An outsider's insights can save a business

When businesses hit a rough patch for which they are not prepared the strain can leave management with few viable options.

Executives who, in less stressful situations, are level headed, can be reduced to making high-risk and irrational decisions akin to those of a gambling addict when their business's survival is on the line.

Acting as the lead business rescue practitioner in a turnaround in 2013, Keith Fairhurst, a director at BDO Innovation, kept a diary of the rescue process and ended up unintentionally charting the emotional course of the main protagonists.

"I didn't set out to observe the people but that's what I saw so I wrote it down. If you go to the literature on bankruptcy and corporate failure, even if it's in legal or financial terms, the underlying element you see in common is the choices management has made.

"There's inevitably a human component - whether it's how people are experiencing it emotionally or the influences and biases that shape the choices that brought them to that point, or how they behaved as the business become increasingly financially distressed," Fairhurst said.

Creditors can feel betrayed and sometimes suspect the management of a failing business of having stolen their money and deceit, Fairhurst said.

"Some of the comments you hear from angry creditors don't look rational on the surface, such as: 'I don't care - it's my money!' [As business rescue practitioners] we have to be very conscious of being a neutral, independent party."

Balancing the interests of all parties caused Fairhurst and his partner at BDO Innovation, Alastair Macduff, to pioneer a joint practitioner system and review progress daily to ensure that they maintained their focus and independence.

"We never take individual appointments. We learnt very early on that for one person to carry the burden of business rescue is incredibly challenging - emotionally, timewise and logistically. We have daily reviews to hold each other up to the standard of independence when a business's survival is on the line.

"It's a system of checks and balances because what we do or say should not be interpreted as favouring one party over another. There is anger, and because the practitioner is in front of someone, he can become the target unfairly."

This is at least partly because the business rescue process is still in its relative infancy in South Africa. The Turnaround Management Association, which is the largest body of turnaround professionals in the world, is helping to raise the level of professionalism of practitioners.

"Practitioners must maintain their professionalism and independence, but it's not easy. Over time, more understanding will emerge and more case law will be built up to provide guidance on interpreting the act."

According to Fairhurst there is only a small pool of business rescue practitioners in this country and an even smaller cohort of dedicated practitioners who have handled more than three cases.

This is not only because of the difficulty of the task itself but also because of the regulated fees practitioners may charge.

"There is provision for a success fee in the act but we've never done that. We haven't been able to think of a mechanism we feel would not compromise independence."

It's not a job many people are qualified to do and requires experience in running businesses. Fairhurst agreed with research by the University of Pretoria that showed that the most important attribute of a successful turnaround practitioner is "sense-making" ability.

This is because small businesses can often have many overlapping roles - the largest shareholder might also be the manager, and getting a family business out of danger can become complex.

"Some businesses are just too small to carry the costs of surviving distress. In some cases we walk away from them because they're dead on arrival - there's no hope of saving them and sometimes that's because of their size," Fairhurst said.

The separation of roles and good governance are often not sufficiently considered when business is healthy.

"When it's in distress, roles are even further confused and it brings about complications."

Someone who is good at his trade might start a business that does well until it hits a bump, such as losing a major client or being awarded a big contract, he said.

That person may not be able to work on his trade and work on managing his business simultaneously - one aspect could be neglected.

"If the support mechanisms - such as independent directors - have not been built up in times of health, the company will run into difficulty."

Resilience is not easy to build and Fairhurst said the principles of good governance are often seen as being simply a regulatory requirement or unsuitable for small business.

"I've seen small and medium businesses that have flourished as a direct result of having those principles in place. The best thing an entrepreneur can do is gather around himself people with the right insight."