As the penny starts dropping that we’re into the Second Machine Age – with all the disruptive innovation that implies – more attention will have to be given to developing and supporting entrepreneurs. One of the best ways of doing so is to help those job creating risk-takers who fail and support those who are faltering. In theory, South Africa’s Business Rescue industry is a good idea, but with a mere 8% success rate, something is clearly amiss. In this insider’s look, Daniel Terblanche of professional services firm Mazars shares his ideas on how to improve the dismal statistics. – AH
By Daniel Terblanche*
The current economic climate is placing businesses under severe pressure resulting in large numbers going out of business, filing for bankruptcy or turning to Business Rescue as a possible lifeline.
During 2012 the success rate for businesses that applied for Business Rescue was only 8 %.
Initially unfavourable tax demands, stringent legal regulations, unviable business plans and the skills set of the appointed practitioners all contributed to the low success rate of business rescue attempts. Statistics circulated by the Companies and Intellectual Property Commission (CIPC) during 2013, however reveals the real rate of success of all businesses that have concluded their rescue operations is between 12 % – 15 %.
During 2013, the number of appointments in the Western Cape alone was 15.8 % less than in 2012. This gives some credence to the interpretation that companies are benefitting from Chapter 6 of the Act, which came into effect in May 2011.
Although Business Rescue is functionally non-judicial in nature, the current trend in South Africa places the decision of whether to file for Business Rescue in the hands of the Board of Directors and a trusted team of attorneys.
Major decisions in the process are based on the business plan prepared by the directors and employees, often overlooking the inherent emotionally charged bias stemming from their desire to see the business succeed. A further reason for the failure of the rescue proceedings is the over-optimistic operational and financial projections which overstate the forecast cash flows and understate the funding requirements of the business.
At a Turnaround Management Association of Southern Africa meeting during 2013, the questions were posed whether Business Rescue in South Africa is too legally focussed, and whether key financial considerations were overlooked in favour of legal consideration.
The CIPC indicated that a sure fire solution would be to increase financial analysis prior to the filing for Business Rescue. There is a far greater role for financial specialists to play in providing an objective and realistic view on the business plan, prior to filing for Business Rescue. This independent view point will enable both attorneys and the Board of Directors to take clear view on the integrity of the business plan and whether Business Rescue is a viable option. Seeking this sort of advice can only improve the success rate of Business Rescue in South Africa by excluding those companies which have followed the process as a last ditch attempt to rescue an ultimately doomed company.
@alechogg well said , the BR practitioners are milking it for themselves, also they are preferential creditors, first mistake.
— Sean Hoatson (@seanhoatson) February 7, 2014
It is becoming increasingly evident that if you don’t adequately prepare for financial distress and Business Rescue, chances are you probably won’t survive it.
There are currently 160 conditionally licenced Business Rescue practitioners with interim conditional licences. The majority of practitioners are practicing in Gauteng (54 %) and the Western Cape (21 %). There are no practitioners registered in the Northern Cape Province. Currently there are 54 Experienced Practitioners, 91 Senior Practitioners and 15 Junior Practitioners conditionally licenced in South Africa.
26 % of Practitioners are practicing attorneys, 11 % Chartered Accountants, 26 % Accountants and 37 % Business Consultants. The balance is made up of practicing liquidators. The average turn-around time reported is 5.6 months which is substantially shorter than liquidation proceedings.
During a recently conducted web survey it was found that only 25 % of jobs were lost in the Business Rescue process. The rescue process effectively saved 75 % of jobs, where in the case of liquidation all jobs would most probably have been lost. If you consider the number of dependents to a full time job which is commonly calculated to be at least six (6), the effect is more than 30 000 lives that have been affected positively. The CIPC is currently considering a number of possible plans to address serious competency/skills challenges that include;
• Implementation of an Accreditation/Competency Framework
• Pairing of practitioners
• Disciplinary review committee
• Restriction of the number of ventures that practitioners are allowed to accept
• Firm action against culprits found to abuse the rescue process that could include litigation to claim back fees and damages
• Blacklist all whom are found guilty
* Daniel Terblanche is a director with professional services firm Mazars. He looks after its Business Rescue Services, has 16 years’ experience in the Insolvency/Business Recovery sectors and is a practicing Insolvency and Senior Business Rescue Practitioner.
