Successful businesses can teach us many valuable lessons; so too can businesses in strife.
THE failure this month of Griffin Coal left many people asking the question: how can a business owned by a man worth $700 million and with a licence to print money fall into administration?
While Griffin Coal owner Rick Stowe may never have been worth $700 million – the folks at BRW magazine engage in a fair bit of educated guesswork when they put together their annual ‘rich list’, especially when they are looking at reclusive, private business owners – he was, nevertheless, clearly a very wealthy man.
It is also clear that he once owned a very strong business, evidenced by the BB- credit rating that Standard & Poor’s assigned to Griffin in 2006 – quite an achievement for a privately owned business.
Griffin’s slide into administration shows that, no matter how strong the underlying business, there is a limit on how much debt it can service.
This lesson gets learned and learned again through every business cycle. There are always business owners who have enjoyed a good run through a boom period, and adopt an overly optimistic view on the resilience of their business.
Just think of Alan Bond, Christopher Skase, John Spalvins and many other 1980s entrepreneurs. More recently, think of Babcock & Brown and its universe of satellite investment funds.
In all of these cases, the group took on massive debts, leaving little margin for error.
Griffin is believed to have well over $1 billion of debt, including the project debt on the Bluewaters power stations at Collie. That appears to have left the group tightly stretched.
Add in some operational problems at its new Ewington coal mine, including poor quality coal, some delays with commissioning Bluewaters, and a stoush with the tax office, and a tightly stretched group becomes a broken group.
West Perth-based investment group SAS Global is another business that was caught out last year with excessive debt.
Five of its satellite land development companies were placed in administration, although in this case there was an added dimension – it arguably paid too much in the first place for marginal land development opportunities.
A roaring boom, which lifts the value of all assets, can cover these mistakes; a market correction exposes the weakness.
The problems facing listed property developer Port Bouvard are not as acute, but it was forced last year to suspend its shares and one of its joint chief executives resigned as it negotiated new debt facilities.
The new St George Bank facilities, announced on December 23, will allow the company to proceed with its major developments but are subject to a $20 million capital raising, higher interest rates and strict repayment terms. In other words, it is beholden to terms set by its lender.
Another lesson from the past year was that being in a boom sector was no guarantee of success.
Nor is winning a lot of contracts. In fact, this can be a warning signal, because new contracts can often be won by sacrificing profit margins.
And just as important, winning contracts is only beneficial if the business can deliver in an efficient manner.
Listed modular accommodation supplier Nomad Building Solutions illustrates some of these points.
It shocked the market last week when it disclosed that its net result for the year to June 2010 was likely to be a loss of about $2 million on revenue of $250 million. Just three months earlier, it had tipped a net profit of $10 million to $12 million.
The group said it was adversely affected by the failure to secure as much work as it had anticipated, partly as a result of delays in client tenders, additional costs for completing existing contracts, arising from poor management systems, and continuing pressure on margins.
The margin pressure is not surprising. Supplying modular accommodation to resources projects and remote communities has been widely recognised as a major growth sector and, as a result, a raft of new players has entered the market.
Some other lessons from recent years include the importance of watching overheads. They can bring down a business, and can also be a sign that management is becoming remote from their operations. The old regime running Coles Myer illustrated both points.
Another lesson is to be wary of technology risk. The failure of BHP Billiton’s Ravensthorpe nickel project illustrated this point.
None of these lessons is new; they just get forgotten.
