Turnaround industry constraints
Long lead time before a turnaround is triggered
Boards and management tend to wait until a crisis has developed before triggering real turnaround action.
When banks intervene with workout action, the distressed company is, in terms of the Z-Score , normally already deep into the Failing Zone.
In such circumstances, the viability of a turnaround is seriously compromised.
New Business rescue legislation , with heavier penalties for directors, may address this problem to some extent.
Lack of turnaround finance
A turnaround invariably requires a cheque book (see funding the business).
There are no specialist turnaround private equity firm in SA.
While foreign and local DFI's (Developmental Funding Institutions) have been supportive of such a concept, especially in view of the job preservation aspect of it which is in alignment with their charters, they require a private sector lead investor.
Hitherto, in contrast to overseas practice, the SA private sector has been reluctant to support such a fund.
Those private equity firms that do finance turnarounds tend to focus on underperforming rather than distressed companies.
Even though private equity firms indicate their willingness to look at turnaround situations, the lead-time for their due diligences tends to be too long for a company requiring urgent refinancing.
On the positive side, there is movement in terms of bank and private financing company initiatives to establish distressed debt transactions and case-by case turnaround funding.
CRS Turnaround has identified a number of high net worth individuals and organisations that will invest in distressed companies on a case-by-case basis.
In addition, CRS Turnaround is planning to launch its own R300m turnaround private equity fund. For more information, see turnaround private equity.
Lack of turnaround funding is restricting the turnaround industry.
Antiquated insolvency legislation
This constraint should be overcome once new Business rescue legislation has been introduced.
Stringent labour legislation
In view of the high unemployment rate government understandably does not support retrenchment as a mechanism to reduce costs.
Hence the stringent labour legislation that applies by virtue of the Labour Relations Act (LRA).
Recent amendments to the Insolvency Act reiterate the government's commitment to saving jobs and the protection of employees when a company experiences financial difficulties.
For instance, if a distressed company is sold, all employees form part of the deal.
New Business rescue legislation is not expected to prompt a change in the LRA.
Attitude Of Sars (SA Revenue Services)
Sars' attitude of not allowing past and assessed losses is seen as a stumbling block preventing entrepreneurs and financiers stepping forward to participate in business rescue.
It is expected that this issue will be satisfactorily addressed since Sars has committed itself to the new Business rescue legislation .