2012/09/02

Business Rescue Plans - Overview Dr Marius Pretorius Professor – Strategy, Leadership, Turnaround Department of Business Management [email protected] @prof_sturns

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What we know

BUSINESS RESCUE PORTAL

• >600 BRs filed x 95 BRPs as on 30 June 2012 • Plans are submitted to CIPC • Very few comply with S 150 – some very weak – Legal view • WORSE is that they do not comply with what a plan should do – Business view 2

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What we don't know

BUSINESS RESCUE PORTAL

• What should be included in the BR plan? • To serve the purpose of the plan? • Where should the focus be if based on the business perspective?

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Why the big fuss about plans?

Business Rescue Portal

Protocol Compliance

Attract PCF

Opportunity

BR Plan

Creditor DM for vote

BRP Reputation

BRP Removal

BRP Re appointment 4

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Notice of Court proceedings

creditors

Right of participation by

Form creditors committees

Relevant event

Rights

Decision May be determined by value of claim – defined procedure for determination and / or review

Meeting

Formal participation in Court proceedings

Amend

Iro BR Plan – Vote to

Propose alternative

Reject Informal participation in making proposals related to the BR plan

Present offer to acquire interest of other creditors

Approve 5

Court proceedings Decisions

Notice of

Meetings Relevant events

Right of participation by

shareholders (Section 145 and 151)

Participate in formal Court or BR Proceedings Rights

Approve Reject

Iro BR Plan vote to

If BR Plan is rejected:

Right exists if plan intends to alter class of securities held Proposed alternative plan

Present offer to acquire some or all creditors and/or other holder rights 6

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Findings in Post Mortem Analysis • As many as 25/52 elements of the PM audit

Business Rescue Portal

• Thus, BR plan is 1st source of evidence • Expert opinion? Required in PM – How can I give an expert opinion if the core is rotten.

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Who am I to address you 1. Business strategist 1. Interest in failure

2. Professor in Strategy, Leadership & Turnaround 1. Entrepreneurship background – business plans

3. Business focus > finance > legal process

Business Rescue Portal

1. Really business mainly 2. Owners, boards and creditors

4. Before rescue, experience in informal turnarounds – (1991 – today) 5. Research in practice 1. PhD and M Com students 2. Current 8

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MP Current BR research Data Integrity

Agency theory

Employment focus

PCF – Bank perspective

Decision making Business Rescue

BRP stress Deliberate practice Employee coaching needs

PFF and PCF

BPR skills

Verifiers Entrepreneur awareness of rescue issues

BR Plans

Creditor problems 9

Therefore the 2 views

Business Rescue Portal

1. Legal compliance will only be mentioned – 10 slides to set the scene

2. Business “compliance” will be expanded and supported by a case and template.

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Business Rescue Portal

Legal perspective 10 slides for self study as it is not the aim of this presentation

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Proposal of Rescue plan

Part A Background as at date of beginning of BR

Section 150 Plan must contain

Part C

Part B Proposals

Assumptions and conditions

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Complete list of material assets & security thereon Complete list of creditors, including indication of insolvency preference & whether same have proved claims

Probable liquidation divided

Part A Background as at date of beginning of BR

Must be published by the company within twentyfive days of appointment unless

BR Practitioner must prop a plan for consideration and adoption at a meeting to determine the future of the company

Holders of majority of creditors voting elect

Court order otherwise, on application of company

Complete list if shareholders

Proposal of BR plan

Remuneration agreement with BR Practitioner Statement regarding informal proposal made by creditors Nature & duration of memorandum

Accept

Plan must contain

Extent to which company seeks to be released from debts and conversion to equity Ongoing affairs & treatment of existing agreements

Assumptions

Effect on employees

and conditions Circumstances in which BR will terminate

Certificate of BR Practitioner confirming

Order of preference proposed, if plan accepted

Effect plan will have on each class of shareholders

What conditions must be satisfied to initiate and then be fully implemented

Part C Divided into three parts

Part B Proposals

Property available to pay creditors claims

Benefits of plan vs liquidation

Reject

All information reasonably required to facilitate ‘affected person’

Protected i/s three years assuming plan adopted

Projections in good faith & based on factual info

Include notice of material assumptions forming basis

Information accurate, complete & up-to-date

Complete list of material assets & security thereon Complete list of creditors, including indication of insolvency preference & whether same have proved claims

Protected b/s three years assuming plan adopted

May include alternative projections

May include

alternative projections Include notice of material assumptions forming basis

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Part A Background as at date of beginning of BR

Probable liquidation divided

Complete list if shareholders

Remuneration agreement with BR Practitioner Statement regarding informal proposal made by creditors

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Background minimum - S 150 A (i - vi) 1. (i) a complete list of all the material assets of the company, as well as an indication as to which assets were held as security by creditors when the business rescue proceedings began; 2. (ii) a complete list of the creditors of the company when the business rescue proceedings began, as well as an indication as to which creditors would qualify as secured, statutory preferent and concurrent in terms of the laws of insolvency, and an indication of which of the creditors have proved their claims; 3. (iii) the probable dividend that would be received by creditors, in their specific classes, if the company were to be placed in liquidation; 4. (iv) a complete list of the holders of the company’s issued securities; 5. (v) a copy of the written agreement concerning the practitioner’s remuneration; and 6. (vi) a statement whether the business rescue plan includes a proposal made informally by a creditor of the company. 15

Nature & duration of moratorium Extent to which company seeks to be released from debts and conversion to equity

Part B Proposals

Ongoing affairs & treatment of existing agreements Property available to pay creditors claims Order of preference proposed, if plan accepted Benefits of plan vs liquidation Effect plan will have on each class of shareholders

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Proposal minimum - S 150 B (i - vii) 1. (i) the nature and duration of any moratorium for which the business rescue plan makes provision; 2. (ii) the extent to which the company is to be released from the payment of its debts, and the extent to which any debt is proposed to be converted to equity in the company, or another company; 3. (iii) the ongoing role of the company, and the treatment of any existing agreements; 4. (iv) the property of the company that is to be available to pay creditors’ claims in terms of the business rescue plan; 5. (v) the order of preference in which the proceeds of property will be applied to pay creditors if the business rescue plan is adopted; 6. (vi) the benefits of adopting the business rescue plan as opposed to the benefits that would be received by creditors if the company were to be placed in liquidation; and 7. (vii) the effect that the business rescue plan will have on the holders of each class of the company’s issued securities. 17

Part C - Assumptions and conditions

What conditions must be satisfied to initiate and then be fully implemented Effect on employees

Certificate of BR Practitioner confirming

Information accurate, complete & up-to-date

Projections in good faith & based on factual info

Circumstances in which BR will terminate

Projected i/s 3 years assuming the plan is adopted

Include notice of material assumptions forming basis

Projected B/S for 3 years assuming plan adopted May include

alternative projections

Include notice of material assumptions forming basis

May include alternative projections 18

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Assumptions minimum - S 150 C (i - iv) 1. (i) a statement of the conditions that must be satisfied, if any, for the business rescue plan to— 1. (aa) come into operation; and 2. (bb) be fully implemented;

2. (ii) the effect, if any, that the business rescue plan contemplates on the number of employees, and their terms and conditions of employment; 3. (iii) the circumstances in which the business rescue plan will end; and 4. (iv) a projected— 1. (aa) balance sheet for the company; and 2. (bb) statement of income and expenses for the ensuing three years, prepared on the assumption that the proposed business plan is adopted. 19

Assumptions minimum - S 150 ss 3-5 1. (3) The projected balance sheet and statement required by subsection (2)(c)(iv)— 1. 2.

(a) must include a notice of any material assumptions on which the projections are based; and (b) may include alternative projections based on varying assumptions and contingencies.

2. (4) A proposed business rescue plan must conclude with a certificate by the practitioner stating that any— 1. 2.

(a) actual information provided appears to be accurate, complete, and up to date; and (b) projections provided are estimates made in good faith on the basis of factual information and assumptions as set out in the statement.

3. (5) The business rescue plan must be published by the company within 25 business days after the date on which the practitioner was appointed, or such longer time as may be allowed by— 1. 2.

(a) the court, on application by the company; or (b) the holders of a majority of the creditors’ voting interests. 20

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Observations

BUSINESS RESCUE PORTAL

BUSINESS RESCUE PORTAL

• Legal compliance seems not to address the philosophy and aim of the BR plan • The next section addresses this • Questionnaire

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Business perspective WHY? Link to legal 22

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Spirit of the act?

•

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Definition of BR plan (Pretorius & Rosslyn-Smith, 2012)

BUSINESS RESCUE PORTAL

Business Rescue Portal

• Save business – not company • Save jobs - dilemma • Protect – debtor friendly vs creditor friendly

• Document describing the contract between affected persons and BRP • Contains Assumptions, position (DWhB), causality (TAS), rescue strategy and substantial implementation measures (scorecard) • For decision-making to proceed with rescue implementation • Must enable transparency to all affected • Eventually to attract PCF for both phases 24

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Assumptions

BUSINESS RESCUE PORTAL

Appearances

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Broad Key components of BR plan 1. 2.

Executive summary – (write last) Is there a business? 1.

3.

1.

BUSINESS RESCUE PORTAL

4.

Liquidation value Creditor situation

Financial status 1. 2.

6. 7. 8.

TAS evaluation

Position and opportunity assumptions 1. 2.

5.

How sick is it? Or Severity matrix

Causality for being in rescue

B/S and C/F projection

Rescue strategy PCF effects Substantial implementation measures (scorecard) 26

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Decision making clarity of facts about BR over the process BR Insight process metaphor

Appointment

1st Creditors

Plan

2nd Creditors

Facts vs hearsay

• Day 5 • Some verification • Call or not - for continuation • DWhB,

• Day 20 • More clarity • If not • Possible extension • Data verification

• Day 25 • Maximum facts • Data integrity • Plan to vote on • More extensions

• What we know

Planning SA

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Drama

Extension request effects (Legal – business dilemma) F i l e

1

2

s

10

t

C

n

25

d

??

C

E x t e n

Distressed = no cash, no one interested in PCF = COD aggravates distress, costs Generally no operations / production

?

Plan kicks in and funding becomes effective

Consequence

Vote

Deterioration as costs increase Or Operations 28

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3 Questions to be addressed in plan 1. Is there a business?

Do we ...

1. How sick is it? Or Severity matrix TAS 1

2. Causality for being in rescue 1. TAS evaluation Business Rescue Portal

3. Position and opportunity assumptions

ORD 6,7 and 11

1. Liquidation value (comparative base line) 2. Creditor situation 3. Opportunity analysis 29

Money flow in the normal venture F

CASH

P

Overheads

Profits Payroll Retained profits

Direct Expenses

Share Holder Capital

OWN FUNDS

OverDrafts

Loans

BORROWED

FUNDS EMPLOYED

CREDITORS Things you have to pay for

Income Tax

DEBTORS Cash to be paid to venture

FIXED ASSETS

Land, building, facilities, equipment (CAPEX) (Keep and maintain) WIP

Things to be turned into cash

INVENTORY

Things to be turned into cash

C

SALES ----------------COGS

N S

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BRP - Pressure of the plug (2) BR Success probability

High Plug

Low

Time

Opportunity Evaluation elements

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Customers, Market share, Demand , Market capacity

Value proposition Competitive advantage Sustainability of CA

Team and Resource fit

Concept Offering

Entrepreneur Management Technical experience Business Plan Strategic Fit

Market Business model

Rivalry Entry barriers Supplier power Buyer power Substitutes

Competitive environment

Finance

Income projections Cash flow projection Burn rate, OOC TPC CAPEX options Financing options

Margin, Gross profit trends, Operating net profit, Sales growth, Capital requirement IRR potential, Free cash flow , Time to B/E cash, Capacity utilization

© Management Transfer cc 1995/35535/23

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Findings in PM process • 23/52 elements of the PM audit

Business Rescue Portal

• Thus, BR plan is 1st source of evidence • Expert opinion? – How can I give an expert opinion if the core is rotten.

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Rescue plan = contract

Business Rescue Portal

• At the vote, and on accepting of the BR plan, it becomes the contract between creditors and the BRP

• Serves as guideline on which the plan must be executed.

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Role of Rescue plan for BRP and PM

Business Rescue Portal

• Key document for evaluation of BRP • Integral to the evaluation process

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Observation • As time goes on the creditors become more informed / wise about the issues and

Business Rescue Portal

• Ask legal council which makes life tough for BRP’s • Will probably continue to take place

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BUSINESS RESCUE PORTAL

BUSINESS RESCUE PORTAL

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BR Plan Case analysis Solar Spectrum (BR Plan template in booklet)

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Research process

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1. Obtained plans 2. Initial process: 1. Investigated mentions of elements 2. Investigated types of PCF used Business Rescue Portal

3. Phase 2 1. Comprehensive content analysis

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Scale Evaluation Absent Present (Mentioned) Sufficient to interpret

Score 1 2 3

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BUSINESS RESCUE PORTAL

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Preliminary Findings 41

Business Rescue Plan Review

Wesley Rosslyn Smith M Com Business Management University of Pretoria

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Business Rescue Plan Review – 1st plans evaluated Background Analysis

Business Rescue Plan Review – 1st plans evaluated Commencement Of BRP Informal proposal made by a Creditor List of the holders of the company’s issued securities The Dividend That Creditors Would Receive In Liquidation The Liabilities Of The Company Breakdown of Security by creditors and classes List Of Creditors The Assets Of The Company Remuneration Agreement With The SBRP Tax position Commencement Meetings 0% Absent

Present

20%

40%

60%

80%

100%

Sufficient

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Business Rescue Plan Review Proposal The benefits of adopting the business rescue plan as opposed to in liquidation Order of preference (Application of the proceeds of the sale of the assets of the company) Property of the company that is to be available to pay creditors’ claims in terms of the business rescue plan The On-Going Role of the Company and Treatment of Contracts Going Forward The Effect Of The Proposed Restructuring In Terms Of Liabilities And Shareholding Payment and securing of the post commencement finance

Release from the payments of debts

Duration of any Moratorium in Terms of the Plan

Effect on the Balance Sheet And The Company 0% Absent

Present

20%

40%

60%

80%

100%

Sufficient

Business Rescue Plan Review Assumptions Used In This Business Plan

The Projected Cashflow For Company For 3 Years

Assumptions Used In The Projected Financial Statements

The Projected Balance Sheet and Income Statement For Company For 3 Years

Conditions for the Business Rescue Proceedings Will End

OFFER TO PURCHASE THE SHARES AND LOAN ACCOUNTS OF SHAREHOLDERS IN THE COMPANY

The Effect of the Proposed Business Plan on the Employees Going Forward

Conditions for the Business Plan to be Implemented

0% Absent

Present

20%

40%

60%

80%

100%

Sufficient

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Business Rescue Portal

S 150 compliance

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Key information absent from plans • Financial projections – Supporting evidence / assumptions – Virtually no C/F’ forecasts

Business Rescue Portal

• Silent on employment effect

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Good plan

BUSINESS RESCUE PORTAL

• Allows “outsider” decision making for PCF to invest or not • Give the basics to guide such a decision pending due diligence

• Act compliance = minimum base line 49

Factual verification of data High

2

1

n

s

d

Accuracy of data

t

C

C

Sufficient DM Information

Low

Time

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Thank you • [email protected] • www.brportal.co.za

Business Rescue Portal

• @prof_sturns • vimeo (full video): http://vimeo.com/15354244 • • YouTube: 1. Part 1 - http://www.youtube.com/watch?v=xWSiT_3Qtjw 2. Part 2 - http://www.youtube.com/watch?v=x4ibn6dJa5w

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Preferences if liquidate after creditors reject rescue Costs

Liquidation Admin costs Rejected Rescue Admin costs

> 15 cents in Rand

P C F

Employee PC costs

Claims

Secured creditors (in time order)

Pre & PCF

Unsecured creditors Concurrent creditors

Pre C F 52

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BUSINESS RESCUE PORTAL

Chapter 6 - Why ask? • Section 141. (I) “As soon as practicable after being appointed, a practitioner must investigate the company's affairs, business, property, and financial situation, and after having done so, consider whether there is any reasonable prospect of the company being rescued. 53

What is needed? • Quick and dirty

BUSINESS RESCUE PORTAL

• Not due diligence - analyse and test the assiduousness of a business venture • Not full business review - proactive process that generates a live, working document …. • Not a critique – Advisory analysis testing strategic direction and business focus 54

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When do we ask? • Need to find out how sick is the business?

BUSINESS RESCUE PORTAL

• Triage questions • Should we proceed with rescue or not? • 1st creditors meeting –

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Basic rescue thinking procedure Identify core causes & Issues for recovery to address

Diagnose

Vision

Intervention Decision – 1st Creditor M

Other Strategy

Retrench and do Strategic Analysis Stabilize 2nd Creditor

Restructure decisions

Difficulty gradient depends on level of failure

A c t i o n

Rescue/Recovery/Turnaround principles 56

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BUSINESS RESCUE PORTAL

Triage 1. “Is there a business?” (Harker and Sharma (2000:41) 2. “How sick is the business?” (Castogiovannii, Balga and Kidwell (1992:27) 3. “Is the business worth saving?” (Quinn, Mutzberg and James (1988:680)

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MEDICAL/ Triage BUSINESS TRIAGE •

• •

•

•

MEDICAL TRIAGE a) Those patients who can be saved but whose lives are in immediate danger, requiring treatment immediately or within a few hours (red triage tag: “immediate”; priority 1) b) Those patients whose lives are not in immediate danger but who need urgent but not immediate medical care (yellow triage tag: “delayed”; priority 2) c) Those patients requiring only minor treatment (green triage tag: “minimal”; priority 3) d) Those patients who are psychologically traumatized and might need reassurance or sedation if acutely disturbed (no specific triage tag) e) Those patients whose condition exceeds the available therapeutic resources, who have severe injuries such as irradiation or burns to such an extent and degree that they cannot be saved in the specific circumstances of time and place, or complex surgical cases that oblige the physician to make a choice between them and other patients (black triage tag: “expectant”; no priority)

• •

This last category, “expectant,” which encompasses those who are dead or who are “beyond emergency care,” carries the most emotional and ethical baggage for individuals doing triage.

•

BUSINESS RESCUE PORTAL

• •

•

• • •

•

BUSINESS TRIAGE a) Those businesses who can be saved but whose sustainability are under immediate threat , (financially distressed) requiring turnaround immediately or within a limited time span (red triage tag: “immediate”; priority 1) b) Those businesses whose sustainability are not under immediate threat(financially distress within next six months) but who need urgent intervention but not immediate turnaround (yellow triage tag: “delayed”; priority 2) c) Those businesses requiring only minor intervention (green triage tag: “minimal”; priority 3) d) Those businesses who are still profitable but psychologically traumatized and might need new strategic direction –informal turnaround (no specific triage tag) e) Those businesses whose financial distress exceeds the liquidity and solvency tests , to such a degree that they cannot be saved in the specific circumstances of time and place (gone concern) (black triage tag: “expectant”; no priority) This last category, “expectant,” which encompasses those businesses who are gone concern who are beyond turnaround intervention.

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Do we have a business? 1 Demand BUSINESS RESCUE PORTAL

2 Capacity 3 Business case 4 Cash flow 5 Caveats 59

Economic model and breakeven Sales Volume (N)

P = ∑N(S-C) - F Profit (P)

Fixed Expenses (F)

Margin (S – C) 60

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BUSINESS RESCUE PORTAL

Cash flow potential • If all in place, can there be + flows • Sustainability • Seasonality

Projection

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Caveats 1

BUSINESS RESCUE PORTAL

• Anything that void decision • Also called “fatal flaws” • Shareholder fighting • Fraud • Inbreeding

Data integrity 62

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Caveats 2

BUSINESS RESCUE PORTAL

• Illogical nature

Verifier determinants Day 2 63

Caveats 3

BUSINESS RESCUE PORTAL

• Agendas

Business plans day 3 64

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Standard problem of BR • Pre rescue - Poor management DM

Business Rescue Portal

1. 2. 3. 4. 5.

Poor decisions Management generally in shambles Financial records – generally a mess Potential self enrichment Cash control

Outdated Conventional thinking on Venture decline Perform well Under perform Distress Crisis Dissolution Bankruptcy

Success

continuum

Failure 66

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Turnaround Situation (TAS)

23456

• The turnaround situation refers to any point in time that a turnaround is required and the appointment of a turnaround manager or alternative leadership is considered. • It is characterised by a combination of unique preconditions (internal and external) that threatens “normal operations” and requires a reorientation of positioning, strategy, structure, control systems or power Complex configuration distribution. • Absolute and relative to industry declining performance. Turnaround event / Rescue event

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Determinants of Turnaround Situations (TAS) 1. Resource munificence 1. scarcity vs abundance

2. Causality (Origin of distress) 1. Internal vs external 2. Influences severity

3. Leadership (includes management) 1. Old vs new 2. TAS fit 3. Practitioner? 68

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Turnaround Situations:

Resource Munificence

Resource Abundance

Resource Scarcity

Unique Precondition matrix

Performing well:

Strategic Distress:

Underperformance:

Crisis:

Internal / Operational

External / Strategic

Causality (Origin of the distress)

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Strategies for Turnaround Situations

Resource Munificence

Resource Abundance

Resource Scarcity

Overall Broad Low-Cost Differentiation Provider Strategy Strategy Best-Cost Provider Focused StrategyFocused Low-Cost Strategy

Differentiation Strategy

?

?

? Internal / Operational

? External / Strategic

Causality (Origin of the distress)

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Turnaround Situations: Unique

Resource Munificence

Resource Abundance

Resource Scarcity

Precondition Configurations

Performing well: Good sales demand, market share, Established CA, Invisible rising OverCost/unit trading Growth

Strategic Distress: Dwindling sales, Losing Market share, Losing CA, Demand changes, Competitive products Sudden inventory growth Expense ratios increase

Underperformance: Good sales demand, Pressure on contribution margin, low capacity utilisation, Pressure on CA, Relative productivity low, Cash strapped

Crisis: Rapidly dwindling sales, Losing Market share, Lost CA, Demand changes, Cash strapped

Internal / Operational

External / Strategic

Causality (Origin of the distress)

Complementary Turnaround Strategies: Each

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responding

to a unique TAS

Resource Munificence

Resource Abundance

Overall Low-Cost Provider Strategy

Broad Differentiation Strategy Best-Cost Sustainability Provider Strategy Strategy

(Needs Focused Low-Cost Strategy

renewal) Focused

Forced Repositioning Strategy (Needs turnaround)

Differentiation Strategy

Combination Strategy ???

Resource Scarcity

Efficiency Strategy (Needs turnaround)

Internal / Operational

Last resort Strategy (Needs rescue)

External / Strategic

Causality (Origin of the distress)

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Thank you • www.brportal.co.za – Check resources section for papers and videos

– Join forum – Write on blog

– Next slide details 73

Thank you • vimeo (full video): http://vimeo.com/15354244 • • YouTube: 1. Part 1 - http://www.youtube.com/watch?v=xWSiT_3Qtjw 2. Part 2 - http://www.youtube.com/watch?v=x4ibn6dJa5w

• • Blog: http://brportal.co.za/blog

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Important differentiation •

Decline – A venture is in decline when – its financial performance is worsening over consecutive periods and it experiences distress to continue operations. – Intervention through alternative management and financial injection could keep it operating albeit not in its current form and depending on the level of seriousness of the distress (crisis). – Decline is a natural precursor in the process to failure.

•

Failure – A venture fails when – it involuntarily becomes unable to attract new debt or equity funding to reverse decline, consequently, – it cannot continue to operate under the current ownership and management. – Failure is the endpoint at discontinuance (bankruptcy) and when reached, operations cease and judicial proceedings take effect.

• A venture has experienced a turnaround when it recovered from a “decline that threatened its existence” to resume normal operations and achieve performance acceptable to its stakeholders through reorientation of positioning, strategy, structure, control systems and power distribution. Return to positive cash flow is associated with achievement of “normal” operations. 75

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