Three survival options for UK converters

David Pattison, senior business analyst at industry consultants Plimsoll, advises label converters how to avoid the common mistakes a failing company makes

Restructuring specialists believe the number of UK insolvencies will soar by 55 percent towards the end of 2009, more than double the number before the credit crunch. However, a new analysis by business intelligence analysts Plimsoll Publishing suggests that it’s not too late to save many of the 63 UK label companies rated as being at high risk of failure. However the new report comes with a warning: if these 63 companies rated as danger are to survive, they must start to fix their problems now.

The first issue is to understand the extent of the problems the company is facing. In our 22 years of analyzing the label market, the symptoms of a failing business are sadly, all too familiar. Phase 1: the company comes under pressure to increase sales, so uses all its resources, often resorting to selling at a loss, or adding extra costs to service their clients’ demands. Phase 2: as a result, the company is encouraged to take on extra short term debts to finance the sales drive, putting extra pressure on their profit margins through extra interest payments – therefore failing to cut costs which is what is actually needed. Phase 3: after a while, the banks grow nervous and ask that this unsecured finance be swapped to long term finance. Phase 4: armed with the extra financed capital, the company continues with the failing strategy and allows the overdraft to start to build up again and thus eroding the profits more. Despite the increased financial pressure the company is now under, profits are eaten up in interest payments whilst the company tries to maintain sales. Phase 5: the company debt grows to an uncontrolled level and the banks once again grow nervous on the company’s ability to pay it back. It is often now that the banks will demand immediate repayment of the debt, and when the company is unable to do this, administrators are called in.

A critical factor in this cycle is to understand the key measures to monitor in your business in order to pinpoint any decline. Our analysis will tell you instantly where the company is strong and what it weaknesses are, so that a clear set of turnaround targets can be put in place. Companies are made aware of their problems sooner, and the management then has more time to put a survival plan in place and stave off the administrators.

Administration should be viewed as a clear last resort. The damage done to the long-term health of the company in terms of the brand and negative publicity are all too difficult to recover from.

In essence, the key to avoiding administration is to put in place the measures yourself that they would instigate.

As I see it, these 63 label companies currently under severe financial pressure have three options if they want to survive and be well-placed to capitalize when the market picks up:

1. Cut costs now
This is not easy: it means the company must accept it will be a smaller enterprise; internally this will not be well received in the organization, as job losses will generally be part of the plan. It then needs to look at a survival plan and adopt the mindset of a receiver, cutting out non-profitable contracts, reducing overheads and also renegotiating with key suppliers. The objective must be to reduce the level of debt and get the business back on an even keel.

2. Sell the company or look for an investor
Despite the doom and gloom in the market, this option should not be ruled out. One hundred and sixty-four firms identified in the sector have cash to spend and could easily afford to finance a purchase out of cash. These 63 ‘danger’ companies are very vulnerable to an aggressive takeover, yet my view is there could be a great benefit in selling up. A new owner would give the company time and resource to turn their performance around. Sadly, again, this will inevitable involve job loses and reducing the size of the company to rejuvenate the business.

3. Trade their way out
In the current economic climate this is the least likely strategy, most of these 63 companies have fairly long term problems, so its clear their current business is not competitive in the market and simply doing the same will not change anything. Combine this with the inability to raise extra finance and time is not on the side of this approach. Only a few of the ‘danger’ companies have this as a viable option.

This latest analysis is designed to help companies understand their options in the changing marketplace. It will assist potential buyers in locating businesses in distress and help those considering selling up find potential buyer. Each of UK’s leading 383 label firms are named, analyzed and valued. Copies are available for GBP 350 by calling Clair Sherwood on 44 (0)1642 626 400 or emailing c.sherwood@plimsoll.co.uk.