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Jan van der Walt, Corporate Renewal Partners 2 August 2005 Contrasting informal turnaround with turnaround during formal insolvency Conference: Managing.

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Presentation on theme: "Jan van der Walt, Corporate Renewal Partners 2 August 2005 Contrasting informal turnaround with turnaround during formal insolvency Conference: Managing."— Presentation transcript:

1 Jan van der Walt, Corporate Renewal Partners 2 August 2005 Contrasting informal turnaround with turnaround during formal insolvency Conference: Managing a Turnaround, WBS, 1 – 5 August 2005 An industry perspective

2 Contrasting informal turnaround with turnaround during formal insolvency :  “What’s in a name?”  Timeline of financial distress  Management-led turnaround  Informal creditor workout  Business rescue “What's in a name? That which we call a rose by any other name would smell as sweet.” – William Shakespeare

3 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 3 What constitutes a turnaround situation? TERMINOLOGY Stuart Slatter and David Lovett "Firms whose financial performance indicates that the firm will fail… in the foreseeable future… unless short-term corrective action is taken." Stanley J. Goodman "To produce a noticeable and durable improvement in performance, to turn around the trend of results from down to up, from not good enough to clearly better, from underachieving to acceptable, from losing to winning." The Turnaround Finance Group " Turnarounds involve saving an insolvent… or potentially insolvent business… from terminal insolvency… and returning the business… to a stable financial and operational position."

4 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 4 Turnaround definitionTriggerTriggered by: Broad definitionReacting to symptoms of decline or failure  Very pro-active board  Management  Seldom happens Middle road definitionReacting to profit or solvency crisis  Triggered by a financial stakeholder  Mostly board  Sometimes bank Narrow definitionReacting to cash crisis  Bank or other type of lender A turnaround situation can be defined in terms of the turnaround trigger TERMINOLOGY In practice a turnaround tends to be triggered only when a crisis develops.

5 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 5 Alternatively, a turnaround situation can be defined in terms of the stage of corporate decline TERMINOLOGY Stage of decline VisibilityDescription Phase 1 Decline – the hidden phase Visible from the inside  “Pre-emptive turnaround” Phase 2 decline – the subtle phase Visible from the outside  “Business correction”  Projects - business improvement, business transformation, corporate renewal Phase 3 decline – the overt phase Visible to all  “Classic turnaround”

6 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 6 DefinitionFinancial situation ManagementSystems Turnaround of moderately underperforming businesses Moderately underperforming Intact Turnaround of severely underperforming businesses Severely underperforming, but no crisis Intact Turnaround of distressed businesses DistressIntact Deep turnaroundsDistressGood managers have left Broken systems Another way is to define a turnaround situation in terms of the seriousness of the situation TERMINOLOGY Distressed = financial crisis in terms of profitability, solvency and/or liquidity

7 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 7 For instance, we offer either corporate renewal or turnaround services depending on the degree of decline/financial distress of a client Financial position Crisis Non-crisis Insolvency Time Decline Turnaround Corporate renewal  Possible leadership changes  Financial crisis  Intense emergency management and crisis stabilisation  Leadership development  No financial crisis  Stabilising the decline, creating a burning platform Corporate renewal or turnaround? TERMINOLOGY

8 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 8 So how does one measure the seriousness of a turnaround situation? Should one use triggers?  Symptoms? Profit of solvency crisis? Cash crisis? Should one use the stage of corporate decline?  Hidden? Subtle? Overt? Should one use financial ratios to distinguish between underperformance and distress? Which one(s)?  Profitability? Solvency? Liquidity?  What are the cut-off points?  When is one OK?  When should one really start acting?  When is one is in real trouble? TERMINOLOGY

9 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 9 The financial health of a business can be accurately determined for any performance situation Z-Score:  Thoroughly tested and broadly accepted distress- prediction model  Developed by Professor Edward I. Altman of the Stern School of Business at New York State University: –Active participant in the Turnaround Management Association –Chairs the association's Academic Advisory Council. TERMINOLOGY  The Z-Score applies statistical techniques (Multiple Discriminant Analysis) to financial ratios (profitability, solvency, cash, etc.) to determine the overall health status of a business: –Healthy Zone: Business is in good shape –Danger Zone (zone of ignorance, zone of uncertainty): Warning signals, exercise caution –Failing Zone: High likelihood of bankruptcy within one year Note that there is a Z 1, Z 2 and Z 3 Score depending on listed vs. unlisted, and manufacturing vs. non-manufacturing.

10 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 10 The most daunting task faced by turnaround practitioners is turnarounds that are triggered to late – the rule rather than the exception  Turnaround action should ideally commence: –When the Z-Score starts declining –At the latest when a company enters the Danger Zone  In practice, however, turnarounds: –Suffer from late starts, or –They take too long before taking the shape of a serious turnaround intervention  Once in the Failing Zone, the business is, in the absence of turnaround action, likely to be bankrupt within a year  This situation presents turnaround practitioners with the most difficult scenario possible - that of the "deep turnaround": –Banks will not lend –Difficult, if not impossible to find private equity funding –Suppliers stop supplying, tighten up on credit terms and/or ask for upfront payment –Key clients will not buy or hedge their bets by shifting their purchases to more stable competitors –Key staff are long gone to better situations or preparing to move “It is far easier to tread on an acorn than on an oak tree” – Neil Harvey. TERMINOLOGY

11 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 11 Let’s look at an example of how the Z-Score was used to forecast turnaround results at a listed distressed company  2003: Z-Score graph reflects history, and turnaround plan inclusive of debt repayment schedule agreed with bank (informal creditor workout)  Share price was R0-35 at the time  Turnaround plan soon thereafter attracted R20m private equity investment (not reflected in Z-Score) at R1-20/share  Share price increased to R2-00 within months  Company adhered to bank debt repayment schedule  Today: forecast problems realising, share price = R0-78  Today: bottom 5% of its sector on stock exchange TERMINOLOGY

12 Contrasting informal turnaround with turnaround during formal insolvency :  “What’s in a name?”  Timeline of financial distress  Management-led turnaround  Informal creditor workout  Business rescue

13 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 13 The timeline of financial distress provides a timeline perspective to turnaround situations Provides a framework for:  Legal considerations  Who is in charge of the turnaround  Cost of a turnaround  Success rate of turnaround TIMELINE OF FINANCIAL DISTRESS

14 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 14 As a troubled business moves along the timeline, costs increase, but the success rate and management power decrease TIMELINE OF FINANCIAL DISTRESS

15 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 15 The timeline of financial distress distinguishes between four processes The 4 stages in the timeline of financial distress: Informal Processes Insolvency Processes Management-led correction Informal creditor workout Business rescueLiquidation Emerging problemsAcute and worsening problems Insolvency but possible viability Insolvency and unlikely viability Turnaround in the absence of creditor and legal issues Informal agreement between management and creditors (banks) to reduce indebtedness Present: judicial management and Section 311 Compromise of Creditors Future: new business rescue legislation Realisation of the distressed company's assets and the distribution of proceeds to its creditors Management retains the initiative and controls the turnaround agenda  Terms of workout agreement dictates agenda  Banks hold the power  Court-driven – inflexible and expensive  Historically a low success rate TIMELINE OF FINANCIAL DISTRESS The timeline of financial distress is adapted and extended from Matthias Kahl, “Economic distress, financial distress, and dynamic liquidation”, Journal of Finance 62 (February 2002) pp.135-168 Used by the G10’s Contact Group on the Legal and Institutional Underpinnings of the International Financial System to describe insolvency arrangements and contract enforceability

16 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 16 What are the costs of financial distress, and how is the success rate defined? Direct costs:  Management consulting fees  Accounting fees  Legal fees Indirect costs:  Additional management time  Loss of employees, customers and suppliers Success rate:  Claimholder recovery rate – traditional measure used by insolvency industry  Company survival rate – more in the spirit of the new business rescue culture  Job retention rate – we would like to see this measure too TIMELINE OF FINANCIAL DISTRESS

17 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 17 To which stages does turnaround apply? TIMELINE OF FINANCIAL DISTRESS Turnaround and the timeline of financial distress: Informal processes Insolvency processes Management-led correction Informal creditor workout Business rescueLiquidation Turnaround applies by definition  Turnaround applies where the intention is to trade a distressed business out of trouble  If the workout intention is to merely restructure the distressed business, only some aspects of turnaround management may apply e.g. crisis management and financial restructuring  Judicial management – not applicable  Section 311 Compromises of Creditors – could be  New business rescue legislation: –Turnaround can take place within formal insolvency procedures for the first time –Note that a distressed business can be “rescued” by refinancing or selling it too Turnaround hardly ever applies

18 Contrasting informal turnaround with turnaround during formal insolvency :  “What’s in a name?”  Timeline of financial distress  Management-led turnaround  Informal creditor workout  Business rescue

19 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 19 Turnaround should ideally occur as management correction  For directors and management: Directors and management remain in charge of the agenda  For creditors: Action is taken by management to protect the exposure of creditors without the need for creditors to intervene or to invoke a formal insolvency process  For all Highest success rate and the lowest cost of all processes applied to troubled companies Benefits MANAGEMENT-LED CORRECTION  Companies where early warning signals of impending distress are recognised early enough and acted upon  Companies that are underperforming but not in financial distress  Distressed companies supported by benevolent shareholders:  Distressed subsidiaries of strong groups which support management-led correction financially  Organisations in the public sector Where and when Management-led correction:  Triggering normally by a concerned Board of Directors  Most turnarounds take place in the form of management correction  Examples:  SA Post Office (Maanda Manyetshe)  Edgars (Stephen Ross)  Transnet (Maria Ramos)  Spoornet, Portnet, etc.  SAA (Khaya Ngqula) Further characteristics Failure of management to react timeously and successfully to early warning signals of distress normally leads to intervention by creditors.

20 Contrasting informal turnaround with turnaround during formal insolvency :  “What’s in a name?”  Timeline of financial distress  Management-led turnaround  Informal creditor workout  Business rescue

21 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 21 Should management-led correction fail, creditors – normally the bank(s) intervene INFORMAL CREDITOR WORKOUT  Acute and worsening problems impair a company’s ability to meet its commitments to its financial and trade creditors  This normally leads to creditor invention  A workout follows negotiated agreement outside the legal framework i.e. out-of- court settlement on a plan to reduce indebtedness Where And When Informal creditor workout:  Strong workout capability: “Special portfolio", "credit recovery" or "intensive care" departments in credit or risk management structures  Cannot participate in the management or intervene in the affairs of a troubled company, since the rights of other creditors may not be prejudiced  Yet, banks have considerable influence e.g. make continued and/or further support conditional to an independent review of the affairs of a troubled client, and conditional to the submission of credible turnaround plan  In a multi-banked situation a consortium may be formed, which is of great help to make a turnaround work  In a consortium, normally under independent chairmanship, affected banks join forces to:  Ensure a common approach to the problem  Ensure that no single lender steps out of line and prejudices the overall situation for the other lenders  Sometimes spread the risk Role Of Banks

22 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 22 Informal creditor workouts have advantages, but serious disadvantages too INFORMAL CREDITOR WORKOUT  For directors and management:  Secrecy, avoiding the stigma of a more public formal procedure such as business rescue (and avoiding investigation and challenge of directors’ conduct).  Cost savings relative to formal business rescue  For all:  Flexibility in the absence of legal procedures  Success rate (Franks and Sussman study of UK banks):  75% turned around or switched banks  Average time 7,5 months Advantages Informal creditor workout (2):  For directors and management:  Although management remains in charge, the agenda is determined by the terms of the workout agreement  For banks:  Degree of "free-riding" by other creditors such as trade creditors and SARS, who offer little by way of solutions, finance and sharing in the risk during the workout, but who share in the benefits should the workout be successful  Dissenting creditors, normally the smaller ones, may derail the workout by reverting to formal insolvency laws  Have to rely on management's promises, capabilities and integrity to execute a turnaround plan  Should a company go into liquidation following an unsuccessful workout, banks run the risk of being accused of having favoured themselves during the workout  Banks are often blamed if job losses occur as a result of the workout Disadvantages

23 Contrasting informal turnaround with turnaround during formal insolvency :  “What’s in a name?”  Timeline of financial distress  Management-led turnaround  Informal creditor workout  Business rescue

24 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 24 Business rescue has a number of objectives and benefits  The purpose of business rescue is to preserve the going concern value of a distressed firm, that is insolvent but potentially viable, through: –Turnaround (which may include refinancing), or –Refinancing, or –Keeping it afloat and selling it as a going concern (for turnaround/refinancing by the buyer)  A firm that enters business rescue and emerges intact may satisfy creditors' claims more effectively than a firm that is liquidated  Business rescue is meant to allows a distressed firm to: –Satisfy claims of creditors –Continue in the economic stream i.e. source of business for other companies –Preserve jobs and create employment –Pay taxes However, SA’s business rescue legislation is antiquated - judicial management not effective. BUSINESS RESCUE

25 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 25 Promulgation of planned new business rescue legislation will mark the most significant event in SA’s turnaround industry history  Judicial management to be replaced by new business rescue legislation: –Refer to David Gewer’s presentation on legal aspects –Refer to Themba September’s presentation on “Developments in the South African Turnaround Industry”  The Business Administrator may have the benefit of: –Concursus Creditorum: Creditors and employees' positions will be frozen at the time a company is placed under administration, thereby overcoming the free-rider problem experienced by banks when funding informal creditor workouts –Ringfencing and ranking as to preference of creditors' interests –Moratoria on debt repayment –Cram-down provisions will bind dissenting minority creditors, thereby overcoming one of the weaknesses of the informal creditor workout  It is understood that new business rescue legislation could task a turnaround practitioner as Business Administrator to: –Determine turnaround viability –Conduct a turnaround if viable BUSINESS RESCUE Turnaround practitioners may, as Business Administrators, be able to operate within a turnaround-friendly formal insolvency process for the first time.

26 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 26 Business rescue overseas, however, is not without problems High cost:  Direct costs representing 24% of book value on entering business rescue (Nachtman et al, 1999) – but still less expensive than liquidation Low success rate – the USA experience:  Baker Smith, President of Morris-Anderson: "Since over 85% of businesses never successfully emerge with a confirmed plan of reorganization, the cure must be worse than the illness. Most companies die in Chapter 11. Unless a company’s underlying problems are addressed with a turnaround plan or sale, Chapter 11 can’t ultimately save them."  Many firms increase their investment expenditures only by very little in the first two years after a debt restructuring (James 1995)  In each of the first five years after emerging from business rescue, between 35 percent and 41 percent of all firms have negative operating income (Hotchkiss 1995)  More than 75 percent of firms that complete debt restructurings emerge with a leverage ratio that is higher than industry median and most are still significantly more highly leveraged than before the onset of financial distress (Gilson 1997)  Furthermore, between one quarter and one third of all distressed firms re-enter financial distress within a few years after completing a debt restructuring (Hotchkiss 1995 and Gilson 1997) BUSINESS RESCUE

27 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 27 The success rate of business rescue is low because it is deemed to be a measure of last resort Why a low success rate:  Formal business rescue is expensive: –To save costs, management-led correction and informal credit workout are still attempted when formal business rescue should already be taking place  Stigma of bankruptcy –In countries with a legacy of English law like SA, business rescue taking place under insolvency laws carries the stigma of bankruptcy, leading to loss of prestige, staff and customers –This is in contrast to Chapter 11 in the USA where bankruptcy carries less of a stigma  Our new legislation will be creditor-friendly i.e. hostile to directors and management: –Directors and managers resist business rescue since they lose control when a business administrator takes over –This is in contrast to Chapter 11 in the USA where directors and managers remain in charge (DIP or debtor-in-possession principle) BUSINESS RESCUE As a result, a business tends to be in the Failing Zone of the Z-Score by the time that business rescue is triggered.

28 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 28 We identified a number of key success factors for business rescue in South Africa BUSINESS RESCUE Business rescue key success factors Avoid the need for formal business rescue  Avoid formal business rescue by promoting timeous and effective reaction to early warning signals of distress through educating business Expediting business rescue  A stronger legal deterrent to directors trading under insolvent conditions  Avoiding “free-fall” business rescue i.e. don’t start looking at turnaround viability only once formal insolvency procedures have kicked in  Instead, use “prepackaged” business rescue: –To achieve the lower cost of informal creditor workout while achieving the legislative benefits of business rescue –Achieved by first devising a turnaround plan and then invoking business rescue

29 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 29 Business rescue key success factors (continued - 2) BUSINESS RESCUE Business rescue key success factors Industry associations  Turnaround Management Association, Southern Africa Chapter) to: –Promote the turnaround industry –For purposes of information exchange, networking, education and raising the standards of turnaround across both the informal and formal sectors  ABASA – Association of Business Administrators of South Africa –To regulate business rescue through admission criteria and powers of disciplinary action Education  Education of industry and government through TMA and ABASA  Educational turnaround conferences like this one today  Education of turnaround practitioners/Business Administrators: –Certified Turnaround Practitioner (CTP) – exam plus proven track record and experience –Admission exam for ABASA – could be the same as the CTP exam –See Professor David Burdette’s presentation on ACTP

30 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 30 TMA, SA Chapter and ABASA have different roles BUSINESS RESCUE

31 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 31 Business rescue key success factors (continued - 3) BUSINESS RESCUE Business Rescue Key Success Factors Turnaround finance  Need for a turnaround private equity industry in South Africa: –That invests in distressed businesses too as opposed to underperforming businesses only  Some banks strengthening their distressed debt capability and preparing for turnaround private equity in anticipation of new business rescue legislation Turnaround, not mere restructuring  Restructuring alone is OK if positive EBITDA or operating profit, but loss-making due to interest charges  But business rescue of businesses with serious strategic, organisational and operational challenges often amounts to merely stabilisation and restructuring of the business  If the underlying causes of distress are not fixed, the required turnaround is in effect postponed or left to a buyer to address Unless the business is fixed, "business rescue" has a temporary outcome.

32 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 32 Business rescue key success factors (continued - 4) BUSINESS RESCUE Business Rescue Key Success Factors Business rescue scorecard  The success rate of business rescue overseas is low  Yet there is much hype from government and in the press, creating false expectations about the prospects for business rescue in SA  We therefore call for a scorecard to measure and the track the success of all business rescue attempts: –Number and turnover of businesses that survive business rescue –Percentage of jobs retained as a result of business rescue –Claimholder recovery rate as a result of business rescue –Cost of business rescue –Restructuring, sale or turnaround Avoiding type 2 error  The purpose of business rescue is to avoid making a Type 1 error (Type 1 error = to liquidate businesses that should be rescued)  Conversely, Type 2 error refers to attempting to rescue businesses that should be liquidated  Type 2 error cost = cost associated with the unsuccessful rescue attempt plus the cost of subsequent liquidation

33 3 The Trails, 127 Linden Rd. Sandown 2196, Sandton Contrasting informal turnaround with turnaround during insolvency - WBS 2005 Cell: 082 853 1414 Phone/fax 011 477 4414 www.corprenewal.co.za www.turnaround-sa.com crp@corprenewal.co.za 33 Cell: 082 853 1414 Land line & fax: 011 477 4414 Web site: www.turnaround-sa.comwww.turnaround-sa.com Web site: www.corprenewal.co.zawww.corprenewal.co.za Email: tasa@turnaround-sa.comtasa@turnaround-sa.com Questions Jan van der Walt CEO: Corporate Renewal Partners CEO: Turnaround South Africa


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