10/02/11

By Jeremy Harbour, Owner of The Harbour Club

Any well-established and efficiently run business can run into trouble, and when it does, the decline can be swift and painful. Many businesses fail everyday and never realise their market potential simply because they did not have access to the specialist expertise or the right investment that could solve their problem.

Cash flow tends to be one of the main stumbling blocks, with simply a small injection of cash required to get everything back on an even keel. The trouble in the current environment, however, is that the banks are extremely unwilling to loan funds, and SMEs are struggling.

Seeking the help of an Angel Investor or a Venture Capitalist is one way of trying to raise some much needed capital to alleviate cash flow problems. There isn’t a huge difference between an Angel Investor and a Venture Capitalist (VC) — they will both want a lot of value, and both will want involvement and to interfere, no matter how much they tell you they don’t. However, the involvement with an Angel is likely to be more flexible, whereas with a VC it will be more legal based, i.e. to the letter of the agreement. Whilst you are on target there should be no problems, but business is not always that straightforward.

However, my advice is don’t look to raise money if you have a huge hole to fill from past mistakes. As an Angel Investor I hate it when people want you to pay off all the old creditors — you should be in a stable position looking for investment in the future. If you are not in that position, you may have to make some stark choices about the viability of the current vehicle.

One method I used successfully was getting a supplier to invest. I wanted to buy a small competitor, but the cash drain would have made it very difficult, so I agreed with one of my suppliers to temporarily run up my account with them for 6 months. This gave me the cash I needed, gave them a bigger customer, and then they had the option to convert the debt to shares or be repaid over time. It was a neat deal. Because they knew the sector, a deal could be agreed in principle on the same day that I had the idea.

In the current climate, I am not sure any VCs are left in the lower end start-up space, so to do a start up nowadays you have to look to Angels and the 3 F’s - Friends, Family and Fools. However, most investors want to bet on a horse that is running. If you can start on a shoestring, prove success with a few clients and then raise the funding, you will get more takers, a much better deal on equity and some good discipline around cash management in the future.

Mergers and acquisitions
This may appear to be a strange approach to some, but another way to cope with financial difficulties or reduced revenue is to actually buy another business or merge two together. The big challenge in a recession is that not only does the market contract, but the customers also retrench. I was once asked who my biggest competitor was, and my reply was 'apathy'. It is just very hard to get people to move. However, if you acquire a business with a customer base you can shortcut a lot of the sales and marketing required to attract new customers. Companies will probably find that the cost per acquisition of a customer is lower in this way than through direct sales.

The challenge that exists is that it is hard to switch from running a business to buying a business. The reason that most deals are not completed is naivety - how you find them, how you structure them, how you minimise upfront investment etc. Most people believe that to buy a business you need a large amount of capital upfront, access to bank lending to leverage the deal, and to learn capital efficient acquisition methods that use no bank debt.

My advice is to buy and sell something non-core to a business in order to work out the wrinkles and provide some experience. This may seem like a luxury, but it is possible to structure a deal with little or no upfront capital and de-risk the whole deal with the correct structure.

Beyond the coin

If businesses simply cannot find the funding required, there is the opportunity to turn to dedicated recovery specialists who can deliver pragmatic guidance and insight, providing the skills and resources needed to get businesses back on track to sustained profitability and growth.

Members of The Business Recovery Forum, a new, not-for-profit association, representing an elite membership of experienced business turnaround specialists, do not ask businesses to pay the fees that can often exacerbate an often-fragile situation: rather, the commitment is based on taking equity stake in a troubled business. Accordingly, when a BRF member agrees to help a business they are making a firm and lasting commitment.

If a business does not thrive as a result of a BRF member's intervention they will not share in its success. They shoulder the risk alongside the business, helping them to make the right decisions for the business at the right time and to identify and capitalise on existing and new market opportunities.

About Jeremy Harbour

During a career spanning over 20 years Jeremy has started many businesses and has grown an organisation to 130+ employees with £10m+ revenues. More recently he has also completed over 20 company acquisitions, mostly distressed, and many exits. He has been the runner up in Coutts Entrepreneur of the Year three times, appeared on the Money Channel, mentored for the Prince's Trust and been involved with its fundraising committee, and has been invited to Buckingham Palace and the House of Commons to provide his advice and opinion.