Seven habits of highly vulnerable companies
By the time investors or banks reach for specialist help for a business in trouble, there may be little choice but to preside over a more or less orderly decline. Earlier action keeps more options available; but it depends on spotting problems early.
From my years of experience as a company doctor – much of it with small and medium-sized enterprises and much of it, I'm happy to say, successful – it is, I think, possible to discern some corporate habits that regularly seem to contribute to business difficulties.
Noticed early enough, the habits are early-warning signals of trouble ahead. Acted on, they open the door to effective intervention and a higher chance of rescue and revival. There are seven habits I've found particularly telling:
1. Acquisition fever. When a business that has traditionally grown organically starts heading down the acquisition trail, it's time to plead for caution. Debts are likely to balloon, soaking up free cashflow, and assimilation of the taken-over company is invariably more difficult than it seems. It usually takes longer as well.
2. Silver lining. Balance sheets weaken rapidly once management starts converting capital assets into current profit. Most commonly, conversion takes the form of hocking the company's properties through sale-and-leaseback or securitisation arrangements. The changes flatter profits, but leave the asset base thinner. Worse, directors can come to believe the massaged figures – and thus delay corrective action. A more extreme form of the same habit is to mortgage future revenues to lift this year's profits; that habit eventually brought down Enron.
3. Eyes wrong. Husbanding a business is as satisfying – and as dissatisfying – as gardening. There can be long periods when nothing much out of the ordinary seems to be happening. As a result, leaders can be tempted to try new sorts of activity simply because they feel bored with the routines of the core business. Loss of focus during the resulting period of diversification, experimentation or acquisition usually damages performance. Serious mistakes in the new activities may wound it fatally.
4. Moving house. There are lots of good reasons for businesses to change offices. Among the reasons are growth, a shift in demand patterns, and key relationships. When a company moves offices without a clear reason – especially when the move is to a more expensive site – investors and trading partners may want to check their exposure. When the move seems to serve only to multiply the number of windows per executive, wise investors may decide to shrink their exposure.
5. Bleeding edge. Any business has to keep up with rivals, and these days that includes keeping up with computer systems. A good system, installed on time and to budget, can open up new commercial opportunities or make the existing business more efficient. Either way, it can deliver a useful return. A poor system poorly installed can cripple. Perhaps the biggest trap is to believe that you have to be the first kid on the block with a new state-of-the-art IT toy. As computer tycoon Michael Dell himself has acknowledged, the leading edge can easily become the bleeding edge.
6. Generation X. Succession near the top of any corporate structure is fraught with stress and egos. In an SME, the risks are greater because the executive ranks are thinner. In a family-owned SME, bringing the next generation into the business can be extremely dangerous. To start with, the new arrivals may not be any good – and that will be hard for both them and their older relatives to acknowledge. Moreover, the handover is likely to cause tension because the new arrivals almost certainly won't want to do things the same way as the veterans. Rising emotional temperatures will then cloud judgment in the Boardroom and cause a fever of uncertainty among staff.
7. Double trouble. Throwing a six with one die carries a chance of one in six. Throwing two sixes with two dice carries a chance of one in 36. Similarly, if success in a single corporate change project carries a respectable chance of 80 per cent, succeeding in two such projects carries a chance of 64 per cent, and for three it falls to only just over 50 per cent. So although it pays to be wary of a business with any of the first six habits listed here, the risks rise rapidly if the business has more than one at a time.
Tony Scott, who specialises in business communication issues, is a director of Oliver Scott Consulting (http://www.oliverscottconsulting.com).