Based on more than three decades of research and development, the Plimsoll Model provides a graphical measure of any company’s current, overall financial health, and the trend in that health over the preceding four years. Plimsoll produces over 1600 individual market studies and rates each company included as Strong, Good, Mediocre, Caution or Danger.
The culmination of the Plimsoll Model is the overall health rating plotted on the Plimsoll Chart that allows you to instantly spot companies heading for trouble. It is worth noting that 9 out of 10 companies currently in administration were rated as Danger by Plimsoll up to two years before their ultimate demise.
How does this type of analysis apply in the real world and what are the consequences of a Danger rating? Here are the four main consequences of such a rating and examples of companies that failed to the heed the warning:
Corporate failure
There are countless examples of companies that failed to heed the warning signs afforded them by the Plimsoll Model and the rating provided.
Jamie’s Italian is a stark, recent reminder of how ignoring underlying financial health in the pursuit of vanity (or sales growth) has disastrous consequences. The company pursued a “bums on seats” strategy while the hole in working capital grew ever larger. Rather than retrenching, they took on debt to plug the short-term capital shortfall. Eventually, the numbers became unviable and the lenders lost confidence and pulled the plug.
Jamie’s Italian follows many other recent failures such as Thomas Cook, where chances to fix the underlying weaknesses appear to inconvenience the plans for growth. Eventually, in almost all cases, the formal lenders lose faith and pull out.
Get taken over and subsumed
Buying a distressed competitor is currently very in vogue. The pandemic has shortened the time it takes to hit the buffers, rather than bringing otherwise strong companies down. Many with brands and assets that have some value to others have found themselves “rescued” by new owners.
Mike Ashley is a master at hoovering up failed brands and businesses from USC to Pretty Green. He then adds those brands and assets to his empire and continues to dominate the market.
Elsewhere, rumours continue to circulate about BT and its likely takeover by private equity groups. Undoubtedly, should any deal happen for the struggling telecoms giant, the company would find itself a much smaller version of its previous space.
Put in place an emergency survival plan
Companies do often take some of the drastic action needed to pair the losses and restructure the business to survive. Not all get it right and there are many obvious examples of simply “dumb-sizing” the business. They reduce the size and sales fall accordingly, leaving a smaller business with the same inefficiencies.
Without investment to improve productivity and a better return on the capital invested, all companies eventually realise they have not fixed the fundamental issue that led them into trouble.
Engine maker Rolls-Royce is an example of a company that have not gone far enough to address their issues.
We can also see BP, the oil giant, selling off heavily depreciated assets such as its Alaskan fields and petrochemical arm. Its attempts to pivot the business away from an increasingly finite fossil fuel market towards renewables and green energy, while shoring up its balance sheet, is a gamble they must take.
Equity injection to buy time
An equity injection buys the board of a company time. An injection by the shareholders, rather than external debt, has the stabilising effect on the overall health of the business. If current shareholders are unable to inject additional funds, enticing new investors is the only alternative. While selling off part of your business may be unpalatable, it is often the only choice for many companies Plimsoll rates as Danger.
In the US casual dining market, a number of operators including BJ’s Restaurants, The Cheesecake Factory and Dave & Busters have all sold equity in their businesses to private investors in attempt to recapitalise and get them through 2020 and the shutdown of in-house dining.
What to do if you’re in Danger
Plimsoll can help you to formulate a four-step plan to ensure the longevity of your own business, whatever your industry or the customers you serve. The steps are as follows:
Step 1 – assess your own company’s financial health
Step 2 – compare it to others in your core market. Are you in better or worse position than your rivals? If they fail before you, could it give you a temporary reprieve
Step 3 – if you are in financial danger, formulate an immediate plan and implementation timeline. Model what actions would be stabilise your business
Step 4 – Develop a 5-year plan to cement your business health
Plimsoll provides a range of analysis tools to complete this process far faster than those relying on fragmented data sets and incomplete analysis. Visit www.plimsoll.uk or call 01642 626400 to discuss how Plimsoll can help you today.