Triage: The art of business turnarounds

TRIAGE

The art of business

turnarounds

Stephen Barnes

First published in 2024 by Stephen Barnes

© Stephen Barnes 2024

The moral rights of the author have been asserted.

All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission.

All inquiries should be made to the author.

A catalogue entry for this book is available from the National Library of Australia.

ISBN: 978-1-923007-44-4

Book production and text design by Publish Central

Cover design by Julia Kuris

Disclaimer: Neither the publisher nor the author is engaged in rendering professional advice or services to the reader. The ideas, suggestions, legal interpretations, and procedures provided in this book are not intended as a substitute for seeking professional guidance. Making adjustments to a financial strategy or plan should only be undertaken after consulting with a professional. Neither the publisher nor the author makes any guarantee or shall be held liable or responsible for any loss or damage allegedly arising from any suggestion or information contained in this book.

Contents

Foreword

In the ever-changing world of business, one undeniable truth stands out: constant change and disruption have become the new norm. All businesses, regardless of their size or sector, are grappling with the impact of digitisation and technological transformation.

Recent events have significantly shaped the global business landscape, especially in the realm of corporate restructuring. Jurisdictions worldwide are in a continual scramble to upgrade insolvency legislation, aiming to rescue financially distressed yet otherwise viable businesses. In the US, the UK, Europe, India, and Asia, academics and practitioners are exploring innovative approaches to enhance the corporate terrain. They seek to use legislative reform, ‘preventative restructuring’, and pre-insolvency frameworks to improve asset protection and limited liability for entrepreneurs.

Commonly mentioned is the US Chapter 11 and the shift from ‘creditor-in-possession’ to ‘debtor-in-possession’ regimes. The latter allows the director to remain in control of the business and take responsibility for its survival. While Commonwealth jurisdictions have historically favoured the former, the majority of jurisdictions have sought to improve business outcomes through continual adjustments, monitoring and guidance. Unfortunately, Australia seems to have lagged behind in this regard. As the global economy faces challenges, Australia’s leading academics emphasise the importance and urgency of legislative change. Although many restructuring regimes still need improvement, Australia seems to have finally joined the race after acknowledging that rescuing viable businesses leads to better outcomes for businesses, creditors, employees, and ultimately the economy.

In 2017, Australia took its first step towards this concept with the introduction of the ‘safe harbour for directors’ legislation. The new section 588GA provides eligible directors with protection from personal liability for insolvent trading if a restructuring and turnaround plan is prepared (with the Hon. Kelly O’Dwyer MP clarifying that ‘hope is not a strategy.’). In January 2021, the government introduced a simplified debt restructuring process for eligible small businesses. This process, subject to certain thresholds, allows directors to stay in control of their business and continue trading while proposing a debt compromise to creditors. Unfortunately, there remains issues surrounding small businesses’ ability to access these recent legislative turnaround and restructuring initiatives.

The book Triage: The art of business turnarounds couldn’t have come at a more opportune time. On 12 July, 2023, the Parliamentary Joint Committee announced the results of an eight-month Corporate Insolvency Inquiry review after receiving 78 submissions from a diverse range of the community. Identifying the corporate insolvency system as too complex, hard to access, and unnecessarily costly, the committee made 28 recommendations. These herald the long-awaited ‘root and branch’ review of insolvency, the most significant event in Australian insolvency law history since the Harmer Report in 1988. Many of these recommendations can be attributed to the expert analysis and insight of a few insolvency law academics and several pioneering Business Restructuring and Turnaround Practitioners.

In the business realm, another truth often overlooked emerges – one that has eluded directors, business advisors, and the Australian Government: the root causes of struggling businesses are frequently hiding in plain sight. Often attributed to the Dutch philosopher Desiderius Erasmus and frequently quoted in the business community is the term ‘prevention is better than cure’. Stephen Barnes fearlessly confronts the truth about business turnaround, urging a keen eye and the courage to address fundamental components beyond the legal entity or corporate vessel.

Triage: The art of business turnarounds logically begins with diagnosing the business, challenging conventional notions using clear analogies to redefine what it takes to turn a business around. In this era of contemporary business turnaround, Stephen Barnes dissects the essence of running a business, demonstrating that principles remain steadfast amid changing circumstances.

The journey unfolds in four phases, correcting Australasia’s approach to business turnaround. Triage: The art of business turnarounds, deferring formal insolvency options until the final phase, meticulously unveils the priorities in a complex turnaround. Business triage, inspired by the medical field, is portrayed as an art – a roadmap using Analysis, Emergency, and Crisis Stabilisation phases to divert a business from collapse.

Stephen Barnes dissects business operations, revealing overlooked fundamentals that underpin success. The revelation emerges that every business, irrespective of legal structure, shares common vulnerabilities and transformation potential. ‘Triage as an art’ is comprehensively featured, highlighting the skillsets required for a business revival.

Returning to more ‘heavy-handed’ tools, Stephen Barnes guides readers to the latest formal insolvency options in Australia and New Zealand, providing invaluable insights for businesses on the brink of financial crisis. Triage: The art of business turnarounds promises a transformative experience, challenging reflection on personal and managerial effectiveness.

Triage: The art of business turnarounds is more than a guide; it is a mirror reflecting Stephen Barnes’s experience and passion for saving businesses. It demands introspection and inspires action, serving as a clarion call for directors and advisors to adopt triage as an art. The aim is to confront business core issues and root causes for distress, empowering directors and business owners to emerge stronger, more resilient, and better equipped for future challenges, steering clear of expensive and value-destroying formal insolvency options.

Eddie Griffith

Chair

Association for Business Restructuring and Turnaround

Preface

Business is hard! I have never heard anyone say it’s easy, yet each year thousands of brave people start a business. At almost the same rate each year thousands of businesses fail, get into financial distress and/or cease operating. However, it is the ‘dash’ that matters.

¹

In between starting and ceasing, there is a journey. The type of business, the structure of the business, the location, products, industry and people are different from one business to the next, but the business lifecycle is invariably the same: startup, growth, maturity, decline, cease operating.

This book is written for businesses in the decline phase, and while focused on business turnarounds and restructuring, it’s equally applicable to everyday management. Just like a car battery that is going flat, if we keep the engine running the alternator will recharge the battery and it is likely the car will start next time. Don’t keep the engine running and the battery will go completely flat and it will be impossible to start the car. Many businesses in the start of decline could benefit from a dose of some preventative turnaround medicine too. They need to keep the engine running. A business that has been recently acquired often needs some remedial medicine too.

Turnaround opportunities exist everywhere in a business – be it in a retail store, manufacturing, product lines and offerings, or looking at divisions and subsidiaries. You are always competing in business, and you must earn that right to compete every day – day after day. The basics of a turnaround are the same principles that help every business compete and survive, so this book may be useful in that context too.

I do want to congratulate you for picking up this book and starting on your business turnaround and restructuring journey. This very act of picking up and reading this book has given you and your business a far better chance of not ceasing, not failing, and you may even prosper and exceed your expectations.

I do not know of any business owner who starts a business without the intention and desire to make it a success. Success is an individual and personal thing – success might be enough to earn a living to support a lifestyle. Success might be to own a multinational conglomerate. Success might be the smile on the face of the person that bought your product or service.

Failure too is an individual and personal thing. If your business fails you may feel you have failed your family, your customers or clients, your creditors, your staff and your investors. But to me it is not you that has failed, it is your business that has failed. You as an individual are just a part of that business.

The three types of business failure

There are three types of business failure:

1. The startup that never starts: this may be due to the market not existing, being undercapitalised to grow or to endure a shock, being unable to survive the competitive forces of bigger firms catching up and entering the market, or the person running the business is not a businessperson.

2. The catastrophic failure: the business suffers a major event such as a flood, fire, cyber-attack, fraud, lawsuit or change in regulations.

3. Normal business failure: the incremental failure over time.

This book is written predominately about normal business failure, though the advice can be applied to startup and catastrophic business failures, or even businesses that are performing quite well.

Normal business failure follows the trajectory in the diagram below. This book covers the periods from step 2 to step 6 – underperformance to stabilisation.

In my decades working in the business turnaround field, I have heard all sorts of ‘reasons’ a business has failed. Most are what I would describe as excuses or symptoms rather than reasons. These are usually outwardly focused; for example, global recession, the retail market is in the doldrums, the main customer has gone belly up, the currency exchange rate has gone up (or down), or the cost of a key input has gone up. All things that a business owner has no, or little, control over.

But ships don’t sink because of water around them. Ships sink because of water that gets in them. Don’t let what’s happening around you get inside and bring you down.

There are, in my opinion, three valid reasons for a business to be ailing. Your business is not running so well, or could run better, due to one or more of the following:

•A lack of business skills in the business.

•A lack of attention to applying business skills within the business.

•You are spending the majority of time working in the business rather than on the business.

imgfd89509d5d8e But ships don’t sink because of water around them. Ships sink because of water that gets in them. Don’t let what’s happening around you get inside and bring you down.

The good news is that running a business is a skill – and skills can be learned. All you need is some devotion and time. This book will help.

‘Get comfortable with being uncomfortable. When you start your own company, you have to get used to learning how to do things that you don’t know how to do.’

Heidi Zak, Founder of Thirdlove

Running a business often becomes an ‘addiction’. The way to satisfy an addiction is to get more. Alcoholics need another drink, drug addicts need more drugs, and business owners need to work harder and longer. But as with all addicts, this approach may satisfy their short-term need but it is not good for them in the long term. To treat an addict, you must subscribe to a form of relief. Smokers use nicotine patches and heroin addicts use methadone.

Overcoming an addiction isn’t a simple process. In fact, it may be more accurate to think of it like a journey in which you venture through uncharted territories before finally reaching your destination.

The book Changing for Good breaks the addiction recovery process into six stages, which are sometimes referred to as the Transtheoretical Model.

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The stages are:

1. pre-contemplation

2. contemplation

3. preparation

4. action

5. maintenance

6. termination.

Each stage corresponds to a particular phase in an individual’s journey from active addiction to lasting sobriety. Moreover, these six stages essentially decipher the rehabilitation process, making it easier to understand by reducing the long road to recovery into a series of distinct checkpoints. Of course, understanding the importance of this model requires a closer look at each of these six stages.

With a turnaround process, the same stages are applicable, and it starts with the pre-contemplation phase. In reading this book you are at this stage. Use this book as a tool, but for the turnaround to succeed you must have the desire and willingness to make changes and, like an addict, follow through the stages and enact the changes. Reading the book alone will not be enough. It is a reference guide that addresses the reasons your business is in decline, distress or failing, and a practical guide to how to turn your business around. The information you need is here, but you must act on it.

Most people don’t read business books from cover to cover, and I expect this book will be no different. I first discuss what the turnaround process and business triage is and the causes of corporate decline. Parts II to III discuss the triage steps in a turnaround and restructure process. Finally, there is a brief overview of formal insolvency options in Australia and New Zealand.

Your business may have a particular area that needs some focus, and you can move directly to that part of the book. The book looks great in a bookcase, but I’d rather you have a battered, well-read copy handy. Come back and go over a chapter or a concept again just like you would keep referring to a manual when fixing an appliance. Have a physical copy of the book on your desk to refer to so when you are watching TV or are away from the office and an idea or question pops up you have easy access to the book.

While the book discusses business turnaround and transformation, and looks at the business as a whole, many of the ideas and concepts can also be utilised down to a project level. My team and I have worked on turning around major projects and utilised many of the same concepts in this book to do so.

1

The Dash by Linda Ellis is a contemplative poem where ‘the dash’ represents our life. The dash that Linda Ellis refers to is the one that comes between the year of our birth and the year of our death. The dash is the representation of life itself.

2

Norcross, Prochaska, & DiClemente, 1994.

Introduction

In many respects, businesses are like people. People are similar and yet unique at the same time. They may be located in different countries, in cities or in regional areas. They may be newborn, young, mature, or nearing end of life. They may be good at some things and not so good at others. They will have different interests, and some are introverts while others are extroverts. Some will belong to big families, and some will be alone.

Like people, businesses sometimes get sick. Sickness may occur over a period or be sudden and traumatic. When people are at a serious stage of illness, they often end up at the hospital emergency department.

The first person they see is a triage nurse.

What is triage?

Triage comes from the French verb trier, which means the sorting of patients according to the urgency of their need for care.

³

Triage is the process of determining the priority of each patient’s treatment by the severity of their