K2's March 2022 Turnaround Update
Each month I send out a monthly newsletter by email but this is my first on LinkedIn so I very much hope you will sign up to receive this monthly via LinkedIn by clicking the “+?Subscribe” button above.
In this edition:
While I normally stick to business topics in my posts and newsletters, the dreadful situation in Ukraine cannot be ignored so I shall seek to relate my comments to the world of turnaround and supporting SMEs.?
Courageous Ukrainians
First, I would like to acknowledge the tremendous courage of Ukraine and all Ukrainians who are defending their country and their freedom from attempted subjugation by an evil force.
As a former soldier I have often discussed why nations go to war, and why others retaliate even when faced with overwhelming odds against them. In the case of Ukraine, the free world is humbled and fortunate that its brave people have stood up to evil, even when faced with the prospect of death and the destruction of their homes, towns and cities. I believe that soldiers don’t fight for “Queen and Country” but for their family and friends and, importantly, for their self-respect. The prospect of capitulation is anathema to proud and courageous people since it undermines their very being, their sense of self-worth and leaves them with a broken spirit and as a hollow human being.?
I invite readers to reflect on what it means to take decisions that require integrity and courage.?
We live in a world where we are constantly making decisions and it is often easy to take the path of least resistance or the path that serves our own best interests. Often without regard for others. Wilful blindness, deceit, dishonesty, unethical behaviour and immorality are modern equivalents of the seven deadly sins. It takes integrity and courage to resist them and often the initial consequences are not to our advantage. However there is a greater loss, the loss of self-respect as this eats into our soul and happens when decent people take decisions that they know they will regret. It is all about considering the second and third order consequences of our decisions.
Some of you will be aware that I have produced a number of guides including a couple on leadership. My one about dangerous leaders cited Trump as an example with a photo of him but I am wondering whether I should replace it with this one of Putin? Spotting dangerous leaders, like spotting dangerous partners, is a useful life skill and the Guide covers how you can extricate yourself from an abusive or dangerous relationship. If you would like a copy of my Guide to Dangerous Leaders or my Guide to Business Leadership please request it in the comments below. One of the insights below is based on a personal example of when I failed to spot the traits in someone we appointed as managing director to one of our companies.
The Pressure Is On
Turning to business closer to home, we are facing some ugly economic facts. The end of Government Covid support measures and the end of a moratorium on issuing winding-up petitions are coinciding with rising costs of materials and energy, rising wages, staff shortages and rising insolvencies.?
The January 2022 figures from the Insolvency Service showed that corporate insolvencies more than doubled year-on-year and a surge in the number of winding-up petitions is being issued by creditors. This will increase after the end of March when it is anticipated that HMRC will resume its pre-Covid measures for debt recovery.
Those facing such pressure might benefit from some early advice and in the first instance are advised to speak with their accountants or if facing extreme financial pressure,?they might get in touch with K2.
Accountants are often the best advisers to speak with when a business is in trouble.?
While business owners often don’t know what to do about certain business problems, their accountants can generally offer valuable advice. They can quickly spot signs of trouble and advise on what to do. Indicators of problems include: declining sales; growing losses; reduced margins; not paying the accountant; being in arrears with VAT and PAYE payments; being on stop with suppliers; reduction of overdraft facilities; and refusal of loans.
A company’s accountants as trusted advisers are best placed to have an honest conversation about the situation facing their client and any swift action that might be needed. Make sure you are talking with each other on a regular basis.
Insolvency is not the end of the business story
When we look at the options for improving the performance of a company we consider whether it needs a turnaround, transformation or a pivot.
1) Turnaround?usually involves making an existing business more efficient and generally this will involve cutting costs which can involve brutal downsizing if a company is losing money. The focus is on existing activities that are profitable and perhaps returning to the core business.
2) Transformation?involves revisiting the business model or product/market mix.
3) Pivot?involves keeping some essential elements but changing everything else.
We also look at the finances and specifically cash flow and the balance sheet which both normally need fixing as part of any turnaround. Indeed, often companies cannot pay their bills on time and are therefore insolvent.
However being insolvent doesn’t mean the end for a business although it is an indication that decisive action is needed, whether via a turnaround, transformation or pivot.
Deciding which is the best for a business involves a close examination, a strategy and viability review. Ultimately all businesses need to be sustainable and normally this needs profits so firstly we identify the resources that are already available. These can be divided into physical resources, human resources, intellectual resources and financial resources.
There is more on this in our post here ↓
A Timely Warning To Directors
The director of a Midlands-based home renovation and refurbishment business has been disqualified from being a director for seven years after the business’ liquidators reported to the Insolvency Service (IS) that he had failed to co-operate with them.
The director, Mitchell James Smith, 40, from Dudley, “failed to deliver up the company’s accounting records”, meaning it was not possible to determine if assets could be realised for the benefit of creditors, or how much any creditors were owed.
The IS investigated and uncovered money paid to the company totalling ￡2,189,405, for which there was no explanation. In addition, outgoing payments of ￡2,205,375 were not explained.
Dave Elliott, Chief Investigator at The Insolvency Service said:
“It is important for all directors to be aware of their responsibilities to the company and its creditors. Failure to maintain accounting records is a failing for which the Insolvency Service will seek serious and significant sanction.”
Why I always inspect the ladies’ toilets
When I became a company doctor in 1990, there were a number of ‘early warning signs’ that were used as indicators of a company that was heading for bankruptcy.
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Three of the recognised, early warning signs were:
1) a rubber plant in the boardroom
2) a fish tank in reception
3) a Porsche in the car park
Although slightly humorous, these signs served as indicators of the psychology of management and were often seen when a company couldn’t pay its bills. As I gained experience, I developed many of my own heuristics for assessing the state of a company and the people behind it.
From the title of this article you’ve probably guessed where this is going now...
One of my personal early warning signs is based on inspecting the ladies’ toilets.
As mad as it sounds I have two very true stories that justify this practice having proved integral to two businesses that were in distress.
For the first story, I recall visiting a company many years ago.
After the working day had closed, I walked around the factory on my own so I could get a sense of the work environment there. As is my particular style, I opened every door and that included the ladies’ toilets. To my horror, I found that the women of the company were quite happy to smear faeces over the cubicle walls. It was clear that they had no respect for their employer at all. What’s more, the managers clearly had no respect for their staff as cleaners hadn’t been paid to clean this abominable scene up.
Repairing such a damaged corporate culture is almost impossible without brutal reorganisation so I had to recommend to the owners that the company was beyond saving and should file for liquidation.
For my second story, another company had cash drying up and to save costs I was aware that cleaners had not visited the business for many months.
As before, I went around all the offices and opened all the doors. To my relief, my inspection of the ladies’ loo revealed that the women of this company had maintained their toilets impeccably, even arranging fresh flowers by the window. The outlook for this company was needless to say much brighter. As part of our discussions with staff, we explored the prospects of saving the company if they were prepared to sacrifice their salaries and wages until it could afford to pay them. Fortunately, the directors were prepared to make the greater sacrifice and the result was that the staff between them became majority shareholders and owners of the company.
The result was astonishingly successful, not only was cash preserved but productivity improved and I’m happy to tell you the company survived.
So when you want to get the measure of a company culture, I would recommend that you always check the ladies’ toilets.
Can you spot a dangerous leader?
...I didn't, and almost got thrown out of a window
I produced the Guide to Dangerous Leaders following a personal experience since I had thought I could spot them until I had a business stolen by one.
Psychological studies have indicated that the prevalence of psychopathic traits might be up to 20x higher in corporate leadership circles than in the general population.?
Psychopathic narcissists are drawn to the business world because it offers the potential for great personal reward and validation. Their cunning nature and willingness to do anything to succeed mean they often then make it to the top in an organisation.
This means that for anyone reading this, the question is not so much if you are likely to come across a psychopath but when.
Classical traits include:
What makes it tricky though is that psychopaths are expert deceivers and so will likely hide these negative traits well. This is a lesson I learnt the hard way after having a business stolen by a psychopath several years ago.
The company was a boiler manufacturing business that we had acquired and successfully turned around by changing the business model. The new model involved selling long-term service contracts with free installation of the boilers. The boilers had been difficult to sell due to their cost of manufacture, however they were inexpensive to service due to their quality. The low maintenance costs meant the company was highly profitable versus its previous loss-making model of selling expensive boilers.
We appointed what we thought was an excellent managing director to the company. He came across as very capable with an excellent track record of past business successes.
Unfortunately, by the time we realised he was a complete psychopath it was already too late.
Indeed, he was a fantastic salesman and ran a tight business but after some time we discovered he wasn’t passing information on to us. Further investigation revealed that he had transferred the business and assets to a new company in his name.
When I confronted him about this blatant theft in person, he became physically violent and all but tried to throw me out of a second story window. Rather than fight it and risk further engagement with this dangerous individual, my colleagues in K2 agreed we should walk away from our investment.
Looking back on it there was nothing what-so-ever to suggest his hidden nature up until the confrontation meeting. But we should have conducted a far more thorough investigation into his background and taken up references. We were also too quick to give him control of the business. Since then, K2 no longer hands over the control of the finances and accounts to any non-K2 director, ever.
I tell you this story in the hope that it might help you to avoid these mistakes and better equip you to spot the signs yourself.
I am happy to send a copy of my guide to spotting dangerous leaders if you post the following text as a comment below: “Please send me a copy of your guide to spotting dangerous leaders”.
About the Author
Tony Groom?is a turnaround and?restructuring professional with?K2 Business Partners,?a firm that invests in companies that have committed boards and assets that others find difficult to value.?
“As a turnaround investor, I back Directors of industrial and manufacturing companies who are facing a crisis. I bring an understanding of business as a Director and Shareholder of the many businesses and turnarounds that I have helped make successful.”
About K2 Business Partners
K2 Business Partners?are a small team of turnaround investors who put their money where their mouth is by backing directors and companies with ￡3m-￡20m turnover with assets that other investors find difficult to value.
K2 don’t generally sell out and are in it for the long haul!
Download a copy of K2’s Business Survival Guide ↓
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Tech Entrepreneur and Social Investor - Specialising in Leadership & Strategy Execution
2 年Enjoyed the newsletter Tony, especially the dangerous leaders piece. Re checking state of the ladies as an indicator- a good rule of thumb and one I haves used in judging culture fit when working with clients. A good share
Managing Director & Owner at The List - The Services Business Network.
2 年Tony – thank you.?Slightly off your turnaround topic, but nevertheless close to my recent experience where independent due-diligence protected one of my clients from hiring a potentially dangerous leader.?And here I stress 'independent' due-diligence, as opposed to mere reference taking as a process requirement which will seldom, if ever, flag up serious concerns.