What to do when you need to survive an IBR
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Many businesses find their relationship with their bank stretched at the moment and, as a result, the perception may be that the bank is not being supportive and in some cases is moving, or has moved, into recovery mode.
So if you are told by the bank that they wish to instruct a firm of reporting accountants to carry out an Independent Business Review (‘IBR’) a number of questions will probably come immediately to mind:
- What is the bank’s agenda?
- Is this the end of the relationship, or even our business?
- What input will we have into, and control of, the process?
- What are the likely outcomes? and
- What will it cost!
It is important to make no mistake about how serious an IBR is for the company; since with the wrong findings, an IBR can be the tipping point that crystallises a potential business failure.
However, a successful IBR can provide a real opportunity to help you to improve your business, set it on a firmer footing and rebuild the relationship with the bank.
So if faced with an IBR it is vital that you both understand and manage the process to obtain the best result.
And that is where this Galen Partners Business Guide can help you.
1 Avoiding an IBR in the first place
Many directors’ first reaction to such a request is to ask themselves why the bank needs this type of review to be carried out.
The answer usually lies in a series of failures to deliver information or performance on their own behalf which has led the bank to ask themselves what is actually going on.
The preventative steps a board can take can be split into two types:
- managing the relationship; and
- doing the simple things right.
From the bank’s perspective your account is one of a portfolio of relationships a corporate manager has. If the relationship is properly managed in an open and collaborative way there is every chance you will fly ‘under the radar’ and even minor blips will be easily dealt with and overcome.
A key part of managing your relationship with your bank involves keeping their confidence in you and your management of the business and its numbers.
So if your account is one that comes up on a regular basis on watch lists for overdue diary dates for the supply of agreed financial information such as management accounts or forecasts, or regular breaches of lending covenants, there is little doubt that you will soon become a cause for concern.
In these circumstances the bank may then seek a review both in order to ensure it understands the financial position, as well as to investigate the reasons for the problem.
However, given the number of businesses that the banks deal with and the volume of accounting information that they see across all business sectors, it is also important to remember that the banks have some quite sophisticated ‘credit scoring’ and benchmarking systems in place. These are intended to enable the bank to spot warning signs of potential business problems as early as possible, so that they can begin to manage their levels of risk before any problems become serious.
In some cases therefore the bank’s requirement for a review will be triggered by a concern about the business’s underlying trading performance. Often the bank will, through its systems, become sufficiently concerned to start to look hard at the account, well before the company’s directors realise that there is, or is perceived to be, a potential problem.
But remember that the bank is a business that is looking to earn profits from a relationship with its customers. So, from the bank’s perspective your business is valuable to them. The modern banking world is competitive and it requires a lot of time and energy to bring new accounts into a portfolio. It therefore follows that banks will be reluctant to lose a relationship and that they will do everything they can to keep things on track.
So directors can, by doing the simple things right, mitigate the risk of being forced into a potentially damaging and challenging process by:
- Maintaining a regular and professional dialogue with your bank;
- Providing management information on time as agreed with the bank and ensure it is accurate;
- If you promise to do something, do it, or communicate the reasons why you can’t;
- And if there is the possibility of a problem ahead discuss with the bank at the earliest opportunity.
2 How banks manage their relationship with you
All banks operate by giving staff the ability to deal with their customers up to a specified level of authority or ‘discretion’.
When the relationship between banker and customer is working well, then there is usually little interference in the relationship between the bank manager and the customer for any item within the manager’s discretion.
Where a customer has a requirement that goes beyond the manager’s level of authority then this will generally be referred upwards for decision by the relevant credit committee.
However, when the bank’s systems flag up a relationship as being a potential concern, for one or a combination of the reasons set out above, the first stage is for them to move responsibility for the management of the relationship either up a level to a more senior manager, or across to a new manager in a specialist intensive care or business support department.
This change in itself tends to creates issues as a new individual, with little knowledge of the business or individuals involved, takes over. They will initially form an opinion of the relationship based on what he or she sees on the bank’s files and once they have completed this initial appraisal the relationship manager will usually introduce them to the company’s directors.
It is at this point that the immediate future strategy is usually decided and is generally the first point at which the new manager considers whether they want to instruct an IBR.
There are a number of points of guidance for this initial meeting which are extremely important:
- Find out what the bank’s agenda is and what it sees as the reasons for this escalation in supervision. Establish if the bank’s concerns can be allayed at this stage as it is not unknown for the bank to have misunderstood the position!
- Listen to and ensure you understand what the bank is looking for and try to agree what is reasonable, what isn’t, and how it will be delivered.
- Don’t be afraid to assert your position and contribute to an agreed plan of action rather than just going with the flow.
- Understand what the additional costs are, what the timescale of the intensive care process is, and what the criteria are for a return to a mainstream banking arrangement.
- Ensure you communicate that you have a business plan to which you are working and look to see how this matches the bank’s requirements for the return to a mainstream relationship.
- If commitment to provide information or deliver performance is required by the bank ensure you both clearly understand every point and are confident they can be met. If not negotiate.
If as a result of this meeting, or any later development, the bank does require an IBR, it is important to appreciate what will be involved in managing the process and its seriousness for the business.
In all of the above, the better you can appreciate how your business is being assessed by the bank in terms of, for example, security calculations, as well as more generally in terms of the bank policies, processes and priorities, the better you will be able to manage the discussions and work with the bank to obtain the best result for both sides.
If this is not something you are familiar with, then you should strongly consider seeking some support with, either from your existing advisers, or from specialists in this field.
3 Before the review begins
The ultimate aims in dealing with an IBR have to be:
- for the review to be as smooth, efficient and collaborative as possible;
- to ensure that the day to day running of the business is not disturbed unnecessarily by the review; and
- to obtain the optimum result for the business in terms of both:
- ongoing bank support; as well as
- input into the business’s strategy and performance (after all if you are paying for a review then you need to ensure you obtain best value from it).
Preparation is the key, both to ensure you have everything ready for the reporting accountants, and that your management information is up to date, accurate and reliable; as well as to be in a position to present a credible plan for returning the business to ‘good book’.
Whilst there is a danger in over preparing which could use up time and resources unnecessarily, it is important that you ensure that not only is the information required available when the review work commences but that you have reviewed it, understand it and can explain it to the reporting accountant. It is very common for the directors to present reams of information but when questioned by the reporting accountant, are unable to explain it!
Most IBRs will be confirmed by an instruction letter issued in advance by the bank which the director(s) will be asked to sign. It is important that you satisfy yourself that the letter confirms what has been agreed in terms of scope, responsibility and timescale.
The letter will also usually contain a list of information to be provided and confirm both the fee agreement and the mechanism for payment. It goes without saying that this letter should not be signed unless agreed. Don’t hesitate to question any areas that are either unclear or at variance with your understanding of what has been agreed.
As stated above the engagement letter usually includes a list of information required by the reporting accountant. It is important to ensure this information is provided on time and in the right format. Misunderstandings at this stage can often lead to problems later on in the review process so are best avoided.
Ensure there is clarity of communication between the bank, reporting accountants and yourself. Many IBRs have been seriously inhibited because the three parties did not either agree or stick to reporting lines. Establish a regular line of communication with the reporting accountant but leave them to get on with their work. At the same time ensure the bank is able to speak to you when they need before, during, and after the process.
Do not forget to manage the message with staff. IBRs usually take place at a time of uncertainty for the business and staff will naturally be nervous even before the men in suits arrive. Failure to communicate internally will without exception exacerbate the difficulties the business is facing.
It is therefore important that the management group agree the message to staff and deliver it before the review commences and maintain the internal communication as the process continues. Whilst there will inevitably be confidential and sensitive discussions which cannot be shared, this process, properly managed, will pull staff together and focus them on the objectives necessary to take the business forward.
And finally, keep notes of meetings as this will be invaluable during the process where inevitable disagreements arise.
4 The IBR Process
It is important that all parties are clear on the scope of the review as set out in the initial engagement letter and that this is referred to regularly during the process.
The engagement letter and the associated discussions should have established the specific areas of responsibility. It is fundamental that during the course of the field work the right balance is struck between being available to the reporting accountants as they require and not interfering.
A brief discussion at the start of each day to establish an outline plan is in our experience simple and effective. Remember that there is still a business to run during the course of the review.
The timescale should have been agreed in advance but will inevitably flex as the process runs its course. Whilst it should not detract from the outcome of the review a failure on behalf of the management team to provide information on time will create a poor impression of management’s efficiency in the minds of the reporting accountant.
It is normal for the cost of the review to be fixed in advance but the engagement will usually however allow flexibility if additional work is needed. IBRs are not cheap and it is a fundamental contradiction that at a time when cash is tight, the business if faced with a significant additional cost. We would therefore advise that great care is taken in ensuring costs are managed very carefully.
Once the field work is completed the reporting accountants should sit down with the management team to give an overview of the report’s findings and set out the next steps. If the reporting accountants are reluctant to communicate at this stage seek clarification of their agenda and timescale.
It is common practice for the reporting accountants to produce a draft report for discussion with the company’s management team prior to finalisation.
This provides a good opportunity to iron out any factual inaccuracies, identify any areas of disagreement and give management a flavour of the report. From the reporting accountant’s perspective they will be keen to get consensus and buy in to the report and should seek to be co-operative at this stage.
However not all of the report may be made available for review. Key sections, such as the bank’s estimated security cover, and the reporting accountant’s recommendations to the bank, are often kept confidential.
In practice experienced advisers in this field can usually create an estimate of what these sections are likely to say based on the draft report which can obviously assist the business in any negotiations which may then follow.
5 The immediate post review phase
The best advice in the immediate post review period is: Don’t Panic.
As discussed, it is usual for the reporting accountants to provide a first draft soon after the completion of the field work. There will however then be a period between this and the production of the final report which usually results in a meeting with the bank and the reporting accountants to discuss the findings.
This period can be a time of great anxiety and uncertainty for the management team; however it does give time to consider, based in the review copy of the report that you have seen, what your strategy for any discussion with the bank should be.
Having a structure to this post review thought process will help prepare for action when the report is issued and key points to consider are:
- What issues were discussed in the completion meeting? Do you agree with them and if you do, how can you begin to deal with them immediately? Being able to demonstrate action has already been taken by the time the follow up meeting with the bank takes place is often a big positive step.
- Plan what you propose to do in the short to medium term. The structure of a 30-60-90 day plan is always a good start. There will be no expectation that all the issues can be fixed in a few days but a recognition that the issues are being addressed and a structured plan is in place will again creative a positive impression.
- Analyse who are the recipients, what their respective agendas are and how do you need to deal with them when they receive the report.
- Be patient. Do not worry if you don’t hear anything from the bank or reporting accountants in the period between the completion of the fieldwork and the scheduled date for issue of the report. But do be proactive in chasing the report if it is not issued on time.
6 The report
IBR reports can come in many different varieties and styles.
Much time and money has been spent agreeing standards between the banks and the reporting accountants.
There will inevitably be a lot of analysis, some jargon and as a result of the wide ranging nature of the banks’ general instruction letters, some sections which may be irrelevant to your business or situation; so a disciplined approach will be required to analyse this report.
A view from an independent professional with experience of this work at this stage will often be invaluable.
Whatever you are presented with, the key areas you should ensure you focus on when reading it are:
- Check and challenge the report. Are the numbers correct? Does the report fairly reflect what was discussed at the exit meeting? If not act to clarify immediately.
- Concentrate on the substance which will be the recommendations as to business strategy and performance issues; and don’t be distracted by the extraneous detail. What are the key conclusions and points of the report in so far as they are disclosed to you? What strategies or business improvements are being recommended? Do you agree with them? Form your own view of these recommendations and if you disagree with them, prepare your arguments and supporting information with which to counter them.
- Form your own opinion of the report and discuss with the reporting accountant as necessary.
- Ensure you understand the bank’s likely position in response to the report including consideration of their likely estimated security position. Obtain specialist advice if required to help you assess this and prepare your position.
- Integrate and refine the plans that you have put in place since the review was completed, ready for the bank meeting.
- Prepare for the follow up meeting with the bank ensuring the report that will be used as the basis for discussion is an agreed final version.
- Set your own agenda for the meeting and what you want to achieve from it. It is important to take control of the process at this stage so establish key performance indicators (‘KPIs’) and benchmarks for discussion and agreement at the review meeting.
Remember it is important to the bank and the reporting accountant that they have added value by preparing this report. They will need to receive this vindication from the client company at this stage. Use this to help you to get what you want out of the report process.
7 Agreeing a strategy
We have already discussed the importance of being proactive in planning the work required following the review.
Whilst the bank and the reporting accountants will have considerable input in helping you to shape the business’s strategy, neither party are directors of the company and will not have the responsibility to deliver implementation.
It is easy to say from the outside ‘this need to be done by then’ but it is a completely different thing to implement it. There therefore has to be some negotiation when considering the review and arriving at a practical final strategy.
At this point it is useful to remind yourself of the bank’s agenda. The bank will want to see their customers flourish and grow and will, in the majority of cases, want the review process to be a jumping off point for recovery and growth. They will want to see a strategy that is positive for the business and is realistic, measurable and achievable.
It is also vital to have the buy-in of key stakeholders to the strategy and care should be taken not to commit on behalf of third parties until you are happy that what is required can be achieved.
When finalising the strategy care should be taken that the bank agrees the reporting timescale and content for the short to medium term and that this can be met.
And finally, don’t forget to communicate the strategy agreed to employees and shareholders as applicable to achieve their support and buy-in.
8 Implementation of the strategy
Many, many business reviews have concluded with a real determination on the part of the directors and management to turn things around and use the review as a basis for real change and improvement. But then the immediate enthusiasm fades as the pressure form the bank is perceived to have eased and the reality of implementation and the hard work hits home.
This then comes to a crunch when the directors receive the call / email from the bank wanting to follow up on the report and assess progress.
In order to achieve effective implementation and real recovery and growth additional resources are often required. This can range from an independent professional being a critical friend monitoring progress and providing guidance and advice, through to ‘hands on’ support in delivering the change, or assistance with finding new or alternative sources of finance.
The cost of this type of support will often be an issue for the business, and indeed is one which, together with issues of independence, often precludes the reporting accountant who will usually be part of a top 10 accountancy practice (as these provide the ‘panel firms’) from fulfilling this role.
But this type of support can deliver real business value in both demonstrating to the bank management’s desire to implement the necessary changes, which is important for maintaining and growing the bank’s confidence in the business, but also for actually implementing the changes.
We would advise all directors to consider talking to Galen Partners at this stage, if you have not already done so earlier, as we are able to provide this support and have significant experience of delivering in such situations.
The company undertook specialist construction contracts in a number of different sectors under a number of different business names, whilst it also had substantial interests in a number of property development situations.
The company’s FD had resigned, its management accounts were three months behind, the MD had no idea whether its construction contracts were making money or not, the bank account was hard up at its overdraft limit, there were substantial disputes arising over the property development situations, and to cap it all the company was facing an employment tribunal claim from a dismissed employee.
Unsurprisingly the bank commissioned an IBR to help it to understand where the company stood, what its prospects were, and whether the bank should continue to support it or not.
In order to produce information to enable the IBR to be conducted the business brought in, with the bank’s help, experienced advisors to work within the company who were able to:
- Rapidly bring the accounts up to date;
- Get cash under control;
- Investigate each contract to establish its profitability or otherwise for corrective action;
- Use this information to produce meaningful business forecasts; and
- Enable the reviewer to complete their review.
As a result of this work and joint discussions between the company, the bank, the reviewer and the supporting advisers, the company was able to:
- Regain control of its contracts and operations and was able to manage their profitability going forwards.
- Devise a strategy to divide the business up into separate trading and asset holding entities, so that each part of the business, and its relevant risks and assets, could be properly managed.
- Obtain the support of its bank to this strategy.
- Recruit in a new permanent FD to both help implement the changes required and to properly manage the finances.
The group is now highly profitable and successful with substantial cash reserves.
14 Key points summary
- An IBR is a serious event and the wrong result can have serious consequences. So if faced with an IBR it is vital that you both understand and manage the process to obtain the best result.
- An IBR can often be avoided by in the first place by doing the simple things right in terms of reporting and managing the banking relationship.
- Often however the bank will through its systems become sufficiently concerned to start to look hard at the account well before the company’s directors realise that there is, or is perceived to be, a potential problem.
- When an IBR is proposed, don’t be afraid to assert your position and contribute to an agreed plan of action rather than just going with the flow.
- Preparation is the key to making an IBR run smoothly so ensure you have everything ready for the reporting accountants.
- Keep notes of meetings as this will be invaluable at some point in the process where inevitable disagreements arise.
- Ensure everyone is clear about the scope of the review as set out in the initial engagement letter and that this is referred to regularly during the process.
- The best advice in the immediate post review period is: Don’t Panic.
- Plan what you propose to do in the short to medium term and the structure of a 30-60-90 day plan is always a good start.
- Check and challenge the report but concentrate on the substance.
- Form your own opinion. Ensure you understand the bank’s likely position in response to the report including consideration of their likely estimated security position. Obtain specialist advice if required to help you assess this and prepare your position
- Understand the importance of being proactive in planning the work required following the review, as directors of the company it will be your responsibility to deliver the implementation of whatever plan is agreed.
- Ensure you obtain the buy-in of all key stakeholders to the plan agreed.
- To achieve effective implementation and real recovery and growth additional resources can often be required which deliver real business value.
At Galen Partners we have considerable experience of assisting businesses that are, or are likely to become, subject to an IBR. We can ensure that this process is managed and controlled to minimise cost and disruption to the business and maximise the benefit to you.
Banks have become increasingly receptive to customers carrying out their own IBR and sharing the results, seeing this as a much more collaborative way or working towards resolving problems rather than the more confrontational approach of the past.
Galen Partners are able to carry out the full range of reviews appropriate to businesses of different sizes in different sectors with a wide range of situations through our team with extensive experience of such assignments.
Contact us today for IBR support.