How to save a “Stressed Business”

Insolvent businesses that could be saved are closing unnecessarily

Distressed companies are often subject to asset stripping, have dated equipment and have lost important markets, helping to explain below average performance.

People became entrepreneurs 'not by choice but by necessity'

The Employee Buyout (EBO) is seen as a breakthrough in dealing with both the issue of employee entitlements, and, when appropriately used, is a successful strategy for corporate rescue, with a lower failure rate than management buyouts.

The EBO can also address a key problem of globalisation, by helping to anchor capital and jobs locally and preserve communities and skills.

However, there is a lack of knowledge and information about employee buyouts and their potential in business rescue, and employees are unable to act quickly to purchase a company due to the lack of access to appropriate finance and support.

The employees, using the employee buyout, are in a strong position to become the preferred bidders for the business if the lack of information and finance can be overcome.

In the majority of corporate distress cases (77%), by the time the insolvency practitioner is called in the business is beyond saving.

Many business failures (almost 50%) are due to management problems. The key people who can rescue the business - the employees - are not included in creditors' meetings or other negotiations.

Employees know what is going on and have the firm-specific knowledge to contribute and enhance the recovery process.

Previously the receiver was an undertaker, too ready to bury companies in the interests of the banks.

Whilst not able to provide a perfect solution to what is an imperfect situation it is the best of the immediately available policy options given the broader negative consequences of the other alternatives

Insolvency involves five key actors and the relationships between them:
• secured creditors (legal charge holders)
• unsecured creditors
• administrators
• directors
• the courts

More attention must be given to preventing the redundancy situation arising and secondly using the situation to restructure the organisation. Employees are often in a good position much better than public shareholders to evaluate the exercise of managerial authority within the firm: whether managers appear to be capable and well motivated, whether production moves smoothly, whether resources of capital and labour are efficiently used.

Many good companies become insolvent due to incompetent and reckless management, and could be saved by appropriate intervention.

A proactive strategy would begin with the development of an early warning system to predict corporate failure and distress and where possible avoid administration and insolvency. 77% of cases, rescue professionals were appointed too late to avert failure.

The Employee Buyout is thought leadership. However, two problems need to be resolved.

  • Dealing with the need to cut back on employees
  • and to have finance in place quickly.

The employee’s money is as good as anyone else’s.

There are fewer sales of companies as going concerns, as the traditional buyer is reluctant to purchase a company weighted with employee liabilities. This sometimes leaves the employees as the only realistic buyers.

But when the demands of doing business conflict with the morality or well-being of society, it is business that has to yield, and this, perhaps, is the ultimate point of business ethics.

Employees when united and organised have a very significant influence on the course of insolvency administration.

More attention must be given to preventing the redundancy situation arising and secondly using the situation to restructure the organisation.26

Saving companies worth saving

There is a potentially large pool of non-unionised family SME businesses of under 50 employees. These are often the most difficult for the insolvency practitioner to deal with and are liquidated 'en mass' when many have potential for an EBO.

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Importantly, the EBO is not recommended as a saviour for all distressed companies, but many that failed, both large and small, have had the potential to be successful as an EBO.

It is important to note that employee buyouts may be completed in one transaction, when the total equity is transferred to the employees, or it may occur over a period, when equity is transferred to the employees as debt incurred in purchasing the business is repaid.

Globalisation

Is the major economic issue of the 21st Century and is a prime factor in the decline of labour intensive companies and industries, and also the context for aggressive private equity firms taking over companies and bankrupting them

The EBO importantly enters this debate offering an alternative to a strictly financial perspective in enabling workers to make the decision on whether they want to be displaced by global restructuring and retrained, or anchor jobs and capital locally by taking action to purchase and preserve their company against low wage completion, and offering added value and proximity to their customers

The employee buyout versus the management buyout

The Corporation is increasingly seen as vehicle that undermines democracy and environmental sustainability.

Financial restructuring using the EBOF with an emphasis on 'patient capital' would bring about a transformation of the company moving from the short term focus of an MBO with its needs for aggressive returns on capital to a long term focus which will deliver greater economic stability and anchor capital at the local and regional level.

Saving one job in a key enterprise is claimed to affect another 13 jobs in the community

Partnership workplace relationships and high performance workplaces will be more easily delivered by an EBO

Conditions for success

Firstly, the successful EBO needs a cohesive and homogenous group of skilled workers. This reduces the number of disagreements that arise and contains those that do. It also seems to encourage employees with the latent ability and confidence to take on managerial roles.

Secondly, leadership is needed which is totally committed and able to balance the short and long term social and economic goals of the enterprise. An individual or a group as in the elected assembly board of experienced workers can provide leadership.

Thirdly, the presence of effective and consistent advisory support mechanisms is needed.

The key design features:

  • Equity Participation – collective and individual equity holdings for all employees ensures individual motivation and the long-term stability of the organisation
  • Corporate Governance – a two-tier board is recommended involving key stakeholders, enabling the legitimisation of management and the ability to deal with complexity
  • Employee Participation – the emergence of worker self-management and a team-based model, restructuring the insolvent enterprise from command and control to maximise employee engagement and performance improvement.
  • Networked Companies – companies working in a cluster to leverage resources and tendering opportunities, also as a buffer against the market offering greater employment security and hence a willingness of employees to engage in workplace change and the improvement of corporate performance.
  • A financial institution providing a range of financial packages, financial and management advice, training and technical support.

Conclusion

Employee ownership is world changing. It is the way ahead for the UK in the global economy. It reflects that human capital is becoming more important than physical assets. A company is more and more defined by its skills. It relies more on its creative energies… The global economy will succeed when employees feel a stake in the business.

This report argues that the employee buyout needs to be considered as a strategy to deal with globalisation

The purchase of the company by the workers is the first stage of a series of transitions to transform the company that will deliver on the issues of job security and, importantly from a labour process perspective, wide dissemination of job satisfaction throughout the organisation;

The Employee Buyout (EBO) is seen as a breakthrough in dealing with both the issue of employee entitlements, and, when appropriately used, is a successful strategy for corporate rescue, with a lower failure rate than management buyouts.

The above has been extracted from:

"Insolvency, Employee Rights & Employee Buyouts - A Strategy for restructuring by Anthony Jensen, Ithaca Consultancy"

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Dr Anthony Jensen consulted and advised in the development of the C-Mac's Manufacturing Workers Co-operative.

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