Portsmouth Football Club’s insolvency has valuable lessons for other troubled businesses. Why did this premiership club that has been established for over 112 years go bust?

Putting aside the football legislation and emotional embroilment of Pompey’s fans, there were several business factors that led to Portsmouth FC becoming the first premiership club to go into administration.

• Overdue payments to HMRC

Portsmouth failed to pay its scheduled payments as they fell due. This allowed HMRC to provide the courts with evidence that the company was technically insolvent. Not every case will result in a creditor taking action against an overdue unpaid bill, but directors should remain aware of the potential consequences. 43% of successful winding-up petitions are presented by HMRC, but they will support what they believe to be a viable business, so it is vital directors act early.

• Cash flow

It is reported by the BBC that due to Portsmouth’s insufficient ground capacity, the club relied heavily on TV payments to meet its monthly outgoings. When the premier league withheld its TV payments in January 2010, the strain on the company’s cash flow was evident with players not been paid on time and management searching for new sources of finance. Accountancy Age reported that the club was looking to receive a cash injection before 17 February from an associate, but this never came. Cash flow is a key component in operating a successful business, and during a recession its importance cannot be understated. If you are regularly unable to pay suppliers or employees, then without restructuring your business and finances, the outcome will normally be insolvency. There are various cash management strategies that can be implemented (for example, re-negotiating supplier terms or selling non-core assets) to give a company some breathing space.

• Management and infrastructure

In the last 12 months, Portsmouth has had 4 different owners and sold several key players, such as Jermain Defoe and Peter Crouch. Management failed to recognise that stability and long term planning is vital for the future success of a company. Without key employees or coherent management strategies, it will be difficult to overcome any external pressures. Now, more than ever, owners/directors should be keeping a close eye on the company’s accounts and the monthly management reports. Spot potential problems and resolve them quickly and swiftly. If ever unsure, directors should seek advice promptly before it is too late.

Should these recent events be a stark warning to all that HMRC are starting to play hard ball? Will 2010 bring a influx of winding up petitions being presented against companies? Should the Portsmouth situation start to ring alarm bells for other companies in similar situations? The answers are most likely to be yes in all cases.

On 2 March, the Financial Times reported that following HMRC request the High Court has ordered a hearing to be held to consider whether the administrators appointment was valid. So with HMRC continuing to add pressure, there is still a danger that Portsmouth could be wound up.
 

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For most businesses, the next year or so will be a time of battening down the hatches as they see their profits squeezed, their cash flows under increasing pressure, and the banks not as 'profligate' as they were before.   The companies that manage to trade through this period will find most of the answers lying within, rather than outside, the business.  For them, cash will be 'King', all thoughts of growing market share or maintaining profitability will be sidelined as the focus is placed firmly on a survival of the (cash) fittest.  

• Cut out all non-essential expenditure.  Do it now, do not defer it for another day.  Be brutal, assume that the sector will not recover quickly, if at all.  If you have cut too deeply, you can probably repair things later on.  If you do not cut deeply enough, you could die 'a death of a thousand cuts' , others  on whom you may need to rely later for support will view your management skills as weak.
• Recognise where your commercial muscle lies, and then fully utilise it.  This can be on the supply side (typically) or sales side (less often).  Use your muscle to obtain longer payment terms from your suppliers.  They will not want to see you reduce your spend or go out of business.  Use your muscle to secure earlier payment from your customers.  They may need your prompt service or wish to see you reduce your prices to help them survive.  Be flexible, do what is necessary in the short to medium term.
• Reduce your fixed costs (those that you have to pay regardless of how busy you are) and increase the proportion of variable costs that you have.  Examples of this include taking on temporary rather than permanent staff.  Changing your cost base to one that is more resilient to unforeseen changes in activity levels will increase the chances of you surviving the battle of the fittest. 
• Keep on good terms with your bank and HM Revenue & Customs.  The bank's view is often that as the largest single investor in your business, you should have more regard to their interests than others'.  HMRC's view is that, as an 'involuntary' creditor, any ' investment' in your business is probably too much.  Don't rely on getting better terms from either, expect both to cut a hard bargain.  But be fair with them and recognise their views, and they will probably be fair with you.
• Cut your own outgoings.  You will not encourage others to work with you and support you if they do not see you hurting too.                     

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Credit is hard to find and, with global recession looming, businesses face many new challenges. The solution is to develop sensible, cost effective and tax efficient restructuring plans.

Cash flow and business viability are key and should be uppermost in your mind when considering restructuring options and strategy. Falling turnover, pressure on margins and limited cash resources require a tightening of belts and a speedy withdrawal from those business ventures that have a long lead time to profitability, or otherwise drain the business of cash. Identifying such parts of the business is usually quite easy, but downsizing or eliminating them can be extremely challenging.

A good restructuring plan begins with an in-depth review of the business operations and an understanding of what drives costs, profits and cash flow. After analysing the business model and its structure you should consider the restructuring options available, taking into account relevant commercial and legal constraints effecting the business operations and its cash resource.

Restructuring a business is likely to involve the removal of financial burdens that may include the cost of premises, employees, unprofitable contracts, or loss-making subsidiary companies or operations. The legal mechanisms for dealing with these will be different in each case and may involve compromising debt through a company voluntary arrangement or via an administration, or even liquidation. The need for an insolvency process will depend upon whether the company, group or business requires protection from its creditors while a restructuring plan is put in place.

The main focus is to establish a restructuring plan that saves jobs, goodwill and business infrastructure, retaining value to the business wherever commercially and sensibly possible. Business restructuring can be painful, impacting upon the many stakeholders who have supported the business over the years, but this pain should be short-lived. Restructuring an operation into a viable, more streamlined and profitable business will provide opportunities for most of those stakeholders already involved; without restructuring they would get nothing.

None of this can you do alone. You need an adviser with experience and expertise in developing the most appropriate restructuring plan for a business facing either a need to downsize or financial distress. They will analyse and consider restructuring and refinancing options, with or without an insolvency process, introducing funders and investors where necessary.

When we at Mercer & Hole are asked to advise in these circumstances, we analyse with clients the requirements and consequences of a restructuring plan and endeavour to ensure that its implementation is as effective and painless as commercially possible.

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