At the BPIF PrintYorkshire National Finance and Investment Conference in September, Begbies Global Network executive chairman Nick Hood gave his diagnosis and prescription for print and printers in a presentation entitled ‘Restructuring in the Raw’.
The first health hazard for print firms is the unhealthy environment they work in. Quoting figures from a Grant Thornton report from 2005, Hood says that in that year, one in four print firms made a loss. In addition, the industry also suffered from a 250% higher company failure rate than the UK average. If anything, the situation seems to have got worse in the two years since the report was published.
The themes are dismayingly familiar; our industry is high risk and low margin and printers have too little capital and borrow too much. As if that weren’t enough of a problem, Hood says: “Print is slightly more at the mercy of larger forces than many sectors. So much business is chunky compared to the size of the firms fulfilling it. It’s similar to the suppliers to supermarkets in that it’s controlled by the customers.”
What that all means is that printers, more than many others in business, need to be vigilant about the larger forces at play that will affect their customers and stakeholders, such as the bank.
The key is to know what’s going on inside your own business and to be able to spot and react to to potential problems before they get out of hand. The earlier the intervention, the more options there are and the greater the likelihood of a successful outcome.
Hood says that there is a well-worn path to problems. “It starts with earnings or revenue decline. The second step is management denial, then balance sheet strain and then cash crisis, which is when the bank gets a call for help. It’s the horrid call late on a Thursday, late in the month, saying: ‘we can’t pay the salaries, what can you do?’.”
A little bit bankrupt
The good news is that if you recognise the signs the last stages aren’t inevitable. “Unlike pregnancy, you can be a bit bust,” he says. “If you start early enough, there are consensual options you can take where you and the stakeholders can agree on the outcomes.”
Recognising the signs is down to tight management. Good management information systems should provide the tools to identify and quickly react to trends such as good monthly figures and budgeting on a rolling monthly basis rather than annually. Warning signs include falling revenues, shrinking margins and tightening cashflow. Monitoring those vital signs often gives you everything you need to keep your finger on the pulse of your business.
There are some obvious signs that there is already a problem. “If you’re struggling to pay salaries two months in a row, especially if it’s not at the end of the quarter when VAT and rent are due, then that’s bad,” warns Hood. But given the current state of the credit and banking markets, turning up cap-in-hand at the last minute isn’t going to help. “Banks are at the beginning of credit rationing and will start with new applicants and then move to existing customers,” he says. “It’s not a good time to upset your bank manager.”
He adds: “Lots of banks are saying ‘we don’t really want your business; can you go elsewhere?’. They’ll be looking to get out of anything remotely marginal.”
It’s possible to greatly improve your business’s chances by being prepared and taking action before a twinge grows into a tumour. If you see the signs and intervene in time, your business may be strong enough to pull through.
“Early on, you’ll have cash and a balance sheet that will stand the cost of restructuring, such as redundancy, refinancing and new kit,” says Hood. The problems come further down the line when it’s too late to act and when earlier inaction has inflicted real damage on the business.
“When your business is in the distressed stage you have a problem, as potential buyers can see that it’s a basket case and will wait until it goes bust,” says Hood. “Sensible opportunist investors are not going to pay for an ailing company – it’s human nature.”
By then you’ll face another problem, which is the value draining out of the company through other channels. You get to the point where rumours start to fly around the industry, good staff leave and customers move their business to other firms.
But it doesn’t have to get to that stage. The danger really comes at the second stage in the business decline curve: management denial. No one likes to admit that they messed up, and often it’s easier to hide your head in the sand and pretend the problem will go away than it is to take tough decisions.
You might expect Hood to start a judgemental lecture about the shortcomings of printers’ management skills but he doesn’t necessarily think that way. While he points out that, in the majority of cases where a business has run into problems, management is the weakest link, that’s not a problem specific to print.
“I’m not sure that the opinion that print suffers from bloody awful management is actually true,” he says. “It is generally management dealing with unusual circumstances. One of the symptoms of management under stress is a bunker mentality. You get behavioural changes, people don’t focus on the big things, they focus on little areas where they can make quick changes.”
Under different management
In these circumstances, Hood argues that it is vital for management to take a different approach. “Never assume that last year’s management is right for today’s problems,” he says.
This can be a thorny subject for printers, however, as so many firms are owner-managed. The problem is often actually one of over-involvement and caring too much, when what is needed at times of difficulty is a dispassionate approach. With the increased pressures on businesses today, Hood believes that owners and managers need to consider the natural lifetime for a business and understand that the need for turnarounds is part of the natural order of things.
“People are in love with their businesses and don’t know when to stop,” he says. “Very few businesses survive more than 10-15 years in the same hands as business cycles move so fast. If a business is 10 years old it is very mature. People think that businesses go on forever. When I started, third-generation family firms were common, but even second-generation firms are becoming increasingly rare now.”
Whether or not the time is right to move on completely, bringing in an outsider with experience of dealing with distressed companies is the best way to successfully treat a firm that needs turning around.
“Don’t be afraid to bring in a specialist on an interim basis who is used to dealing with distressed businesses,” says Hood. “You need someone to think the unthinkable and do the undoable.”
Make the right diagnosis
Before dispensing a course of treatment to turn the business around, an accurate diagnosis is needed.
“Do a bit of triage – the problem at the start of this process is that you don’t know what’s needed,” he says. “Management might think it’s marketing that’s required, but it might be something else.”
Hood refers to the work of London Business School professor Stuart Slatter on the most successful strategies for corporate turnaround. Crucially, the most obvious, such as a cost-cutting programme, are not necessarily the most effective. The single most effective strategy is asset reduction, followed by the previously mentioned management change. Cost reduction on its own is unsuccessful.
The important thing to remember is that even the healthiest of businesses can run into trouble. What makes a difference to a positive prognosis is early intervention, not being scared to seek a second opinion and knowing when to stop trying to heal from within and go for external help. Then, if radical surgery is required, it helps to be able to accept a little pain to stop greater suffering.
Hood concludes: “Turnaround is not a dirty word. Restructuring is inevitable – you just don’t hear about the successful ones.”
CONSOLIDATION
When size matters
Redlin Print was the winner of the Turnaround category in the Excellence Awards 07. Managing director Derek Faint saw that overcapacity was leading to a decline in the firm’s margins. Having gone as far as possible with cost-cutting he knew another approach was needed to regain profitability and competitiveness.
“The return was 3% and we thought we might as well have put the money in the bank,” says Faint. “The real driving force behind the change was that otherwise we’d have to just close down and walk away, and we didn’t want to do that. “
Redlin decided that size was the solution, to gain the benefits of economies of scale. “That wasn’t possible organically due to overcapacity in the market,” says Faint. “We had to consolidate.”
The management identified a takeover target producing four-colour print and the company retained the services of mergers and acquisitions specialist Richmond Capital Partners.
Redlin lacked the capital to fund the acquisition, so the deal was structured as an earn-out, with the target company’s original owner gaining a seat on the board to help with the firm’s subsequent development.
Stabilising the larger business took five months and, although trading was strong, relocation costs put a pressure on cashflow. Further businesses have since been added to the Redlin fold, while the firm has also invested heavily in management information systems, and in developing a new management structure with the help of an external consultant.
Over three years, turnover nearly trebled to £3.2m and profit has gone from a loss in the first year to a margin of 8.5%.
