This paper narrates the writers’ experience with distressed companies in Ghana. It examines the common pitfalls that occasion the financial distress and eventual collapse of several small and medium sized Ghanaian enterprises.  We have about a decade of extensive interaction with companies and individuals who are unable to pay their debts as they fell due. Drawing from these years of experience, we would outline what in our view are some of the primary explanations for this sad outcome for otherwise potentially very viable and profitable organizations. The paper would offer what is in the writers experience and opinions are veritable options for turning this unfortunate situation around

Many of the entrepreneurs and their companies had companies which were by themselves viable entities capable of generating revenues, meeting their obligations and of tremendous growth. It is our collective experience however that, most of the companies on the non-performing portfolio of banks share some 3 common characteristics:

Corporate Governance: Corporate governance refers to many legal and non-legal principles and practices that affect the control of business entities. It may also be perceived as the broad array of similar codes that determine who controls the entity and for what purpose.  

It describes how the risks inherent in a business entity and its activities are identified and managed and how the returns of the firm are allocated amongst all the stakeholders including employees, creditors, customers and even the communities. In a more street sense, corporate governance should be seen as a replication of the old adage: `two heads are better than one`.

Thus it may also mean the gathering of a group of smart and often accomplished people around a board room table to make good decisions on behalf of the company and these stakeholders.  In this sense, we observe that many large local corporates as well as small and medium scale enterprises that we had encountered had very limited corporate governance structures.

At best, they will have persons purported to be directors only in name. Most of these have very little participation in the daily decision making process and would hardly ever attend a meeting to deliberate the affairs of the company. Our estimate is that, this state of affairs is a result of a profound fear that, the entrepreneur would lose control of their business when a good corporate governance structure is in place.

That is not true at all. If anything at all, the lack of such a structure would lead to a lack of concerted decision making, poor judgment and decision making with very dire consequences for the companies. This illustration means that, many of the distressed companies we encountered had very little regard for the company as an entity which is independent of its ‘owners’. Its affairs were thus run in a manner akin to the manner in which Louis XIV of France (5 September 1638 – 1 September 1715) ruled France and the Navarre from 1643. 

Louis established the French absolute monarchy and made France the main political power in Western Europe in his time. At the peak of his reign he famously stated: `l’etats cest moi’ literally translated as ‘I am the state’ and which outcome may be well known to history students: apocryphal. We advocate strongly that, it was relatively easy for us to decipher what went wrong in the business we had interactions with, we also were quite quick to realize the risks that the business failed see and to manage properly.

 By that extension, a competent board would have similarly noticed these and devised means to mitigate them. A lack of one such system is the most likely cause of the adverse situation in which most of the troubled companies find themselves.

Lack of technical competencies, advice or support: The majority of endangered companies also share another characteristic. The founder, as is typical of all entrepreneurs had a brilliant idea, got some funding mostly private equity together and started a business about which they knew very little. Examples abound especially in the Hotel and Hospitality, mining and quarrying and public works sectors. In these instances, a Banker is no more surprised to find that the owner of the company has very little technical understanding of how to run a hotel or that they also typically have very limited understanding of the equipment they imported at great cost. 

In the construction area, instances abound where contractors engaged in public works valued at several million cedis have very little knowledge of civil engineering; most having acquired some skill as apprentices. It is not our submission that an entrepreneur should possess the technical skills required of their industry; but they definitely need to employ or at least partner with expertise. Most businesses in distress or that are performing sub-optimally have little or no technical support.

To emphasize the point further, it is common place to find a company awarded a GHS 50M  road and building contract who had no finance professional and no civil engineer employee. The matter is even of more concern because these categories of companies do not even have any formal continues technical support. The implications for their survival, efficiency and profitability are obvious.

This critical lapse is also evident in another form: Improper or no accounting records. Most of the companies that we have interfaced with did not keep or failed to employ the services of accounting personnel. They were therefore unable to determine on any regular basis the company’s bill of health.  There were many instances where entrepreneurs in pricing their products and services only considered direct costs in arriving at their cost of production.

The immediate ramification is unsustainable debts. Typically, businesses like ‘petrol stations’, that have huge cash flows but low margins are easily rundown in this manner as owners typically will calculate their profits/commissions by multiplying sales volumes by a fixed margin without taking into account indirect cost such as depreciation of building/rent, furnishing, salaries and other admin expenses.

Improper funding structures:  Maybe the bane of most companies that we found were in distress was companies which funding structures were most inappropriate. Maybe Banks and financial institutions are partly to blame but it should be worrying that a company owner would obtain an overdraft to fund a construction project or purchase capital equipment. We also have evidence that many companies wishing to enter the hotel and hospitality industry would make a contribution of the value of Land only and obtain all manner of financing for the building, furnishing, finishing and operational costs of running as much as the kitchen and bar. The debt servicing burden that this kind of funding structure imposes is unsustainable and sooner the company would succumb. It may suffice to set an example that the banking facilities that are most commonly available or are offered by most financial institutions are short-tenured and unsuitable for project financing.

Whilst this is so, it is vitally important to mention that some of this finance options are simply unethical. Thus if for instance a Bank grants an overdraft facility to finance a government road construction; even if that were the customers’ direct request, this should raise serious ethical considerations because a banker with their salt should know that, this structure is unethical.   

One of our most profound avowals is of a customer involved in the quarry sector who aptly put his opinion as follows: ‘I am a business man; I am entitled to dream and would always do; as finance professionals it’s your job to unearth the risks in my dreams and to help me control them’. This business had a zero turnover at our first interaction. Its current turnover after 2 years is up to GHS 5M and growing.

This statement is most profound; because successful entrepreneurs must have the right to dream very big dreams. But in this particular instance, unlike most cases we know of, the entrepreneur acknowledges the need for finance persons to advise them.  This customer also accepted skilled negotiators to renegotiate its exposures with at least 5 large Banks, tax and licensing authorities and even of pension administrators amongst many others. It is heartwarming that the company is now current on all its obligations.

The good news also is that it may never too late: when we act decisively and early. We all as human as we are would make mistakes of judgment. But when companies run into difficulties, they would have many options. Corporate restructuring professionals are one such option. The problem has always been the psychological barrier.

 The entrepreneur’s natural optimism prevents them from seeking expert evaluation and assessment of the performance of our businesses even in good times. The results of this review and the professional advice that comes with it would have the potential of unearthing likely problems, re-aligning the operations and finances of the company to deliver optimal results. The tragedy is that, even when they find themselves in trouble most would hardly accept that they indeed are in trouble. 

So they would keep making mistakes that sink them deeper into quick sand when a multi-disciplinary team of professionals can again do an evaluation and provide efficient and effective work-out strategies that can save the business or even in a wind-down situation, where an entrepreneur deliberately decides to slow down its operations as a prelude to closure; to optimize the value of the entity.

Even though it is perceived in some circles as a negative thing, all over the world, corporate restructuring has become part of everyday life for many companies. This perception but a minority is mostly cultural and mostly a pejorative: as if to equate corporate restructuring to troubled companies. Corporate restructuring need not be confined only to companies facing financial difficulties but can also be used as a tool to unearth value in a company since the key driver to the survival of any company is profitability. Given this advantages and worldwide appeal, it is interesting that, in Ghana this practice is still at a rudimentary stage and is therefore not exploited to the full.

Corporate restructuring refers to the process whereby a company’s financial, ownership, legal or operational structures are reconfigured for enhanced efficiency. Considerable financial and operational improvements can be achieved through corporate restructuring if well executed.

The restructuring process is usually led by strong professional advisors and requires considerable commitment on the part of management. The professional advisors bring their expertise on board to assist the distressed company to identify situations where restructuring can add significant value, create opportunities or shed losses. Internal management might not have the time and expertise to do this hence external professional advisor is frequently required.

Once the need for restructuring is identified, the best restructuring options should be appraised to measure the potential gains a restructuring exercise might accrue. A clear plan of action should be formulated once the best option is identified prior to implementing any changes. To avoid any pitfalls that can delay the restructuring process, clear and effective engagement with all stakeholders is needed.

A well thought out restructuring plan will not only rescue a company from insolvency but also turn it into a viable and profitable business. The professional advisors in many cases are able to use their skill to secure protection from the company’s creditors whilst the restructuring is executed. This is especially a potentially useful relief to distressed companies in Ghana. In our experience cases of default create a lot of mistrust between Banks and their customers and so Banks and Financial Institutions would usually have little recourse than proceed to Court to recover their debts.

Thus whilst  the restructuring professionals would advise  and the process may involve redundancies, changes in employment conditions, closures of branches or plants, cancelling of lease agreements etc, the involvement of a firm of professionals introduces a neutral party between debtors and creditors. This neutral party if credible can then take steps to assure Banks about work-out options that may be preferable to legal recovery through the courts. It would also offer credibility and thus improves any attempts to raise funding through additional equity or long term debt. It is critical to note that, the successful implementation of restructuring plan will require commitment from management and careful planning aided by professional advisors.

Whilst not mandatory, businesses from time to time will benefit if they sidestep internal management and get a review from the standpoint of an independent advisor. Although reviews could vary in terms of scope and focus, all reviews should focus on what strategy can be pursued to move the business forward. Even though most reviews will focus on cost reduction, equally important areas to consider include but not limited to:

Potential for shareholder returns

Business culture both within and outside the organization

The effectiveness of the management team

Management succession planning

The effectiveness of financial controls

Experience has shown that talking to top management on the ground gives a good sense of what is going on with an organization. You turn to easily see signs of panic and lack of clear strategy with companies in difficulties. They are also likely to try everything they can think of hoping that will lead them out of their current predicament.  

At Trustis Corporate Restructuring Services Ltd for instance, we will normally carry out an operational review of a business in four to seven days which usually covers broad areas from financial, management and operational issues and will give an objective view of what needs to change and how the business should move forward.

It is often in the interest of shareholders and other stakeholders to accept major shakeup to a business facing difficulties than to see it go insolvent. These shakeups may include new business module, new management team or even in some instance major changes to the balance sheet to properly reflect prevailing market conditions.

Where necessary, company led restructuring is recommended to reduce and manage the disruptive effect on the business and avoid negative commercial impact associated with formal insolvency. Key to any restructuring, from the onset there must be a re-evaluation of the business of the company, its debt structure and its overall financial position. If it is ascertained that the company’s debt burden is too high, then it will need to negotiate with its creditors, usually banks to achieve a debt reduction or restructuring or both.

Where there exist different debt holders, a consensus will have to be reached between the different holders. The long term survival of the business will largely depend on addressing the underlying weakness of the business and reducing the debt burden which will ensure that the business has sufficient finance to support the restructuring business plan. We strongly conclude that despite all the potential advantages of this program, the effectiveness of corporate restructuring strategy is mainly dictated by early assessment of the business retaining early core commercial viability in the face of the challenges the business is going through.

Many businesses are facing significant liquidity issues due to the global economic meltdown which is causing deterioration in profitability, cashflow and solvency issues. When early action is taken to tackle the core underlying issues, insolvency can sometimes be avoided. In our experience, when companies approach us early, we able to diagnosis and work with internal management and board a restructuring plan which will restore corporate value.

In all this, the first barrier is to get the client to acknowledge that, in good times a complete review of its entire operations can be rewarding. It can reveal potential problems as well as opportunities and help improve efficiency.

In bad times, a professional restructuring may save the company from total bankruptcy.

This in our estimate is the bane of most large, small and medium scale enterprises in equal measure. But they need to get over the pejorative that seeking for professional assistance and corporate restructuring is a sign of weakness. Over-optimism has not done any of our contacts any good: when it was obvious to us, studying the fundamentals that something needed to give.

Conclusion

It is no doubt that there exist a lot of viable but underperforming and distressed businesses in the current economic environment in Ghana. With the right approach which looks at addressing underperformance with a view to restoring corporate value, this in turn will increase the overall output of the business. In the absence of any viable alternative in the face of financial difficulties, corporate value is likely to be broken and stakeholders will eventually face insolvent.

 

Author, Trustis Corporate Restructuring Services Ltd, Accra

email:enquiries@trustis.com.gh