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Would you take over a failing enterprise? From a local magazine to a wheel maker, these battles to rebuild have been a labour of love … and more
Sometimes it is easier to buy an existing business than to start from scratch. It can be risky, though. What if it drains your resources before it delivers? What will it do to your reputation if you don’t succeed?
Peter Mallon worked at local business magazine the North East Times in his 20s. It was among a stable of titles, including many property magazines, owned by publisher Accent Magazine in the northeast of England. But with the 2008 recession and the growth of the internet, the business got into difficulty as it lost print advertising revenue.
Mallon had moved into web design, but had ambitions of setting up his own business. Last summer, when he heard the North East Times was struggling, he began to put out feelers. The firm went bust two weeks later.
Mallon was not discouraged. He presented a business plan and a three-year financial projection for the magazine to his father-in-law, a property investor, and an old associate who was working in wealth management; together, they invested £50,000.
Because the old business had ceased trading, Mallon simply bought the magazine title, forming North East Times Magazine Ltd and he had it running again by July 2015 (it had folded in May).
Mallon drip-fed investment it into the business over a few months until it was sustained by advertising revenue. “We’ve completely reshaped the magazine: at least 40% is independent editorial [including] topical local stories,” he says. Website views have been growing by 50% month-on-month. Printed copies (which are free) are now mailed out to 2,500 key business decision-makers in the region.
While print journalism in general is struggling to secure and maintain advertising deals, print advertising continues to be the main source of revenue for the North East Times. It increased the number of copies sent to chief executives, managing directors and directors after advertisers were receptive to this targeted distribution.
It has also created a subscription service for readers that do not have access to the publication. Advertisers include national brands operating in the region and local businesses. There are set prices, published on its website, with big businesses paying £900 per full-page advert and SMEs paying £595 – Mallon says this price transparency has been important for encouraging consistent advertising revenue.
“We expect to turn over £250,000-300,000 in our first year, growing to up to £350,000 next year, and profits are creeping up – it’s sustainable,” Mallon says. “We’re looking to take on two new salespeople now.”
Chris Shelley’s business rescue story also involves a return to a former employer. He had already turned around Dymag once in the nineties, and decided to give it another go.
In 1997, Shelley walked away from the business, which designs and makes high-performance racing cycle wheels, after he was headhunted for a corporate role. But when Dymag went bankrupt in 2009, due to a lack of investment and the contraction of the high-end wheel market following the recession, Shelley returned and bought the company. “It was an emotional reaction, unfinished business,” he says. “I couldn’t resist.”
He restarted it in 2011, investing up to £350,000 of his own money. The refreshed business grew very fast, turning over between £300,000 and £400,000 in two years. “Carbon wheels took off and car manufacturers started to look at them seriously, so this needed proper investment,” he says.
Shelley applied for a UKTI advanced manufacturing supply chain initiative grant of £3.5m and a loan of £3.7m. Dymag has spent the past year developing new lightweight products for original equipment manufacturers (OEMs), and reducing costs.
Shelley says turnover could reach between £600,000 and £800,000 this year. Of the rescue experience, he says: “It probably took three times as much money as I expected, but I saw an opportunity and wanted to do it properly.”
Not all business rescues turn out as well, as Peter Bibby, managing director of Bibby Ventures, which helps turn companies around, knows.
Bibby has successfully turned around a number of SMEs, buying two of them. But, like many investors, he has had to ride the rough with the smooth. “My biggest disappointment was a height safety product (a lanyard used in harnesses for construction workers). It had some good USPs [being very small and lightweight],” he says.
Six years ago, Bibby agreed to invest £150,000 once the product had CE (European conformity) approval, an amount that would buy the designs and pending orders. As such, he effectively took over the business.
But he discovered passing CE requirements did not assure the product a clear route to market. More testing was required to interest construction companies in buying the lanyard, which it failed to pass. Bibby stuck with the project, making a further investment in tooling to improve the tolerances and quality, but this had limited impact.
In the meantime, the delays affected momentum. “After two years, a total investment of £300,000 and a lot of time, I decided that it was not worth pursuing further, particularly as potential customers had lost confidence and gone elsewhere,” Bibby says.
It seems fewer entrepreneurs are being attracted by take-over opportunities. The latest figures from The Insolvency Service, a government agency that provides services to those affected by financial distress or failure, show that the two most common business turnaround procedures – company voluntary arrangements (where a limited company that is insolvent agrees to pay creditors over a fixed period, so the company can continue trading) and administration (where a court-appointed administrator takes over the management of a company) – are at their lowest levels since 1998 and 2003 respectively.
So what are your chances of success in turning around a failing business? A review The Insolvency Service carried out into pre-packaged (or pre-pack) administrations – where the healthy part of a business that has gone into administration is sold on quickly, often to someone with a previous relationship with a company – revealed some interesting results.
The review tracked a sample of 600 companies that entered administration in 2010 (500 of which were pre-packaged administrations). It found 5% had subsequently entered formal administration within 12 months of the purchase, 17% within 24 months and 23% within 36 months. These statistics suggest that it is likely that 95% of acquired businesses survive at least 12 months but only 77% survive over three years.
If you are interested in taking over a failing company, Adrian Hyde, vice-president at R3, The Association of Business Recovery Professionals, advises thoroughly researching the reasons for its failure.
“A purchaser should not underestimate the effort, and funding, that will be needed to rebuild the customer loyalty after the failure,” he adds. “Be conservative in your estimates of what you may achieve, and don’t go into the business under-capitalised.”