Job Posting: Well paid opportunity for real business people

The past year has been tough for small businesses, particularly in the UK. The dramatic fall in the value of sterling, the increased cost of borrowing and the reluctance of banks to lend to SMEs (small and medium sized enterprises) have all hit firms hard. There are three million family-run businesses in the UK, employing 9.5million people and contributing to more than 30 per cent of GDP and with many facing a white knuckle ride into 2009 there has been an understandable focus on how to ensure the survival of this part of the economy. If unemployment is to be kept to somewhat manageable levels next year this is seen as a key area to target. Small businesses cannot protect themselves from clients, suppliers and bankers in the same way that big companies can, so the speed with which they can run into difficulties when sailing through the current storm is very much heightened.

The British Chambers of Commerce has warned that many small firms will struggle to survive in the coming months, with access to finance and cash flow likely to be major issues. BCC Policy Adviser Steve Hughes says: 'The Government's stimulus failed to help smaller businesses. Many will be forced to lay off staff and in some cases businesses will go to the wall. We must do all we can to help small firms survive, not only because they will get us out of this downturn but because the businesses we lose will never return". One certain opportunity that will come as a consequence is that anyone who is good at running real business is going to become a valuable commodity. If you can manage your way through this and keep people employed the government is likely to be very much "on your side".

Private equity companies, I believe, have a great opportunity in this area. They will quickly need to transfer their focus away from the financial engineering approach of the past five years to a focus on sales growth and productivity gains; i.e. doing something "real". The true secret of private equity performance in the past five years was recapitalisations and pass the parcel secondary buyouts which led to ever more leveraged companies, and unbelievable returns during the good times. Now that the world has turned, there has to be real value added - which is much harder work. Nonetheless, given the likely purchase prices that will be available for the next rounds of private equity deals, the opportunity for those willing to do the hard yards is potentially very high. Many of these opportunities will come as over-levered companies fall by the way side, and government will be keen to help if part of the focus is on keeping people employed.

In the last few weeks and months, a raft of well known high street retailers in the UK have been taken into administration, Woolworths, Zavvi, Adams Kids and Whittards to name a few. Many more will undoubtedly follow early in the New Year after they tally up the numbers for what must have been extremely difficult trading times over the all important Christmas period. 30-50% discounts were not hard to find, even early on in the season, and the impact on the margins of these retailers will become clear soon enough. The ability of government to look at more bail-out type packages to support those who are next to fall off the cliff has got to be increasingly limited. Other non-financial solutions are being desperately looked at, in order for it to be as easy as possible for companies that are big employers to remain in business and keep paying wages.

Many of the companies that will fail, will do so because their balance sheet leverage increased over the past 10 years and as a consequence their sensitivity to margin erosion is acute. This tale is applicable to many more high street names - Boots, MFI, Countrywide, Hilton, Gala Coral, EMI for example. As these leveraged companies come to refinance their original loans (taken in the good times at low interest rates), banks will either choose not to refinance at all, or will do so at incredibly penal credit costs. 2009 will see plenty of covenant breaches on the loans that backed these highly levered deals, which will lead to banks embarking on restructuring programs that will see existing private equity investors diluted out of sight. At this point in time most of the debt that exists from the LBOs mentioned above trades in the market at yields that reflect that the private equity holders investments are worthless, and that these companies are technically insolvent. The insolvency expert Begbies Traynor has predicted that at least 15 national retail chains will go bust in the UK by mid January.

That is where we are heading, but the above commentary can be read in any newspaper so is not particularly revelationary. What is more compelling, and optimistic is that out of all this, there will be some really great opportunities for real business people to pick up the pieces. And these pieces will likely come at very low cost.

A private equity company (that one of the readers of this blog works for), was responsible for purchasing Whittards (the speciality tea and coffee maker) out of pre-packaged administration in the last couple of weeks. Whittards employs 950 people in 130 different stores across the UK. It generated close to £50mm worth of revenues last year, having been purchased by the now beleaguered Icelandic retail group, Baugur, for over £20mm 3 years ago. The sale price out of the "pre-packaged" administration process this time was believed to be less than £1mm. Presumably given Baugurs troubles, they were forced sellers as they would not have had the money to have put into the business at this point in time to get it back on track. I don't know the ins-and-outs of whether Whittards can be turned into a viable business, but if it can then the upside to the investors on their small purchase price could be huge. They are in effect buying a cheap call-option; not quite free, but close.

There will be plenty of opportunities of this nature that start to rise up from the ashes in 2009. I would suspect that there will be other non-private equity participants looking to enter the fray; consultancy firms who earn fees for fixing ailing business should probably look into this area. They have the right people in place to oversee the real business change that will lead ailing companies back onto the right track - so why not see the upside through ownership? I expect to see more fund raising taking place of this nature. Pre-packaged bankruptcies, where obligations to past creditors are close to nil, could well be the territory where the seeds for a broader economic recovery are grown. Governments will certainly be on the side of anyone who is willing to try to keep people employed in the process, especially if they don't have to spend any more taxpayers money. What is for sure is that there certainly won't be much sympathy for creditor complaints that have arisen out of the excesses of the past.