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Business restructuring and the Pandora syndrome – why do owners and leaders of businesses react too late?

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Why – in spite of all the available business acumen and assistance – do businesses, including SMEs, tend to suffer from the Pandora syndrome, a condition identified in animals that is closely linked to post-traumatic stress and which may cause the ignoring of changing circumstances for too long.

A report issued by Statistics SA in March 2017 indicates an increase in liquidations year-on-year, and although the number is less among closed corporations (of which the majority are small businesses), this is possibly due to no new registrations of CCs since 2010. The report further shows that service-based businesses, where 23% of South Africans are working, were most likely to file for insolvency. The figures also show that although compulsory closures have decreased, voluntary closures are still on the rise.  What we don’t hear much about are the ‘quiet deaths and wind-downs’ – all the (smaller) companies that simply close their doors, unable to continue doing business in this challenging economic climate.

The irony of the situation is that help is available. The South African business recovery framework, based on the Companies Act, is actually viewed as very progressive, and the 2017 Doing Business Report of the World Bank rated South Africa 50th out of 190 countries with regard to recovery rate based on its legal framework.
Our legislation covers all sizes of businesses, and, in terms of legislation, creditors and/or management can file for bankruptcy proceedings. Even in the event where this has been activated by the courts, it still leaves an option for businesses to trade themselves out of their current situation.

Although the legislation calls on the services of a registered business rescue practitioner, there is the option of restructuring before the business has to be handed over to someone else for rescue. There is some widespread consensus among practitioners that insolvency can be avoided if professional help is solicited in time. The longer a business waits, the more likely it becomes that the company or its business will not be rescued. This brings us to the question: If legal business saving remedies are readily available, why do owners and leaders of businesses stay reluctant to go this route, especially if one looks at the most common reasons why companies go insolvent – as listed below.

  • Loss of market share where the need to change in a shrinking or changing marketplace is not recognised, where margins have been eroded, where the service or product has been overtaken technically, or where the suite of clients remains incompatible
  • Management failure to update or acquire adequate skills, either through training or a buy-in, over-optimism in planning, imprudent accounting, or lack of management information
  • Loss of long-term finance, over-gearing, lack of working capital/cash flow
  • Excessive/uncontrolled overheads
Most business owners will agree that these are common sense issues, aspects they mull over every day. So why do they not seek help when they realise they, and their business, are in serious trouble?

I believe that Jan Dean hit it on the head in 2009 with his comment that it has to do with protecting the owner or manager’s reputation in that insolvency might indicate that there was reckless spending or bad management while in charge. To increase this pressure further, employees tend to retain trust in the owner or manager to somehow pull a rabbit out of the hat, or maybe have capital stowed away in a secret Swiss bank account that will rescue the business (and their jobs).

Then there are also the financial implications in that business insolvency might lead to personal bankruptcy or that suppliers might be negatively affected by the insolvency. Altruism and personal liability can become confused at this stage. This again can be linked to a culture of negotiating your way out of trouble where owners and suppliers try to delay the inevitable by structuring new credit agreements. If done early enough, this may have a positive impact, but when times get really tough and money is scarce, suppliers and investors become more risk-averse and less willing to put money into avant-garde businesses. This is confirmed by the hesitancy of especially banks to consider post-rescue financing, which makes restructuring, especially for smaller businesses, challenging.

It’s a different world. In the past, insolvent businesses would have had a whole range of options available to them, but times have changed. Credit is tight, and the ‘short dip financing’, although available at a price, that would have helped keep many businesses afloat, simply isn’t freely available anymore.

So, what should business owners and managers do when they realise they are in trouble? First of all, especially in tough times like the present, they need to acknowledge the fact that they are in trouble much earlier on. But even so, the best intentions are sometimes flawed, and what is needed is a mindset and culture that encourages entrepreneurs to accept reality and work within an institutional framework, rather than be deemed as failures. The managers and owners of businesses have to accept the fact that they should look for help and not try to solve the problems they worked themselves into all by themselves. The old saying ‘a stitch in time saves nine’ remains a basic truth when it comes to business survival.
 
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Reinhardt Lohbauer is an independent business restructuring consultant. His experience is in managing businesses and restructuring SMEs. He also teaches on some of USB-ED’s small business training initiatives. 






Join us at Launch Lab, in Stellenbosch, on 10 August 2017 for Student Entrepreneurship week 2017, more details here. #SEW17​
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