South African companies are in distress as corporate delistings from the JSE and business liquidations continue to rise after the pandemic, and a recession looms for 2024.
There is hope for companies, even in dire circumstances, if they can answer two fundamental questions.
Question One: Is the company really worth saving and if so, can you build an investment case?
It starts with asking if the company is worth rescuing. In South Africa, it seems that the default stance in the business rescue community is to look at how distressed companies can be dismantled and liquidated for the benefit of creditors.
But if the company is too important to fail, you have to take a different approach, one that is focused on genuine business turnaround, and then the whole approach changes.
To find out if a company is worth saving, you need to determine what the real problem with the business is, what the core of the business is, what its core assets are, what the company’s best products or services are, what its key markets are now and in the future, and what its path back to growth would be.
To find the answers, one must firstly look at the company’s balance sheet, profit and loss and cash flow statements.
It always starts with the facts. The most critical question to ask when a company is distressed, is whether there is an investment case to be built for saving it.
The investment case needs to be compelling enough to convince sceptical financiers to fund the turnaround of the company.
Building an investment case is critical, and it’s a step that is often forgotten or neglected in the restructuring process.
It is essential to create an entrepreneurially minded investment plan, unpacking the investment potential and how much investment is needed and from where.
Equally crucial is to lay it out in a document that is clear and concise, and not bogged down by mind-numbing detail.
Your stakeholders are not going to read a 60 or 160-page document. If you can’t distil your investment motivation into one convincing paragraph, you’re in trouble. You must make it easy for people to understand the potential of the business.
When building an investment case, it’s not only numbers that matter.
You must also ask the following questions about the people side of the business:
Do you have a trustworthy management team to implement the planned turnaround? The fish always rots from the head. Do you have unnecessary staff, expenses or products you can trim? Do you need to hire better staff or management?
It is critical to determine the amount of refinancing the company needs, where the money should ideally come from, by when and under what conditions.
You also need to establish if the shareholders are on board and if so, what amount you want to raise from them.
When assessing how to change the company’s future trajectory, there is value in appointing a chief restructuring officer without baggage or internal political alignments, who can make unemotional, objective decisions about the future of the business.
While it is imperative to decide if the company has potential, it is equally important to assess how the demise of the company would affect internal and external stakeholders, partners down the value chain, and even the wider industry and society.
Certain companies are just too big to fail. This is when all indications show that the failure of such companies would be disastrous for the economy. We simply cannot allow such companies to fail.
Question Two: Can you find the financial means to turn around the company?
The critical thing to realise is that once you are sure that a company is worth saving, you don’t stop there. Building an investment case to convince the right people – the financiers – that the company is a worthwhile long-term investment is important.
If you can create a business and investment plan that excites them, and they are willing to go on the journey with you, to generate the financial backing you need, your chances of success are high, barring any major catastrophic and unforeseen events.
In most cases, once you have the right people on board, and you can get the money, you can save your company.
Once there is a financial way forward for a company, it’s important to think of the future – and innovation can put a company on the right growth path.
When you come to the point where you can invest in the future of the business and its products or services, it’s valuable to look at key learnings from other innovative companies in the same space abroad and what they are doing right.
Think about the risks if you don’t innovate and the opportunities if you do. Work out which products or services remain relevant and how you can innovate to make them better and more sustainable.
Look at how you can optimise efficiencies and supply chains. Think about whether the product can be recycled, or a service can be streamlined for greater efficiency.
Companies that continue to do well are those that always remain proactive about their turnaround. This means not becoming complacent about current successes or future risks, and continually instilling an entrepreneurial, curious and forward-thinking mindset within the company.
Michael Dorn is the chief restructuring officer at Nampak. He spearheaded one of South Africa's largest corporate recapitalisations for the manufacturing company earlier this year. He is also CEO of global business turnaround firm the RTgroup.