Peter Kahi is an insolvency practitioner. Has been for 32 years. In the business circles, he is known as a the ‘corporate mortician’
Peter Kahi is an insolvency practitioner. Has been for 32 years. In business circles he is known as the ‘corporate mortician’ because he has buried many a business.
But his job is very much like that of an emergency doctor; he can either resuscitate a dying business or let it go peacefully. He’s in a select class of just over 20 insolvency practitioners in Kenya who are called upon when companies are in critical condition.
So what are the biggest signs of a business heading to its death?
Using his current biggest assignments; an administrator of Nakumatt Holdings and fashion retailer Deacons, Kahi explains.
"Ninety per cent of business collapse is caused by poor management,” he says.
Peter explains that most company directors, despite the crystal clear signs of distress, are unwilling to seek help to streamline operations.
He describes how companies slide into failure using a graph known as the ‘distress curve’.
-The first stage that signifies problems is the ‘under-performance stage’. Its hallmark is losses.
-The second stage is known as ‘distress” where the key ratios in the balance sheet make no sense
-The third and final stage is called ‘crisis’ and this is where a business has run out of cash.
Wrong business model and ‘cannibalisation’
According to Kahi, the business model for most of the Kenyan retailers can be linked to their collapse.
Nakumatt collapsed with a Sh38 billion debt while Deacons fell with Sh1.1 billion.
Due to the low-profit margins the retailers are always in an expansion spree. This leads them to use even supplier money thus creating more debt.
“The retail market is quite challenging; the margins are very low, that’s why you see them expanding so that they do volumes,” says Kahi.
Giving an example of Nakumatt, Kahi says that the fallen retail giant that once boasted of more than 60 stores spread out across the region “bit more than it could chew.”
The retailers also have branches that are close to each other leading to “cannibalisation.”
How to expand your business
The right time to scale up is when your current enterprise has strong cash flow and is surpassing set goals.
·Find out if your business is ready for growth. This is the most important step and requires intense research. Is there a market need for expansion? Can you handle increased sales? Can you handle more orders? Do you have enough staff?
· Get the funds. Expansion means more business; thus you will need staff, more stock, etc. Do you have the capital?
· Invest in technology and expert help. Automation in some sectors will free up your time as a business owner to focus on other crucial aspects. Ask yourself how much more you can dd value to your business.
Not owning assets
Most of the collapsed retailers do not own any assets such as land but trade only using their brand.
This means that they can’t even sell anything to pay off some debts or to raise cash for operations.
Owning assets can also attract a strategic investor who can offload some of them to raise cash before pumping in any money.
Nakumatt, for example, did not even own the trolleys and shelves in it stores but had leased them from other companies.
“That’s a lesson; if at least it had own assets, it could be salvaged. (Others) like Uchumi claim to have their own assets and, faced with problems, they can sell it off to use as collateral or get additional funding. That’s why you see their debt is not that big,” says Kahi.
At the moment Deacons is struggling to find buyers of its assets which include stocks, fittings and fixtures in the retail stores as well as some office equipment and motor vehicles. The value of the assets will, however, be very low.
Key rules to owning business assets
· Prioritise having good cash flow over acquiring assets
· The assets should be aiding revenue and not taking away from it
· Do not acquire liabilities (like loans) to build assets
Failure to promote own brand
Deacons operated using the franchising model and operated foreign labels such as Mr Price and Woolworths. It also had its own brands; 4U2 and Deacons Kids. They, however, hadn’t promoted their own brands, so when Mr Price South Africa bought back its Kenyan franchise in 2017 and then Woolworths pulled out from their umbrella, they recorded a significant loss in revenues.
If they had done a great job at promoting 4U2 and Deacons Kids, maybe things would have been different for Deacons.
Market and market your brand some more
That is how you make your brand visible. Never let marketing fall by the wayside. When people don’t know your business, they will not interact with it. This means no business.
Being an anchor tenant
An anchor tenant is a large business that attracts people into a mall. An anchor tenant obviously attracts more rent. Nakumatt in their expansion rush turned mostly to malls which proved expensive due to the high rents. This saw it get evicted due to failure to keep up with the rent.
Kahi says that “walk-in” stores for example in the Central Business District are a good business model for retailers.
They are able to attract a lot of clients that way, says Kahi.
Peter Kahi is a partner at PKF Consulting. He is in charge of Business Recovery and Forensic Services in East Africa [email protected]