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The transcript for ICAEW Insights In Focus podcast episode 33: 'How to bring a business back from the brink'.

Philippa Lamb: Hello and welcome to the ICAEW Insights podcast with news and analysis from the world of accountancy, business and finance. I’m Philippa Lamb and in this episode we’re looking at the role of the insolvency professional and the unique combination of technical and interpersonal skills that role demands. What is it like to assist businesses in difficulties? And when can it be possible to recover a viable business? We’ll hear from both sides, with insolvency professional Tyrone Courtman, partner at RSM UK restructuring advisory and one of his former clients Fraser Dick, managing director of Perfection Alloys. Now as we know, this is a timely subject. Insolvencies have surged in the past 18 months, with the average daily figure nearly tripling from 25 a day in January 2021 to 72 a day in March this year. And with still rougher waters ahead for the UK economy, many more businesses may find themselves calling on the services of an insolvency professional. So, what should they expect? Tyrone, Fraser – welcome to you both. Thanks for joining us. Good morning.

Tyrone Courtman: Good morning.

Fraser Dick: Yes, good morning.

PL: Fraser, why don’t you tell us a bit about your business? How was it founded? Tell us the story up until the point when you met Tyrone.

FD: The business was founded in Leicester in 1999, with my business partner Simon. We work in the automotive industry, repairing windscreens, refurbishing alloy wheels and interiors of vehicles. That’s predominantly the motor trade, although there are some private individuals we service and some insurance companies. I joined Simon 18 years ago, as a van driver. Simon was repairing the windscreens and there is a little sideline of collecting alloy wheels and taking them to a paint shop, where they get repainted, refurbished and then put back on the vehicle. That was becoming a little bit much to do along with the windscreens for Simon, so I joined him as a van driver. I left my trade as a steel erector, I’d been doing that probably 15 to 20 years, so I was pretty good at what I did. I was used to running gangs of lads on site, so I could organise things. And I just needed a different job at this point. I was engrossed with the way that Simon did things, he sort of enraptured me and we got on very well. There was a good spark between us. So I trusted him and I left what I was doing and started collecting the wheels and taking them to the paint shop.

PL: And the business went really well, didn’t it?

FD: It did, yes. We started to build up some momentum, and within a couple of years we were turning over 1,000 wheels a week. There was a niche in the market, I could see, so rather than taking these wheels away, we decided to get mobile paint shops and take the paint shop to the dealerships. And of course the dealers loved that. The company grew rapidly – 50 staff within a couple of years. We were just picking up more and more work. The expansion was rapid.

PL: When did you run into problems?

FD: It was probably about three or four years after we started expanding. Simon was getting some pretty bad advice on the inside of the business. I was out on the road, selling the job, making sure that we’d got plenty of work. Simon was behind the scenes and was working in the workshop and the office, and he was just getting bad advice. And the expansion of the business was at the detriment of paying the HMRC, unfortunately. This all culminated when Simon was away on holiday, and I came into the office and found the office manager at that point in a private meeting with the HMRC. At that point, I interrupted them and introduced myself and took control of the situation as best I could, because the gentleman had brought a closure notice. So it was really serious. It was incredibly serious at that point.

PL: That must have been a horrifying moment. How did you feel?

FD: I was petrified really, because I’d never had to deal with anything like that in my life. I wasn’t really the main manager of the business, I was the sales manager, but I knew how serious it was when he showed me the piece of paper.

PL: So you’re sitting down at the table with the HMRC. As you say, it’s not the area of business that was your area of the business, but your partner’s away on holiday. What happened then?

FD: I spent the next six or seven hours in conversation with this gentleman and our exterior accountants – I’d spoken to them, and they were speaking to me on the phone – and I managed to broker a deal with them to pay the money back. So we managed to avoid catastrophe at that point. But there was another stage in the story, which I’ll get to. We took on an accountant internally who was qualified and vetted, thinking that we really needed to take some good, quality advice and have somebody who knew what they were talking about figures-wise, so we could go out and do our job. Unfortunately, a year down the line, they forgot to pay the VAT. You can’t make this up!

PL: Wow, okay. Disastrous.

FD: Yes, disastrous. We knew nothing of this until I could see the business accounts being accessed remotely. He’d brokered a deal, basically, with the HMRC at the worst time of the year for us, which would be the Christmas period, November, December and January, where work’s very quiet, and December was only 14 working days, and it just stifled the cash flow. The long and short of it was, that completely crippled our cash flow the week before Christmas, which provided another massive shock for us.

PL: And I think I’m right in saying at that point, you had a full order book, didn’t you? But you were owed a lot of money.

FD: Yes, we had more work than we could do. We were owed massive amounts of money. But unfortunately, the motor trade are notorious for late payment. Our terms are 30 days, like most people, but in reality 90 to 120 days wouldn’t be unheard of in what we do.

PL: Right. So you had a serious cash flow issue?

FD: Serious cash flow. We had to put £10,000 in of our own money just to pay the wages, as people were going for their Christmas break.

PL: And at what point did you start thinking you were in serious difficulties and that you might be looking at insolvency?

FD: At that point I knew we were in big trouble when we had to raise £10,000 just to pay the staff for their Christmas holiday. That for me was the bit where I thought, we’re in big trouble here  because we just can’t get the debt in. And there wasn’t enough money there to keep the doors open or open them after Christmas. So I went away, we shut the doors, I didn’t speak to my business partner over Christmas, and we sort of pondered what we were going to do. And on our return, I got our exterior accountants involved immediately, and they confirmed what I thought, and they got an IP involved straightaway. And that was our first introduction into insolvency.

PL: But that didn’t go so well, did it?

FD: No, it wasn’t a very pleasant experience.

PL: What happened?

FD: We had a meeting, they assessed all the finances and what they thought about the business. The result that came back was that we should shut the doors and basically just step away from it all,

just put it all behind us. And that’s something that you can’t really put into words when you live, breathe and sleep what you do. We walked away from that meeting really despondent, legs were like jelly, completely shell-shocked, a rabbit in the headlights – whatever you’d like to call it. And we took a week to just sort of process it and work out how we were going to tell the staff, because we know everybody who works in our business. They are somebody to us. It’s not just a number on a clock card.

PL: It’s personal.

FD: It is personal, you know. So that’s what we did – we took a week to decide. And then things took an incredible… change of events that to this day almost sounds unbelievable.

PL: What happened?

FD: My business partner Simon was helping another friend who’s got a private hire business, limousines picking up VIPs and such like. And he went to help him and picked up a gentleman from Birmingham Airport who’d just flown in from Geneva. And I think my partner really just wanted to tell somebody, but obviously didn’t want to tell people he knew because of the stigma that was involved. So he started talking to this gentleman in the back of the car. And the gentleman said at the end of it, look, I might be able to help you here. I’ve got a contact and his name is Tyrone Courtland. He’s definitely somebody that you must speak to. And that’s where the introduction came from, and how we got involved with Tyrone.

PL: That’s extraordinary, isn’t it?

FD: Unbelievable – almost unbelievable. Yes.

PL: So you reached out to Tyrone, and Tyrone came and had a look at the business, and what did he say to you?

FD: First of all, he came in, he was very calm, didn’t commit either way, and said, ‘Let’s look, let’s really have a look at what’s going on here.’ I think it was about another three or four days, he brought his team in, and they were all over the business. It was a very anxious time for us. But when somebody says, Well, let me have another look at this, there’s just a glimmer of hope for you. And you think, well, maybe we could salvage this, maybe there’s something we could do. And after three, four days, Tyrone came back to us and said: ‘There is a really good business under here.’ He said: ‘I can see what’s gone on. I feel that we can do something with it.’ He explained what the potentials were, and basically applied to the courts and got us into a CVA. And that was where it started.

PL: I’m going to bring Tyrone in here, but before I do that, Fraser, just tell me what that moment was like when he said to you: ‘Actually, I think your business has got a future.’

FD: There was a massive, massive relief. Although we weren’t out of the woods, there was potential for us to survive. So yes, I feel emotional now when I talk about it. It’s… it’s incredible really.

PL: So Tyrone, you are a very welcome surprise at this point for Fraser. Tell me, what did you think when you went into the business? I mean, what was your assessment?

TC: One of my first questions when I arrive at these types of situations… It’s one thing having a look at the numbers and understanding their business model, but the other thing is actually getting a measure of the individuals, and one of my first key questions is, if I had a magic wand, what would an ideal outcome be for you? Both Fraser and Simon said, ‘Well, we want to carry on, we believe the business has a future.’ And I guess from my perspective, I just needed to satisfy myself, financially, that that was the case.

And there were some fairly obvious things that I challenged Simon and Fraser on – things as simple as when was the last time you had a price increase? And very simple things like, if you’re doing 1,000 wheels a week, if you were to add on £1 a wheel, that’s £1,000 a week, that’s 50 grand a year. That’s a material number in the context of their historical profitability levels. And then you look at other things like, why is it you’ve got the best part of  400 or 500 customers when 80% of your turnover is with 20% of those customers in number. So actually being a bit more selective about the people you deal with, because there’s an inevitable cost in dealing with that many customers that was perhaps providing distractions to servicing the really meaningful customers.

Now obviously, liquidity was an issue – they’ve got a bit of previous history, shall I say, with HMRC. They’d been on a time-to-pay arrangement which their previous accountant had made promises about, which were clearly inappropriate given the seasonality of the business, and promises they couldn’t keep. It’s very difficult, when you’re dealing with HMRC, if you say something one day and then find that in two or three months, you’re having to re-trench on what you’ve said. You lose all of that credibility. So it was important to have a meaningful plan, and by the time we got to that point, I think it’s fair to say that the only way HMRC would contemplate another time-to-pay arrangement was if it was going to be on a much more formalised basis. That’s when we turned to the Company Voluntary Arrangement procedure.

PL: So you came to conclusion that the business was viable – you didn’t recommend insolvency. Why was a Company Voluntary Arrangement a better solution in this instance?

TC: This is all about preservation of enterprise value. It’s about meeting the aspirations of Fraser and Simon. In terms of the viability of the business, it was fair to say that there were some changes, but some relatively easy changes that could be effected – and could be afforded. Because let’s not forget, if you’re looking to turn around a business, any changes that you’re going to bring about, often there’s a cash implication. But the simple change of putting up the price of the work they were doing on the wheels had very little cost implications, and of course that price increase goes straight through to the bottom line.

At the end of the day, if those prices were not accepted by the majority of the customers, then maybe the business would have to fail. And then of course, given the sort of corner that the business was in, we had absolutely nothing to lose by bringing about those changes. So that was the financial viability, but we just needed time, the business needed time. It needed a breathing space, and that’s where a Company Voluntary Arrangement is so powerful, in the sense that it brings some order to the creditors. It has the backing of the court, so once it’s approved nobody can wind the business up. It just puts any arrangement on a formalised footing.

Interestingly, in this particular case, by far and above the biggest single creditor was HMRC, so the approval of the arrangement was always going to be reliant on their support. I guess to that extent, it was down to Fraser and Simon and myself to convince HMRC of the merits of the turnaround plan and the merits of the CVA because, had we gone into liquidation, there would have been the 35 or 40 jobs lost, and the prospect for HMRC of recovering a penny, beyond the costs of dealing with the liquidation, would have been extremely unlikely.

Going down the CVA route really did give HMRC and the few other creditors the very best opportunity of recovering something from this, as well as preserving a business and employer and the livelihoods of those 35 to 40 employees. There were some conditions that HMRC imposed on Fraser and Simon as shareholders in that, like a lot of owner-managed businesses, they had previously been remunerated through dividends as compared to drawing a salary. So one of the conditions, which was a cost for Fraser and Simon, was that they had to move their income draw from the business from dividends to a salary, and of course that led to high-rate tax costs for them as individuals, but I think it was a relatively small price, ultimately worth paying, given that we managed to secure HMRC support.

TC: Fraser, tell me: you had to put more money into the business, how did you go about doing that?

FD: We had to put personal guarantees with our properties. We took reduced salaries, and we put cash in that we had ourselves, so there was a combination of  money there.

PL: What was the experience like, working with Tyrone? Obviously, it’s an extraordinarily testing time for you and your partner – how was it?

FD: How can I describe it? It’s very, very daunting at the beginning, you’ve really got to dig deep, find some resolve. But Tyrone was a very calm influence and would talk us through the process and give good advice and listen and guide. Whatever the time of the day was, literally, it was 24/7, if I needed to speak to him because I was feeling anxious or worried or concerned, the phone was always on and I could get hold of him. And that’s pretty much been all the way through. After the event, we still have contact and I still speak to him and just give him updates on what the business is doing. But it was a very, very, very worrying time. Frightening.

PL: Tyrone gave you technical support. He gave you all the support around business fundamentals, obviously being a qualified accountant – but the emotional support, it sounds like that was really key for you?

FD: To me, it was yes, absolutely. We could take on board all the points of business and accountancy, but having somebody there to emotionally guide you and support you is absolutely paramount in having something like this succeed. Getting early advice is crucial, but getting the right advice is crucial. But having somebody that’s got empathy, that can see what you’re going through as an individual is just really, really helpful.

PL: Tyrone, clearly you brought technical rigour to this process, you wouldn’t have tried to rescue the business if it wasn’t capable of being rescued. But that sense of you standing behind them… it sounds like it spurred them on.

TC: There’s a bit of a personal story here, I guess, in terms of why I do what I do. I mean, it’s a brilliant story and Fraser, Simon and I have become very good friends. I think the really rewarding aspect for me in all of this, irrespective of the professional fees associated with it – the much bigger picture for me is the fact that we’re participating in this conversation. It’s a great story and I feel I made a very positive difference to the lives of Simon and Fraser and obviously the employees and the business of Perfection Alloys.

The personal story in terms of empathy goes back probably to my teenage years at home. My father was self-employed. He was a pipeline welder, his work was seasonal, and without sounding too extreme about it… I mean, it never got to the point where Mum and Dad weren’t able to put food on the table, but I could see during my formative years the trauma that they went through in terms of how to try to make ends meet. And I guess it’s always when I approach these situations, it’s with memories of that in mind, which enables me to empathise with what the likes of Simon and Fraser must be going through, during what are very traumatic times for them – it’s very unfamiliar territory. I guess all I can do is to draw on my experience of the formative years with Mum and Dad trying to balance the books, and put myself in Simon and Fraser’s shoes and think, ‘Okay, if it were me, what would I want?’

And that very much then restructures the way that I approach and the way that I strike up a relationship with the guys to try and bring them through this. And that’s why I do what I do. Unfortunately, there are many situations, sadly, where it’s not such a good news story. But boy, is it heartening when we do have a good story like this one. That’s why I do what I do.

PL: It’s that personal insight that makes you uniquely qualified, doesn’t it, for doing this sort of work. Is that what drew you to insolvency?

TC: Probably what originally drew me to insolvency was, if you think about the audit environment… I remember being asked by my audit manager way back when, when are you looking to take your holiday next year, Tyrone? It was literally turning against the fact that my life was going to be so formulaic or so planned out that I’m having to think about what week I’m taking my holiday next year, that led me to insolvency, which is very much more about thinking on your feet. And you never really know what’s going to happen during the course of the day, in the sense that you’re only ever a phone call away from a new situation and a new set of problems and challenges to deal with. That’s what really fired me up.

PL: Do you find it more creative?

TC: Absolutely. I think probably with audits – again, at the risk of disenfranchising myself from my audit colleagues – I probably never really felt that I could make a difference, whereas here I do feel I can make a difference. I do mostly, I’d like to say, make a positive difference to the outcome. It’s all about changing the direction. And obviously, with Simon and Fraser, the direction of travel was that they had been previously advised that the most appropriate solution was to go into liquidation, and that again fired me up to really challenge whether that was the appropriate solution. And clearly in this case, it wouldn’t have been because we were able to bring it around. So yes, so I feel I made a massive positive difference to Simon and Fraser, Perfection Alloys and the employees, and the outcome for HMRC when we got them a load of money back which they wouldn’t have otherwise got.

PL: Yes, that’s hugely inspiring. I think if accountants are listening to this, Tyrone, and thinking it’s a specialism that sounds testing, challenging, exciting – what would your advice be to them?

TC: I think anybody that is contemplating their future direction, maybe as a trainee accountant or as a newly qualified accountant, then it’s probably as close as you can get to being in the sort of commercial world but still remaining very much in professional practice. And of course, rather than if you are working in industry and you’ve got the challenges working in typically one business for quite a period of time, the great benefit of being in the restructuring profession is you get to see lots of businesses across a whole raft of sectors and industries, and they’re probably in the most challenging parts of the business lifecycle. And the other part I actually really enjoy about it, it’s not just about the numbers, it’s about the legal side of it as well. A lot of what we do is driven by case law, and the primary law itself. It’s understanding how that can be usefully applied to bring the best out of the situation as well. So yes, I really do like that combination of business acumen, the accounting, the HR part of it as well, and also the legal process.

PL: Tyrone, thank you. Fraser, thank you for sharing your experience with us. It’s been great to have you both on the podcast. That’s it for this episode. Thanks for listening. You can catch the next Insights podcast in just over a week’s time, when we’ll be discussing the new Prime Minister and his or her plans for UK PLC with a panel of ICAEW experts. The next Infocus podcast where we drill down into a single topic will be in mid-September. Join us for those two and meantime, please do rate, review and share this episode – the more people who hear it, the happier we are. And remember to subscribe to ICAEW Insights on your favourite podcast app, so you never miss an episode.