The Perfect Storm?

The phrase “the perfect storm” has often been used to describe events that have come together in a most unexpected and devastating way. The effects of the simultaneous occurrences are far more powerful than if they had occurred independently.

In our August newsletter we raised concerns about the anticipated fallout from the credit crisis in global markets. The article provided a few key warning signs that companies should be aware of as the uncertainty in the economy grows stronger.

Additional recent events in the world financial and commodity markets have now led some to believe that we are heading for a ‘perfect storm’. What are the triggers? And what are the likely impacts on the Australian economy?

First though some recent headlines from the major newswires:

“Greenspan 50/50 on Recession” – Reuters 08/10/07
“Crisis was “accident waiting to happen" Greenspan” – Reuters 21/10/07
“Bernanke: Housing Woes to Slow Growth” - yahoo 15/10/07
“Credit turmoil could mean turning point for growth” – Reuters 22/10/07
“U S Home Foreclosures Double” – Foreclosures Daily 17/10/07
“Greenspan Says `State of Fear' in Credit Markets” - Bloomberg 23/10/07
“173 US mortgage companies have imploded in the past 12 months” – The Mortgage Lender 23/10/07
“Alarm bells ring ahead of CPI release” - AFR 23/10/07
“Banks warn on higher loan rates” - AFR 23/10/07
US credit crisis
The housing and credit crisis in the US has greatly impacted world credit markets causing a dramatic reduction in liquidity. The market has improved slightly but we are now seeing higher pricing of risk across the board and a re-rating of risk by the major credit agencies. The net result is that debt is becoming harder to source and more expensive for existing and prospective borrowers.

The effects of this are starting to be felt locally, as we are already seeing the emergence of tighter credit policy and higher pricing. This will impact negatively on those businesses that operate on high volume, low margin models and those businesses that are already highly exposed to debt.

The US real estate crash is still unwinding with similar concerns now being expressed about the UK market. As a high proportion of small to medium business owners in Australia have used their properties to finance their businesses, any reduction in Australian property prices will have a dramatic effect on their ability to raise additional finance which will slow their growth or lead many to experience a cash flow crisis.

Oil price
Oil has increased by approx. 50% this year to a high of US$87 of late prompting some analysts to speculate that a price of $100 is now possible. The upward pressure is due to a number of factors including the continuing unrest in the Middle East, increasing demand from China and India, a weak US dollar and an all time low in excess production capacity.

The issue of real concern for Australia’s debt laden families and small to medium businesses is that every 12% increase in oil is equivalent to a .25% increase in interest rates. Therefore, we have actually had 6 interest rate increases this year (2 normal plus 4 equivalent).

High cost of labour
The latest figures released on Friday show that Australia now has the lowest unemployment levels in 33 years at 4.2%. This has further strengthened the belief that interest rates will be increased again towards the end of this year and into next year.

Employers currently find their business activities constrained by a lack of available and skilled staff and the additional high costs of luring new staff or even keeping their own staff in the business. This problem is unlikely to go away even if there is a slowdown in economic activity. These issues are proving both disruptive and costly for most small to medium businesses as they struggle to perform in volatile labour markets.

Interest rate rises
The Reserve Bank has an often stated policy of keeping inflation within 2 – 3 % per annum. Recent events are testing the limits of this policy and therefore require the RBA to use the interest rates to curtail this. The effects of a buoyant economy, low unemployment, growth in real wages, increased food prices (because of the drought) and increased fuel prices all lead to the need for the Reserve Bank to raise interest rates further to keep the lid on an overheating economy.

Given the record levels of individual and small business debt, an increase in interest rates will result in a reduction in discretionary spending and slow economic growth.

High Australian Dollar
In recent years and in particular over the past few months, the strong economy and interest rate differentials between its major trading partners and Australia has placed upward pressure on the currency. The currency is currently trading at around 90 cents with some analysts anticipating it going as high as 92.5 cents by the end of this year and 95 cents by mid 2008.

This is having a significant impact on non mining related exporters. For those companies relying heavily on exports they may be finding it difficult to remain competitive so either margins or sale volumes will come under pressure.

The high Aussie dollar is great news for importers though who find their goods being very well priced and an opportunity for greater profits. The concern is that too much of this sector is towards the non essential or luxury market. The Reserve Bank finds itself having to consider the long term effects of raising or leaving current interest rates as they are. Any increase in rates will lead to more inflows from foreign buyers of the dollar and will lead further upward pressure of the currency.

Faced with so many divergent pressures, business owners need to be thinking very strategically in the coming months to ensure that their business can weather any upcoming economic downturn.

For more information please feel free to contact one of the team at Vantage Performance.

Regards


Michael Fingland
Managing Director

Vantage Performance
Turnaround Management Specialists

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New Vantage Performance Podcast

Michael Fingland, Managing Director of Vantage Performance, has launched our latest podcast edition. This podcast is exploring the complex and highly specialized world of corporate turnarounds.

This new podcast discusses the causes of decline and distress on a business particularly the external factors that a business can face.

For more insights, check our podcast link or download it at Itunes.
http://feeds.vantageperformance.com.au/vantageperformance

See you next time.

Vantage Performance
Turnaround Management Specialist

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How do I listen to the Vantage Turnaround Insights Podcast?

Please copy the following URL into iTunes or your preferred podcast reader: http://feeds.vantageperformance.com.au/vantageperformance

Then follow the instructions below to add the podcast to iTunes:
· Step 1: Click on podcasts
· Step 2: Go to advanced in the top toolbar
· Step 3: Click subscribe to podcast
· Step 4: Copy http://feeds.vantageperformance.com.au/vantageperformance into the URL box and click ok
· Step 5: Select the podcast and press play

Vantage Performance
Turnaround Management Specialists

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Job Advertisements down by 5% to 11% in September

Australian Job Advertisements declined substantially in the month of September 2007



- Banking jobs fell by 11%

- Finance jobs fell by 5%

- Investment banking and corporate finance fell by 9%

- Accounting jobs fell by 4%



This is a reversal of recent trends and may be the result of negative sentiment creeping into the market as a result of the US credit crunch.


Vantage Performance
Turnaround Management Specialist

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Warning Signs Of A Company In Trouble

When considering an acquisition of, investment in, or employment with a company it is best for your peace of mind, as well as, financially to be aware of indications that the company’s true picture may not be what management would lead you to believe.

The surest sign that something is amiss is a frustrated stakeholder – be it the owner, investors, or lenders. What are their concerns? Have there been repetitive problems with the company? Does management not seem to have the right skill set to handle the most pressing issues? Does management spend too much time assessing blame and not a lot of time accurately identifying the company’s problems and devising solutions?

Where to Start

It is best to first take a look at the company’s financials. Start with the balance sheet. Are they building inventory and not able to sell it? Do they have a negative cash position? Have they maxed out their borrowing base? Also be sure that the balance sheet reflects the true state of affairs. For example, has the company written a check which it has yet to mail despite debiting its accounts payable account?

Take a look at the income statement, preferably one with monthly performance over the last 12 months. Group the items into three categories: sales, variable costs including direct sales costs, and fixed costs. What trends do you see in those categories? Perform a breakeven analysis. What is their contribution margin? Is it declining? What about EBIT? Is the company able to service its debt?

It can be helpful to simplify a company’s financial statements, combining similar items in order to move out of the detail and focus on the company’s overall performance and financial position.

The greatest mistake is not necessarily investing in a troubled company, but rather misdiagnosing the company’s problem(s).

Checklist

Here are some items to consider when performing diligence on a company:

Cash shortfall – does the company seem to be constantly in a cash crunch?

Physical deterioration of facilities – signs of inability to maintain facilities due to lack of proper planning and ability to re-invest.

High concentration of leased assets – inability to secure traditional financing.

Lender blamed for current condition – indicates a lack of willingness on management’s part to accept responsibility and look for solutions.

Mounting external pressure – litigation, displeased vendors and creditors, and troublesome audits.

Poor external/internal communication – the lack of effective communication with external parties such as lenders and vendors, as well as, internally with employees can indicate the presence of negative information suppressed by management.

Critical information ignored or discontinued – management is not focused on how the company generates earnings, instead preferring to ignore it and replacing it with less valuable indicators.

Defensive management team – a management team that is always putting out fires is less likely to be able to proactively plan to grow the company’s business.

Liabilities ignored or underreported – the creation of financial statements which do not accurately reflect the company’s true performance and financial position can lead to much more aggressive actions than would be warranted, thus exacerbating a company’s problems.

Credibility problems with key constituents – the inability for management to be trusted can create unnecessary hurdles for management.

Dishonest/Unethical business practices – this indicates a willingness to push the envelope in the face of mounting negative business pressures.

Ownership distracted by outside activities – this can indicate a lack of time for necessary oversight over management.

Deny accuracy of negative information – management is unable to accept reality and deal with it accordingly, instead preferring to “shoot the messenger”.

Looking for a “home run” to fix everything – a management team counting on the next product line, next store, or next IT system implementation to solve its troubles is likely to not be focused on tackling the true problems facing the company.

Inventory is over weighted in slow moving items – this can indicate a lack of unwillingness to write-down assets and accept reality.

Quality issues with products and services – an indicator of poor management and future loss of sales.

Market share losses – this can indicate an inability of management to compete in the marketplace and presages future financial pressures.

Backlog declining – the company faces the potential of declining future sales and EBITDA.

Departure of key employees – May indicate an inability to pay talent their market rate or otherwise maintain an attractive work environment. Also may indicate that key employees realize the company is in trouble.

Unmotivated/depressed employees – the general attitude of lower level management and employees on the shop is a good gauge of how things are going at the company. Oftentimes they are able to catch on to a company’s troubles before it reaches the executive suite.

Conclusion

It is important to note that a troubled company often exhibits some combination of the factors described above.

When examining a company, be sure to be on the look out for these potential warning signs. As always, seek first to have an accurate and meaningful set of financial statements to guide you.


If you would like to discuss this topic in more detail please feel free to contact us.


Regards,

Michael Fingland
Managing Director


M +61 407 226 968
T +61 7 3229 5750
F +61 7 3229 5765
Level 5, 247 Adelaide StreetBrisbane QLD 4000


mfingland@vantageperformance.com.au

http://www.vantageperformance.com.au/

Listen to Turnaround Insights Podcast
http://feeds.feedburner.com/vantageperformance

Vantage Performance
Turnaround Management Specialists

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Nothing Ventured - by ACUMEN Sep 2007 Issue

The next phase of the private equity journey in Australia is likely to be of great interest to small, medium and family businesses in Queensland – especially those struggling.

Discussion at last month’s Brisbane gathering of the Australian Private Equity and Venture Capital Association Limited (AVCAL) centred on how similar today’s private equity environment is to that of the United States in the 1990s.

That was when US firms began to move away from a simple mergers and acquisitions model to that of buying and turning around distressed businesses and those in abject crisis.
Why? Well, as Vantage Performance managing director Michael Fingland pointed out, it’s not only a “good thing to do” – there’s more money in it.

“Distressed asset returns are more favourable than private equity.” Mr Fingland said. “Turnarounds in Australia, now, are where it was in the US in the 1990s. I think we are going to see a lot more of this activity.”

Colleagues on the AVCAL discussion panel, Interfinancial head of mergers and acquisitions Sharon Doyle and Home Wilkinson Lowry partner Michael Reynolds, agreed private equity in Australia is changing.

“A lot of private equity investing here has been as a result of good times, low unemployment, low interest rates, etc.” said Mr Reynolds. The general feeling of the AVCAL panel was private equity firms will soon set up separate funds aimed at distressed firms and business that are undervalued, due to poor management.

In the US, major private equity companies have set up specialist teams aimed at specific industry turnaround opportunities. Australian firms could soon do the same.

“We’re seeing increasing use of industry specialists.” said Mr Doyle. “A lot more industry research is being done by industry specialists now, as part of the due diligence process.”

In the final analysis, turnaround specialists want the same as their upstream mergers and acquisitions brethren: to restructure a business so it is worth significantly more and becomes a profitably saleable item.

The difference is that the starting point is discovering appropriately challenged businesses. Mr Fingland, who is setting up his own turnaround fund, highlights that many small and family businesses are now in distress.

He said the noise of success in sectors such as mining and construction is drowning out the difficulties faced in many other sectors. In family businesses, there is an overwhelming problem of succession planning.

“There’s a plethora of them out there.” Mr Fingland said. “The Australian banking system cannot (effectively) fund these businesses.”
But there is light at the end of the tunnel for well managed businesses – even those fallen on hard times.

For some battling away at the SME coal face, all that hard work may yet pay off – from an unexpected financial quarter that is better known for cherry picking big, iconic companies.■

Vantage Performance
Turnaround Management Specialist

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MITIGATING THE CULTURE OF RISK

The proliferation and diversification of deals has become a major focus forinvestment firms as large allocations offunds are distributed globally. The sheernumber of funds and the amount of capitalbeing raised has experienced exponentialgrowth.

In hedge funds alone, there now exist in excess of 8,000 fundsrepresenting an increase of over 1500% in less than 20 years. Indeedmore than $1 trillion USD in assets is under management, whichcomprises a doubling in assets since the 2000 dot com crash.

The derivative of all this capital play is an elevated culture of risk. The growth in debt capacity, historically low interest rates andrelatively calm markets has created an environment whereinvestment activity increases are present in almost every developedcountry in the world.

Further to the point, large institutional investors (superannuation,insurance companies, college endowments, and others) are typicallyallocating a certain percentage of their investments to private equity,hedge funds and real estate with an objective to secure absolutereturns, capital preservation and diversification of their portfolios.

In Australia vendor price expectations remain high and the volume ofdeals has increased although the amount of funds invested isequivalent to only half of funds raised by private equity.

This suggests the amount of funds in the region exceeds the qualityof deals available. Historically, this has lead to a position whereby thequality of companies being invested in decreases as pressure tomaintain a high return on the funds raised increases.

History suggests that 20% of all private equity investments result in awrite off of the initial investment with a further 19% returning up to100% of the initial investment. That makes a total of 39% where areturn on the investment is not received. Private equity sees this areaas one which will need to be monitored as the likelihood of more fattails continues to grow. Fat tails are the catastrophes which comefrom normal day-to-day fluctuations. This is derived from the shapeof a probabilities bell curve. The long, thin tails on both endsrepresent extremely rare outcomes.


US private equity investments over the past twenty years:


The shortage of deals resulting in some riskier investments togetherwith the historic failure rate has led to an emerging trend in the US ofspecialist Turnaround Management firms being engaged more andmore to assist with deal vetting, monitoring, repositioning and valuemaximisation. Not only are they experienced in assessing businessviability but they can also identify areas of underperformance in abusiness and implement sustainable strategies to rapidly improvecash flow as well as earnings, the very basis upon which a privateequity firm’s exit strategy is based on.

What remains to be seen is whether the Australian private equityindustry will follow the lead of the US and engage the skills ofspecialist turnaround consultants not only to help mitigate risk butalso to ensure that the business plans upon which exit strategies arebased are achievable and possibly surpassed.


If you would like to discuss this topic in more detail please feel free to contact us.


Regards,

Michael Fingland
Managing Director


M +61 407 226 968
T +61 7 3229 5750
F +61 7 3229 5765
Level 5, 247 Adelaide StreetBrisbane QLD 4000


mfingland@vantageperformance.com.au

http://www.vantageperformance.com.au/

Listen to Turnaround Insights Podcast
http://feeds.feedburner.com/vantageperformance

Vantage Performance
Turnaround Management Specialist

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MANAGING FOR A DOWNTURN

The recent tightening of the credit markets has created a short term loss of confidence in the global markets. Companies have been inclined to ask how exposed are their business and should they be concerned with the long term impact of the current market situation.

As negative influences to the market usually have a trickle down effect the real impact to businesses in all sectors will be felt in the months ahead. Through actively understanding key warning signs and actioning strategies to sustain business performance, companies have an opportunity to improve their financial positions, market share and future prospects.

Although the following register of key warning signs is not exhaustive, it will assist companies to determine future strategies and mitigate risk going forward. There are many reasons which may cause a business to decline both internally and externally.

Internal factors are the ones management can control. The main internal factors include – high leverage on the balance sheets, loss of key staff, no clear succession plan, uncontrolled operating costs and narrow product offerings.

High leverage on the balance sheet – a company which is highly geared is exposed to tightened lending and higher interest rates on borrowings. In a low product margin environment or cashflow crisis the knock on effect can be severe.

Loss of key staff – the departure of a knowledge based staff member who understands the organisation and effectively communicates to superiors and reports has a destabilising effect on operations and can lead to the exit of other staff.

No clear succession plan – as the baby boomer generation ages the need for a planned leadership transfer can leave many organisations without a strong chief executive if the current head departs prematurely.

Uncontrolled operating costs – The erosion of margins, ineffective systems for tracking spending, and a lack of accountability will not only stifle a company’s growth but may also trigger a collapse if coupled with other negative factors.

Narrow product offerings – The erosion of a business’s primary market has the potential to seriously impact the company.

External factors are the ones which management cannot control. External factors include changes to economic conditions, competitors, government policy, social trends, and technology.

Economic Conditions – inflation, decreased demand for products and/or services, interest rate movements, currency fluctuations and credit pressure amongst others. Negative economic conditions can rapidly affect a business and exacerbate weaknesses in the organisation. All too often being prepared for a downturn is low on the priorities of management teams; however putting systems in place to enable identification of issues early can be effective to withstand a downturn.

Competitors – the emergence of low cost producers, foreign player in the market, merger of rivals, a competitor introducing a new product range, new company with an innovative business model entering the market. All companies need to keep an eye on their competitors - failure to do so will undoubtedly lead to loss of market share and potentially put the business at risk.

Government Policy – taxation, workplace relations, pollution control, product safety and consumer protection. Whilst these factors undoubtedly impact on businesses they will rarely, if ever, cause a well managed business to fail.

Social trends – changes in lifestyle, employee expectations, composition and attitude changes of a population. Although ever changing, a reasonable well managed company will be able to keep abreast of relevant social trends to ensure that they can react as the changes become apparent.

Technology – cost, disruption to operations, user awareness and understanding, utilisation, and training. The rapid changes in technology over the past twenty or so years has led to advances in materials, processes, techniques and has impacted nearly every company’s business model. In a period of rapid change management need to keep abreast of advances in technology to ensure that they are implementing best practice.

In our experience most causes of business failure are the result of management’s continued reaction to unfavourable internal or external factors. Good management has the ability to identify the key warning signs or engage a specialist firm to conduct a strategic review of the business and implement effective strategies to positively realign the company’s performance.

More often than not good management recognise when their business is in decline before it becomes a long-term issue. They can accept there is a need for effective solutions which rapidly improve the performance of their business and take the necessary steps to resolve the issue.

If you would like to discuss this topic in more detail please contact us for a confidential discussion.

Regards,

Michael Fingland
Managing Director



M +61 407 226 968
T +61 7 3229 5750
F +61 7 3229 5765
Level 5, 247 Adelaide StreetBrisbane QLD 4000

mfingland@vantageperformance.com.au

http://www.vantageperformance.com.au/

Listen to Turnaround Insights Podcast
http://feeds.feedburner.com/vantageperformance

Vantage Performance
Turnaround Management Specialist

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WHAT GETS MEASURED GETS MANAGED!

Key Performance Indicators (KPI’s) provide you with valuable business intelligence.

When was the last time you measured the true cost of your human resources? Do you know how much it cost to hire, replace and train new staff in the past 12 months? The majority of management teams wouldn’t have this information readily available.

Do you know what your total cost of distribution is, taking into account return on sales, customer service levels, overdue purchase orders or backorders subsequently cancelled?

Your business is creating its own intelligence without you even knowing it. With every quote, transaction or production cycle you’ve gathered data that can assist you with improving the performance and value of your business.

By developing a solid KPI system that is relevant, you are left with more time to better manage your business – and yourself!

Depending on your business and industry you should consider monitoring the following KPI’s on a weekly and/or monthly basis:

§ Total sale transactions
§ Average revenue per customer
§ Number of new customers
§ Customer conversion rate
§ Gross profit as a % of revenue
§ Gross profit % per customer and product
§ Net profit as a % of revenue
§ Staff turnover
§ Customer satisfaction levels
§ Average order/service time
§ Average website hits
§ Debtor, creditor and inventory turnover levels
§ Major operating costs as a % of revenue (ie. fuel)

Once you have these measures in place you are then able to identify any key trends that are emerging.

Revenue may be decreasing but unless you know it is due to fewer transactions, excessive discounting or simply a reduction in the average order value you may implement strategies which worsen the situation.

With this “business intelligence” to hand you are then able to make informed decisions that will improve profitability and cash flow.

The key to implementing effective KPI frameworks is to:

1. Understand the key drivers of your business and the industry within which you operate.

2. Know your industry benchmarks so you can compare your business to best practice.

3. Ensure your KPI’s meet your organisational goals.

4. Determine how often they will be measured and reviewed.

5. Decide who needs to agree the KPI’s to be measured. Ideally, the KPI’s will be constructed in discussion with the key people who have control over the particular areas. This will ensure their “buy-in” to the process which is critical.

6. Keep in mind that the KPI’s should be about your objectives. If you live and die by what your competitors are doing, and how they measure their own success, you will loose sight of your own goals.

7. Ensure you have a suite of “Lead” and “Lag” KPI’s. Lead KPI’s are those that give you an indication of future performance such as quotes done, number of new leads etc. This allows you to make decisions in real time rather than waiting until after the fact. Lag KPI’s are those that simply reflect past performance such as total sales completed, gross profit etc.

If you would like to discuss this topic further please feel free to contact us.

Regards,

Michael Fingland
Managing Director


M +61 407 226 968
T +61 7 3229 5750
F +61 7 3229 5765 Level 5, 247 Adelaide Street
Brisbane QLD 4000

mfingland@vantageperformance.com.au

http://www.vantageperformance.com.au/

Listen to Turnaround Insights Podcast
http://feeds.feedburner.com/vantageperformance

Vantage Performance
Turnaround Management Specialist

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KEYS TO THE FUTURE

The unprecedented boom in the global economy has led many people to speculate about ‘the next global down-turn’.

The decline in real estate and the March hiccup in the Chinese markets sent some pundits into a downward spiral. Following this we witnessed the meltdown of sub-prime mortgages in the US which has led to renewed speculation the US economy may be slowing past an acceptable point.

Companies operating in this climate are hesitant to prepare for a global downturn when business remains robust. However, it is this level of forward thought that has allowed businesses not only to weather a recession but to also leverage the environment for growth.

The US recession in 2000-2001 demonstrated that forward planning enabled many businesses to profit and extricate market dominance from their competitors. What were the common traits of companies who benefited from the last US recession?

Low leverage on balance sheets: the average net debt to equity ratio before the recession of those who came out as leaders was half of those who lost their leadership positions. The leaders also had more cash on their balance sheets before the recession.

Control of operating costs: Flexibility created from controlled operating costs before the recession provided top companies with the means to transfer funds, assets and personnel in a tightened market.

Diversified product offerings and business geography: Diversifying revenue streams, managing the customer base and product lines were a significant reason why companies thrived in the downturn, more so over twice as many companies had multiple sales channels.

These three common threads form a powerful case for companies to forward plan and be financially responsible. In addition, dividend-paying organisations either divested themselves or maintained dividends even as profits grew. Once companies moved ahead in their markets, they went further by expanding their businesses, organically (internal investments) or inorganically (mergers, acquisitions, alliances, joint ventures). Several companies grew their businesses and maximised profits regardless of the downturn.

Well-run organisations with fiscal and resource discipline are better equipped to withstand external pressure from an underperforming economy. Implementing debt-reduction, cost-control and diversification strategies well before a downturn in the economy is important to ensure the impact on the business is minimal and the success of the business continues.

If you would like to know more please feel free to contact us.

Regards.

Michael Fingland
Managing Director


M +61 407 226 968
T +61 7 3229 5750
F +61 7 3229 5765 Level 5, 247 Adelaide Street
Brisbane QLD 4000

mfingland@vantageperformance.com.au

http://www.vantageperformance.com.au

Listen to Turnaround Insights Podcast
http://feeds.feedburner.com/vantageperformance

Vantage Performance
Turnaround Management Specialists

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THE EQUITY GAP

The Equity Gap – how you can still close a deal when the purchase price of a business exceeds the amount that can be financed


The Scenario

Lachlan and Philippa Nagle started Nagle Building and Construction in 1975 at the ages of 23 and 20 respectively. The first few years were extremely difficult as they struggled to build their client base and reputation.

The two believed strongly in the great quality and service of their company and after 3 years of hard work, their fortune began to turn. Word was spreading about this small building company who left every client with the perception of “better than expected”. This word-ofmouth reputation led to Con Niarchos of Niarchos Properties hiring them to build his new private residence, which not only came in on time and on budget, but the quality was impressive. He promptly put them on his list of top builders which was where the company sat with every major developer in Australia by 2005.

Thirty-one years later, with a thriving business of 60 employees and a well-established brand and reputation, Lachlan and Philippa realized it was nearing time to pass on the reigns to their children. The idea was to issue shares in the business to their two sons and one daughter.
The three children would then have effective control of the company when the parents retired. The crisis began when none of the children wanted the business. The children wanted to move into finance, go out on their own, or study the arts.

Auspiciously, the couple mentioned to the staff that they were planning to sell the business and retire. A group of employees, one who had been around almost as long as the founders, decided to purchase the business. Their only obstacle was the headline price Lachlan and Philippa expected to achieve from the sale. The two knew the employees would run the company as if it were their own but were hesitant to accept a reduction in sales price after more than thirty years of hard work.

The Solution

Too often mergers and acquisitions are hindered by an “equity gap” that develops between the vendor’s expected headline price and the purchaser’s ability to leverage finance. Unfortunately the result is deals do not succeed even when the purchaser and vendor would like to conclude the transaction.

Deferred consideration insurance solves the equity gap by guaranteeing payment to the vendor in a deferred transaction. In essence, deferred finance insurance is a contractual agreement that guarantees that the purchase price, in part or in its entirety, will be paid at a specific time in the future. This allows the purchaser to pay for the acquisition using future profits rather than equity or debt now. It also allows for the vendor to receive payment regardless of the future success of the company as the underwriters will step in if the purchaser is unable to pay. The policy is non cancellable and irrevocable. Deferred finance insurance is most suitable for the following types of situations:

• Management Buy Outs
• Management Buy Ins
• Aggregation strategies
• Straight acquisitions
• Succession plan driven divestments
• Public to Private Transactions
• Share Buy-Backs

In addition to enhancing deal success rates it also has numerous advantages, such as being significantly cheaper than other types of financing. For example, the typical premiums are between 2% to 4% pa.

As our scenario demonstrates, the maturing of the baby-boomers is poised to leave a succession planning dilemma. Deferred finance insurance can alleviate many of the issues posed allowing business owners the security and peace of mind of guaranteed payment.

If you would like to know more please feel free to contact us.

Regards,

Michael Fingland
Managing Director


M +61 407 226 968
T +61 7 3229 5750
F +61 7 3229 5765 Level 5, 247 Adelaide Street
Brisbane QLD 4000


mfingland@vantageperformance.com.au

http://www.vantageperformance.com.au

Listen to Turnaround Insights Podcast
http://feeds.feedburner.com/vantageperformance

Vantage Performance
Turnaround Management Specialists

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HOW TO BECOME AN EMPLOYER OF CHOICE

How to Become an Employer of Choice and retain or attract staff in a low unemployment arena?

The Australian economy is in a prolonged growth phase. As of November 2006, unemployment stood at only 4.6% of the workforce; the lowest it has been in 30 years.

The past 10 years has seen the creation of over 1.9 million new jobs and the highest percentage of participation in the labour market by working age people. The graph below illustrates the Total Number of Employed vs. Total Number of Unemployed People in Australia over the past 30 years.


In these times of prosperity money is no longer the principle driver of success. Employees are finding that going out on their own can be more rewarding than working for an organisation. The long term success of a business depends greatly on who is coming up through the ranks.

Companies are witnessing an ever shrinking talent pool where the need to secure employees who can grow, manage and take the company to the next level has never been greater.

The old paradigm of reviews and pay raises is no longer enough. Asking the question “how can we attract, retain and remunerate the best staff?” only leads to an endless recruitment cycle, forever choosing the “best” candidate available. Ask yourself, what if the perfect candidate for this position never applied? Fortunately, the paradigm has shifted and the new model requires employers to set themselves apart from the pack. In other words it is imperative to become an employer of choice.

When an organisation becomes a preferred employer, the best talent comes to you. Recruitment transfers to selection of top tier candidates rather than sourcing them. In addition, organisations are free to design incentives and rewards which encompass the values of the business while addressing economic realities.

In the current environment, great employees are savvier, understand they are in demand, expect personalised rewards, have a plethora of options, achieve the organisation’s objectives and can change companies without difficulty. Money alone will not keep them. In fact, many employers make the mistake of thinking high remuneration only is the key to attracting and retaining great staff.

As the recent list of “100 Best Companies to Work For” in Fortune magazine demonstrates, it is not enough to talk the walk you must also learn to walk the talk. The best companies have developed a culture where employees are rewarded and driven in ways that deliver results.

Becoming a preferred employer requires employers to look beyond the obvious reasons why people seek work and develop a culture which is compelling to outstanding staff. When this happens, the best and brightest will seek you out as an employer of choice and you will gain a reputation as a talent magnet. Ask yourself:

• Does our organisation have a dynamic and flexible employee incentive scheme that offers more than just a cash bonus?
• Does our organisation provide an environment for continuous learning?
• Does our organisation provide a platform for individual growth?
• Does our organisation encourage staff to take risks and reward them accordingly?
• Does our organisation convey the message that working hard = success?
• Do we have what others might describe as a modern organisation?
• Is our business seen to be successful and profitable?
• Do we set a high bar for recruitment?

If you have answered yes to all of the above questions, congratulations you are already an employer of choice. If not, implementing the above criteria ensures employees of the highest calibre are interested in being a part of your team.

It takes time to develop the above traits but the benefits which come with them are exponential.

If you would like to discuss how Vantage Performance can assist you in becoming an employer of choice please feel free to contact us.

Regards,

Michael Fingland
Managing Director


M +61 407 226 968
T +61 7 3229 5750
F +61 7 3229 5765 Level 5, 247 Adelaide Street
Brisbane QLD 4000

mfingland@vantageperformance.com.au

http://www.vantageperformance.com.au

Listen to Turnaround Insights Podcast
http://feeds.feedburner.com/vantageperformance

Vantage Performance
Turnaround Management Specialist

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Vantage Performance SURVEY RESULTS

46% of survey respondents predict an economic downturn in the next 18 months.

Our newly launched Vantage Business Performance Survey asked 550 professionals on the front line including business advisors, management consultants, lawyers, accountants, bank managers and business owners for their views on the issues facing Australian companies over the next 12 to 18 months.

The following is a summary of the key findings:

54% of respondents said that insolvencies will rise at a faster pace than in 2006 and 44% predicted that insolvencies will continue at a 6% growth off a base of 12,486 in 2006.

According to the respondents the following sectors will be at most risk in 2007:

32% said Manufacturing
29% said Retail
14% said Motor vehicle
8% said Property

By far the biggest issues that will affect businesses over the next 12 months are:

Availability of suitably qualified staff 44%
Poor management of working capital 28%
Rising labour costs 20%

The vast majority of respondents indicated that less than 50% of businesses prepare regular cash flow forecasts.

64% of respondents indicated that less than 25% of businesses have an adequate business plan in place.

82% of respondents indicated that less than 25% of businesses have a succession plan in place.

96% of respondents indicated that less than 50% of businesses have an adequate employee incentive scheme in place.

88% said that interest rates will either stay on hold or rise by up to 0.5%.

These results would indicate that conditions are going to get tougher for many businesses over the next 12 to 18 months. Particularly so given that many of these companies will be lacking in the most basic and fundamental aspects for the operation of a successful and profitable business, being:

1. A regularly updated cash flow forecast
2. A detailed and up to date business plan
3. An effective employee incentive scheme

If you would like to discuss the Vantage Business Performance Survey findings please feel free to contact us.

Regards,


Michael Fingland
Managing Director


M +61 407 226 968
T +61 7 3229 5750
F +61 7 3229 5765 Level 5, 247 Adelaide Street
Brisbane QLD 4000

mfingland@vantageperformance.com.au

http://www.vantageperformance.com.au

Listen to Turnaround Insights Podcast
http://feeds.feedburner.com/vantageperformance

Vantage Performance
Turnaround Management Specialists

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REFOCUS YOUR BUSINESS

Even the most successful companies review their strategic direction.

The initial questions in the planning process can be answered in three stages.

Where are we now?
Where do we want to go?
How will we make it happen?

STAGE 1

The Strategic planning process starts with a situational analysis of your external trading environment and internal operating performance and is designed to answer the question “where are we now?”

Performing the following analysis of your business greatly improves your ability to move forward with confidence:

Environmental
Image
Client
Strategy Development
Market
Competitor
Self
Defining Market Segment

When you have completed the Situational Analysis, your next step is to summarise the information into a SWOT analysis. There are no hard and fast rules for conducting a SWOT analysis. The principal benefits are that, in a concise format, you can identify strengths, weaknesses, opportunities and threats to your organisation’s business.

Internal Strengths and Weaknesses

Strengths: “What strengths can you capitalise on as compared to your competitors?” Include issues such as: human resources, technology, financial resources, operational efficiencies or market leadership.

Weaknesses: “What can your competitors capitalise on as compared to your business?”

External Opportunities and Threats

Opportunities: “What untapped issues could you capitalise on in order to develop a stronger market position?” or “Where do the best opportunities exist?”

Threats: “What factors might threaten your ability to meet your strategic intent?” Include areas such as: government, economic, legislative, or competitive.

The results of an effective SWOT analysis will form the foundation for developing your firm’s strategic intent which will result in a set of strategic planning strategies which can be converted into action plans.

STAGE 2

Strategic intent is a simple precise statement which envisions a desired leadership position and establishes the criteria your organisation will use to chart its future progress and answers the question “where do we want to go?” Strategic intent captures the essence of winning, is stable over time and provides consistency for short-term action while making sure there is room for flexibility and innovation on a team basis.

These statements are most effective when they are grounded in the past and project the past into the future. They become more essential and inspiring when they focus less on what you do and more on what you will do for your key clients.

The important question is not “how will next year be different from this year?” but “what must we do differently next year to get closer to our strategic intent?” Strategic intent provides consistency to short-term action, while leaving room for acting on new opportunities.

Using the information you have developed from your Situational Analysis, SWOT Analysis and Strategic Intent, you can now identify and prioritise the critical issues in your business, the problems to be overcome and other influences which need to be managed.

STAGE 3

This is the stage at which decisions are taken about how to put your strategic plan into effect and answers the question “how will we make it happen?” Decisions on who, when, what and how must be taken to translate your critical issues into a set of action plans.

Key Performance Indicators - Measures of Success

These enable the monitoring of progress towards achieving your objectives. It is critical that they are established in consultation with those responsible for their achievement. Ensure that understanding and commitment to these initiatives is created at all levels.

Action Plan

What specific actions need to occur for each strategy to ensure that they are implemented?

How will you review progress on the implementation of the action plans?

What process of evaluation will you employ to measure and adjust the overall Strategic plan?

Responsibility

Who is responsible for implementing each action?

Have they the authority and resources to achieve results?

Current Status/Timeframe

What is the current status/timeframe for implementing each required action?

Monitoring and Adjusting

Effective strategy can be defined simply as a consistent pattern of decisions to support your Competitive Advantage! Although we are in a dynamic and volatile business for these reasons it is necessary to keep your plans sufficiently flexible to accommodate changes in the business and economic environments but not so flexible that the plan no longer has meaning.

The 3 stages of strategic planning are vital to understanding the health of your business. At the end of your strategic planning process the underlying questions effecting your business will be answered. In this way, you are able to effectively manage and grow your organization with confidence.

If you would like to discuss this topic further please feel free to contact us.

Regards,

Michael Fingland
Managing Director


M +61 407 226 968
T +61 7 3229 5750
F +61 7 3229 5765 Level 5, 247 Adelaide Street
Brisbane QLD 4000

mfingland@vantageperformance.com.au

http://www.vantageperformance.com.au/

Listen to Turnaround Insights Podcast
http://feeds.feedburner.com/vantageperformance

Vantage Performance
Turnaround Management Specialist

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SUCCESSION PLANNING

You may not be thinking about this today but one day you will be forced to!

Every business owner should have an exit strategy even if they have just purchased a business. Unless you know what your end goal is you will invariably fall short.

That is where Succession Planning comes in. An effective succession planning process will not only ensure that there will be a smooth transition of the management or ownership of the business but it will ensure that the eventual sale price is maximised.

There are a number of key areas to think about when considering your organisations succession plan:

Is transferring the business to a family member actually the right thing for the business?

What impact will it have on the business, its staff, customers and suppliers?

The plan must be linked to the company’s overall strategy, including vision, employee skills and quality of the workforce.

Review your current performance appraisal system to make sure it covers succession issues in each team. In order to have effective succession planning in each team the appraisal tools must be administered consistently.

Senior management and business partners must actively participate in the planning and implementation phases and be responsible for communicating it to their team.

A key manager should be responsible for delivery of the plan so that the tone is the same.

Consider linking the succession plan to a mentoring program for your successor.

Succession planning by its nature is quite holistic. It embraces career development skills and life management planning for individuals while simultaneously linking these with the employers overall business planning practices.

For large organisations, forming a steering committee will generally improve the company’s chances of overcoming the many transitional pitfalls of a succession plan.

If you would like to discuss the key elements of a succession plan in more detail please feel free to contact us.

Regards,

Michael Fingland
Managing Director


M +61 407 226 968
T +61 7 3229 5750
F +61 7 3229 5765 Level 5, 247 Adelaide Street
Brisbane QLD 4000

mfingland@vantageperformance.com.au

http://www.vantageperformance.com.au/

Listen to Turnaround Insights Podcast

http://feeds.feedburner.com/vantageperformance

Vantage Performance
Turnaround Management Specialist

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WHY BUSINESSES UNDERPERFORM

There are many reasons why businesses fail to reach their full potential.

The following is a brief summary of the major causes of underperformance.

Lack of a detailed business plan or the plan is out of date. Research suggests that businesses with a working business and marketing plan achieve 63% higher revenue growth and 58% higher profit growth that those who don't have a detailed plan. The business plan should be updated at least every 6 months.

Lack of an integrated profit and loss, cash flow and balance sheet forecast. Every business should have one and it should be updated every 2 to 3 months.

Lack of a rolling weekly cash flow forecast. Ideally, this forecast should cover 10 to 12 weeks and be updated every Monday.

Poor management of working capital (trade debtors, stock and trade creditors). Businesses that are growing rapidly can quickly come unstuck if they don’t aggressively manage their working capital.

Inadequate review of the key performance indicators (KPI’s) of the business. We regularly conduct KPI audits and recommend the appropriate suite of “pre-performance” and “post-performance” KPI’s and controls that should be monitored on a daily, weekly and monthly basis.

Failing to adequately review trading results every month. Many small to medium business owners only review their trading results every 3 months or their accounts are 2 to 3 months behind. Given that it often takes a few weeks to implement new strategies and then 60 days for these to impact on cash flow, the total time to turn the business around has then become 6 months. 6 months is a long time in business and can be the difference between succeeding and failing.

"Buying" sales without understanding the true impact on margins and cash flow.
Management spending too much time working "in" the business and not enough time working "on" the business. Management need to implement controls and delegate certain key tasks to allow them to spend sufficient time on business strategy and protecting the business that they have spent so much time building.

Failing to seek professional advice "early".

Loss of key management. How adequate is your employee incentive scheme?

Loss of a key customer. Is your business overexposed to 1 or 2 major customers?

Inadequate/Inflexible loan facilities. Businesses can quickly outgrow their finance facilities and therefore, they should be reviewed at least every 12 months.

If you would like to discuss these in more detail please feel free to contact us.

Regards,

Michael Fingland
Managing Director


M +61 407 226 968
T +61 7 3229 5750
F +61 7 3229 5765 Level 5, 247 Adelaide Street
Brisbane QLD 4000

mfingland@vantageperformance.com.au

http://www.vantageperformance.com.au/

Listen to Turnaround Insights Podcast

http://feeds.feedburner.com/vantageperformance

Vantage Performance
Turnaround Management Specialist

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EMPLOYEE INCENTIVES - HOW DOES YOURS COMPARE?

Is your business lacking suitable employee incentives? Are you at risk of losing a high-achiever?

Research shows that a significant percentage of employee resignations result from a feeling of not being properly recognised or rewarded.

Whilst remuneration plays a big part toward employee satisfaction, general working conditions, leadership, team motivators, morale and workplace health and safety all contribute.

There are three areas within a traditional incentive program:

Incentive
Loyalty
Reward

‘Incentive’ programs are designed around key performance drivers and are specifically targeted to spike sales. ‘Loyalty’ programs are just that – those that are allies are recognised for desired workplace behaviour and ‘reward’ programs raise the bar on key performance indicators (KPI’s). If you don’t already have KPI’s as part of your performance review this is a great way to ‘launch’ new company standards and expectations whilst recognising those that strive to achieve them.

The success of these programs is in the fulfilment. If an employee meets all the criteria to be rewarded and recognised then the prize should be distributed without haste. It is essential to either delegate this to a strong administrator or distribution person within your company or outsource.

Studies show that employees can be grouped into the following categories:

Allies: those that see themselves working with management for a common good – and want to be there!
Habituals: those who come to work as it suits their lifestyle and or financial needs.
Opportunists: those who are there for ‘what they can get’.
Deceivers: there to trick their employer about their performance and achievements in order to maintain stable employment and ‘fly under the radar’.

Your workplace needs a high percentile of allies, medium percentile of habituals and if your company is built on high bonus sales structures throwing some opportunists into the mix doesn’t hurt. What we don’t want is the deceiver. Deceivers will be highlighted when you put a recognition and performance program in place.

The keys to a successful incentive program are as follows:

Seek input from your leadership group on the types of incentives/rewards that will really work and motivate your staff.

Be transparent. A “bonus pool” based on profit will not work if you are unwilling to share the full financial results of the company. You need to avoid any perception that the targets can be manipulated.

Use stretch targets. If they are set at appropriate levels then the program will be self funding.

Make the KPI’s measurable! Staff need to know if they have met their goals and if not, why not.

Regards,


Michael Fingland
Managing Director


M +61 407 226 968
T +61 7 3229 5750
F +61 7 3229 5765 Level 5, 247 Adelaide Street
Brisbane QLD 4000



mfingland@vantageperformance.com.au

http://www.vantageperformance.com.au/

Listen to Turnaround Insights Podcast
http://feeds.feedburner.com/vantageperformance

Vantage Performance
Turnaround Management Specialist

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TURNAROUND MANAGEMENT OVERVIEW

The purpose of turnaround management is to:

• Determine if a business is still viable or what is required to restore viability
• Develop and implement a turnaround management plan
• Rebuild key stakeholder support
• Restore shareholder value
  

What's Involved in Turnaround Management

• A review of operations and financial performance (ie. P&L, BS, Cash Flow, finance systems and controls etc.)
• Development of revenue enhancement &/or cost reduction plans
• Cash flow and working capital management (debtors, creditors, stock)
• Critical assessment of management team, business plan and forecasts
• Assessment of appropriate debt structure and bank security issues
• Assistance and advice on the sale of a business or division etc.
• Assessment of other corporate finance alternatives such as buying a competitor etc.
• Development, implementation and monitoring of the turnaround strategy
• Project managing the turnaround strategy
  

Possible Outcomes of a Turnaround Management Process

• Streamlined, viable business
• Bank agrees to support the restructuring plan
• Sale of the business or of non core assets
• Merger or acquisition of a competitor
• Debt facilities are refinanced with another bank
• Adequate controls are put in place to manage the business
• Restored shareholder value
  

In summary, if steps are taken early to address the causes of underperformance then appropriate measures can be put in place to develop and implement a successful turnaround management strategy.

Regards,


Michael Fingland
Managing Director

http://www.vantageperformance.com.au/

Listen to Turnaround Insights Podcast

http://feeds.feedburner.com/vantageperformance

Vantage Performance
Turnaround Management Specialist

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ABOUT VANTAGE PERFORMANCE

Overview of Turnaround Management

Vantage Performance is a specialist turnaround management and performance improvement firm. We identify the key drivers of a business and implement sustainable turnaround strategies which rapidly improve the performance of a business.


Performance Improvement
Strategic business reviews, Financial performance analysis, Business and succession planning
Sales and marketing initiatives,Working capital and funding strategies, Key performance indicator reviews, Financial modeling / cash flow forecasting, Cost reduction initiatives, Acquisition and vendor due diligence, Employee incentive programs.


Turnaround Management
Strategic business reviews, Cash flow and working capital
management, Debt restructuring, Stakeholder management, Business planning and strategy, Restructuring of operations, Acquisition and vendor due diligence, Solvency advice.


Funding Solutions
Debt and equity funding solutions, Deal negotiation and strategy for
parties putting forward Deed of Company Arrangement proposals

Our People:

Michael Fingland
Managing Director

Michael has extensive experience in the performance improvement and corporate restructuring industries.

He has conducted numerous engagements across a range of industries including transport, retail, manufacturing, pharmaceutical, earthmoving, construction, printing and professional services amongst others.

Qualifications:

Chartered Accountant, Bachelor of Business



http://www.vantageperformance.com.au/

Listen to Turnaround Insights Podcast
http://feeds.feedburner.com/vantageperformance

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