Background

A long-established, family-owned manufacturing business was facing challenges despite not being insolvent on a cash flow basis. The business operated in two distinct areas: general engineering and a niche product line. The owner was working long hours and was experiencing health issues.

The Business

• Size: 22 employees
• Turnover: c.£1.9 million
• Operations: General engineering and manufacturing a niche product for export.

Challenges:

• The business was divided into two parts with varying profitability.
• The owner’s health was declining and some potential friction within the management team.
• The traditional engineering work appeared to be “turnover chasing” with low margins.
• The niche product line appeared to have strong margins and a USP but was a low priority.

Initial Assessment

An initial financial assessment revealed that the business was paying HMRC up to date and was not regularly exceeding its overdraft limit, indicating cash flow had not become strained. However, overall profitability was rapidly reducing and the overall business model appeared unsustainable with the traditional engineering division dragging the business down and diverting attention away from the niche product which showed potential for marketing differentiation and high profitability.

The Process

• Initial meeting: The first meeting was held with the owners of the business. The initial approach focused on understanding their concerns, identifying their goals, and assessing their level of commitment to the business.
• Information gathering: Financial information was requested to determine the company’s solvency.
• Assessment of operations: The two different business areas were analysed to assess their profitability and viability.
• Consideration of turnaround management: The idea of bringing in turnaround managers to assist with management and restructuring was explored.
• Evaluation of insolvency options: Various insolvency options, including a CVA, administration and liquidation were considered.

The Solution

• Proposed action: Liquidate the existing company.
• Restructure: Discard the general engineering service.
• Focus: Concentrate on the core, profitable niche product line.
• New Business: The directors would buy back the business and assets of the profitable niche business and continue operations under a new entity.

Rationale

• Profitability: The niche product line had strong margins and a unique selling proposition (USP).
• Sustainability: By focusing on the most profitable area, the business could become more sustainable and less reliant on “turnover chasing” and being “busy fools”.
• Owner’s health: Reducing the scope of the business would lessen the workload on the owner.
• Family dynamics: Streamlining operations gave part of family management team the opportunity to exit the business.

Outcome

The anticipated outcome was that the company would be liquidated, and a new company would be formed to focus solely on the profitable niche product line. This restructuring was expected to lead to a more sustainable, profitable business and reduce the stress on the owner.