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Restructuring challenges for SMEs and Owner-Managed Businesses

By Colin Blessley & Sam Lewis of Menzies LLP
Posted: 18th March 2016 10:50
The relevance of SMEs to the economy
It is not surprising that, more often than not, it is the restructuring of larger businesses that grab the headlines in the financial media.  However, in most of the developed economies in the Western world and further afield, the proportion of national Gross Domestic Product that is generated by Small and Medium Enterprises (SMEs) and Owner-Managed Businesses (OMBs) is significant.  In the United Kingdom, SMEs represented 99% of the 5.2 million active businesses and generated 54% of Gross Value Added.  Furthermore, they represented 60% of UK private sector employment (15.2 million persons) and 10% of direct Government procurement.  In other countries, such as Germany, these proportions are higher.  Accordingly, it is a segment of national economies that cannot be ignored and is deserving of a greater level of support when facing restructuring or turnaround challenges.
Issues facing SMEs
In general, SMEs are more vulnerable to the impacts of economic downturn and research has indicated that many companies in this segment view the economic climate as a major obstacle to their development. 
Among the issues that SMEs, in particular, cite as being major challenges to their wellbeing, the following are among the most predominant:
  • Access to alternative sources of finance;
  • The burden of taxation, when taking into account such levies as employer Social Security contributions, property taxes and local municipal taxes, in addition to direct Corporate Income Tax;
  • The disproportionate impact of regulation, as compared to larger corporations;
  • The inflexibility of the local labour market regulations, particularly in relation to short-term contracts, temporary lay-offs and redundancy provisions; and
  • Despite many pronouncements to the contrary, a perceived lack of political support for the sector
Fall-out from the economic crisis
Since the onset of the economic crisis in 2008, many smaller businesses have been forced to tighten their belts, with less scope to adjust than larger corporations with deeper pockets.
The result has been, with the exception of certain sub-sectors such as fintech, that there has been a general lack of investment across the board, due to lack of available financial resources.  Closely linked to this, many cash-strapped SMEs have not been able to continue to innovate.
Rather than having to face up to the potentially significant redundancy costs which would be associated with a rationalisation of the work-force in order to adjust to leaner times, many firms have continued to soldier on, carrying excess headcount, but sometimes managing to extract concessions from their employees as compensation for maintaining employment.  While this has certainly contributed to the conservation of know-how within businesses, it has meant that companies carry a progressively ageing employee base with ever-growing length of service entitlements.  In many territories, this has led to a progressive decline in productivity per employee and UK businesses are on average 20% less productive than the G7 average.
The challenges of economic recovery
While there is still much uncertainty facing a sustained recovery of the world economy – the slowdown in China and the knock-on effect on supplier countries (in particular those supplying essential commodities, such as minerals, to fuel that country’s growth appetite), the growing instability in the Middle East, low oil prices (good for some, but bad for others), the upsurge in anti-austerity political parties particularly in the lack-lustre economies of Continental Europe, concerns regarding the US Presidential elections and their resultant impact on foreign policy and the prospect of Brexit, to name but a few – indicators would seem to point to a moderate improvement in the prospects for SMEs. 
This backdrop raises a whole series of new challenges for SMEs and OMBs, many of which have been weathering adversity as best they can.  Lenders have been reluctant to foreclose on additional corporate debt problem situations, partly because they have sufficient distressed situations on hand as a result of the prolonged economic crisis, but also because they wish to avoid any more potential fall-out in the courts of political and public opinion after a long period of “bank-bashing”.  Consequently, lenders have renewed facilities in the expectation that an upturn in economic and market conditions will provide a solution.
However, since 2011 lending to SMEs and OMBs from traditional UK sources has continued to decline, despite reports of there being (at least in theory) greater funding available in the market for this sector.  This is a consequence of the mainstream banks, of which, the big four high street banks hold a combined market share for business loans of 78%, applying underwriting criteria with greater rigour than previously was the case.  It appears that the resurgence of “covenant-light” lending has, so far, passed by the SME and OMB segment, with 50% of businesses less than five years old having a 50% rejection rate from banks. 
This scarcity is complicated by the difficulties faced by the sector to harness new equity finance on favourable terms.  Nonetheless, the greater penetration that alternative sources of finance (such as P2P, crowdfunding and the like, in addition to the more traditional methods such as invoice discounting) are achieving in the market goes some way towards offsetting this diminished offering.  The UK P2P sector alone has grown by 75% in 2015 to £1.26 billion.
Smaller businesses also complain that they suffer disproportionately from the oft-used tactic of delayed payments by their larger customers.  While there has been some supportive political noise, there have been little signs that governments are prepared to take concrete actions to redress this imbalance of financial power.
Specific SME restructuring concerns
Ownership structures are often a challenge when restructuring an SME, as these are often closely-held, with difficulties in providing new sources of funding.  Indeed, many businesses have exhausted the personal resources of their owners to contribute additional finance.  This is not helped by the insistence by many financial institutions that business owners provide personal guarantees to support the borrowing of their company.
In addition, generational issues often arise, when considering restructuring options.  The old adage of “it takes one generation to create a business, the next to sustain it and the third to dismantle it” does not seem to have passed into history.
Management issues also tend to come to the fore in any SME restructuring.  The entrepreneurial flair which had been the driving force behind the creation and the development of the enterprise can often cause complications where change is required.  Succession planning (or the lack of it) is invariably a nettle that has to be grasped, along with possible gaps in the management skills line-up.  In many cases this centres on financial management, where accounting and management information professionals have often been regarded as the “poor relations”, with the consequent difficulties in the provision of reliable data (in particular, forward-looking data and reliable cash forecasting), so essential in any restructuring scenario. 
Many SMEs and OMBs have long-standing relationships with other stakeholders – employees, customers and suppliers, to name but a few.  These often create tremendous loyalty, which makes taking sometimes difficult decisions even more complex – achieving redundancies in a non-conflictive way, terminating an unprofitable traditional customer or achieving supplier price adjustments, for example, which, in a larger organisation, can be taken in a more dispassionate manner. 
Restructuring opportunities
Despite a seeming mass of difficulties, the SME and OMB segment does present a number of positives when embarking on a restructuring process. It may appear to be a wide generalisation, but these businesses are often less complex than large corporations. Where there is strong support from owner-managers, the implementation of operational improvements can, on many occasions, be achieved more quickly and more decisively, once traditional mindsets have been overcome.
Banking relations tend to be less complex.  It is unusual to come across multi-bank syndicated debt situations – more often than not, it will be a bilateral facility with a single bank.
The increasing availability of alternative sources of finance is providing more potential funding solutions for SME and OMG restructuring. As always, the challenges are there but, at least, now there are more potential solutions available.  

Colin Blessley works for Menzies LLP a leading chartered accountancy firm based in the South of England. Talk to us about our accounting, corporate tax, audit and business services. Fluent in Spanish and French, and competent in Portuguese and Italian, Colin has more than 35 years of corporate restructuring experience in the UK, Europe, North and Latin America. He has advised many multi-national and domestic clients on a wide variety of strategic corporate

In recent years, he has led restructuring advisory assignments for corporates and lenders alike, involving debt of more than £30 billion, covering a wide variety of business sectors, in particular; media, automotive, manufacturing and consumer products.

Colin can be contacted on +44 (0)20 7465 1937 or by email at

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