Deal with problems head on and take constructive action

David Thurgood Director, Grant Thornton

As a leading provider of advisory services to all types of leisure businesses, we are acutely aware of the challenges they face. Aside from the intense competition which characterises this market, there are a number of other issues which have impacted on the fortunes of these businesses:

• consolidation in the market
• increasing costs of trading (particularly wage rates, energy costs and increased security)
• smoking ban
• increase in fraud
• widespread pressure relating to responsible drinking

In recent months, the spectre of an uncertain economy has cast a dark shadow over an industry struggling to maintain margins. The rising cost of living is causing many to cut back on non-essential items and activities. There is evidence that some consumers - often, heavy smokers - are choosing to stay at home instead of venturing out and are taking advantage of cheap alcohol from supermarkets instead. In addition, uncertainty over property prices means that valuations of operator's property portfolios are on the wane. It seems as if those operators with a distinct proposition and who can adapt to changing circumstances (eg family-friendly pubs with a good food offering who are capitalising on the Smoking ban) are weathering the storm better than those without clear strategic direction. It is no surprise that lenders are becoming more dispassionate about their customers' funding requirements and are less inclined to prop up struggling businesses. This is causing even major players to falter.

Getting the basics right in such a climate can mean the difference between success and failure and there are some key questions that pub operators need to be asking in order to meet their financing obligations:

• are there targets set for what you want to achieve this year?
• is monthly and annual performance against these targets being measured?
• is current performance being compared with that of previous years and in the industry generally?
• is the value of the business known, and is there an awareness of how much more profitable it could become?
• is a performance improvement plan in place?

It is however important to remember that there are many ways in which specialist skills can salvage and stabilise the essence of a business in distress. If a problem is diagnosed early enough, there is a greater chance of success. Businesses can often benefit through bringing in expert help to advise on flexible financial solutions, cash management, robust internal controls and operational efficiencies.

Industry forecasts for 2008 are not encouraging and as cashflow pressures increase through the "double whammy" of falling turnover and increasing costs, company directors or their lenders may be forced to seek protection of their position or to prevent the situation deteriorating further by seeking the appointment of an insolvency practitioner through either an administration or receivership.

This year will be a difficult one for the sector, but the key will be to deal with problems head on and try to take early constructive action to remedy the situation.

About The Author

David has been director in Grant Thornton since 2001 and has over 20 years' experience of working with leisure businesses and their stakeholders.

He specialises in all types of investigation work, in particular independent business and security reviews.