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The demise of BHS and Austin Reed: Lessons to be learned for your exit

April 28, 2016

It is a shame, but no big surprise. Two of this country’s biggest retailers, look likely to disappear from the High Street as they move into the purgatory of administration. New management has now arrived in the form of the ‘Administrators’ and, as Company law prescribes, the focus for them will be creditor and other stakeholder protection as opposed to building value for shareholders. But what can we learn from these two failures in the context of selling your business?

Both businesses have a surprising amount in common. Most notably, three key weaknesses. Weaknesses that may inevitably lead to the demise of these British brands unless the Administrators can restructure the significant fixed cost bases of these businesses with their hands tied behind their back by the fraternity of credit insurers. Time will tell if this is possible. I remain doubtful.

What are the three fundamental weaknesses that entrepreneurs and other business owners need to address if they are ever going to be able to sell up? In no particular order:

1. Barriers to Entry

Neither of these businesses is protected by any significant ‘barrier to entry’ against their competition. I would argue that all businesses, no matter how big or small, can and should proactively create those barriers in a number of ways. Whether that be ‘first mover advantage’, a ‘brand’ that is synonymous with trust or known as the ‘go to’ place for a particular category of product, or a regulated environment that limits competition. Barriers to entry provide a great first line of defence in a competitive world and represent a key pillar on which to build capital value. Start thinking – what are yours….

2. Operational Gearing

Secondly, both of these businesses operate with a very high level of operational gearing. Put simply, a very high fixed cost base as a result of their lease portfolios and staffing bills. This is often a ‘poison pill’ for investors as it drives the business’ breakeven point (i.e. the revenue that a business needs to hit to return a profit) to unrealistically high levels. High operational gearing significantly increases the risk of investment for an incoming acquirer and, in itself, is often a reason why businesses fail to sell. Buyers look at (and test) the break-even point of businesses in due diligence – irrespective of your sector. When you come to your sale, it is important to present your business with a fixed cost base that is at a level that allows the business to continue profitably even in the face of a tough trading environment.

3. A defined proposition

Thirdly, it comes down to the customer proposition – or lack of one. I would argue that it is difficult to articulate the consumer propostiion for both Austin Reed and BHS. Ask yourself: Are you able to articulate who your ‘target’ customer is and why they trade with you rather than with your competition? What is it that makes you different from your competitors? Buyers of businesses like niche markets. Markets where the customer (whether it be businesses or consumers) are easy to define. It is often the reason that big premia are paid for businesses. So do ask yourself what your proposition is and whether it is suitably defined. The question is always asked by investors when you come to sell your business so why not be thinking about it now?

Entrepreneurs typically learn a lot from the mistakes of others. A hunger to learn – it is a great trait. The demise of these two giants of the retail world should not be ignored by the SME community. Yes it is a sad week for the British high street, but let’s see if the silver lining can be taken, learned from and used to our advantage.

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