Archive for April, 2012
Basel III is a series of reform measures, developed by the Basel Committee on Banking Supervision, which are designed to strengthen the regulation, supervision and risk management of the banking system. They have been devised in response to the financial crisis and aim to strengthen the banks ability to respond to economic stress and regulate their risk management procedures.
What does all this mean for the SME?
One definite consequence is that the days of an endless credit supply are even further away than ever.
Basel III sealed a deal in September 2010 to triple the size of the capital reserves that banks are required to hold against losses. It sets out a new key capital ratio of 4.5% – more than double the 2% level in 2010 – plus a new buffer of a further 2.5%. Banks whose capital fall below the buffer zone will face restrictions on paying dividends and bonuses, so the rule sets an effective floor of 7%.
The new rules will be phased in from January 2013 to January 2019. These tougher capital standards are considered critical for preventing another financial crisis but this has curtailed lending, economic growth and is costing jobs.
For the banks, these rules will mean reshuffling their client bases and change products to reduce the amount of risk they take on. Less risk means fewer loans and higher costs associated with those loans.
For business owners, it will lead to transformed banking relationships and different types of funding.
The current economic climate has created more opportunities to buy distressed businesses. The risks are obviously high with such a venture and entrepreneurs will need to do their home work but there are ample rewards for the bold.
Why buy a distressed business? A business in distress or at high risk of failure is obviously less valuable than a healthy business however the fact it is a bargain alone should never be the motivating force towards the purchase of a business in trouble.
Buying a distressed business can offer a quick method of growth and opportunities to return to profit as well as prevent a competitor from seizing the opportunity and a chance for capital growth through purchase, turnaround and controlled sale. It also offers the opportunity of controlled disposal of parts of the business at a premium and is cheaper than buying a successful business. However, buying a distressed business requires a high level of commitment and preparation is crucial.
An entrepreneur needs to ask themselves why they want to do it and what businesses they are interested in buying. Focusing on a particularly industry will ensure they are taken more seriously. They also need to understand why the business failed, what are the costs of making it viable, whether there is room in the market for the business and whether key stakeholders are likely to support the purchase.
The buyer of a distressed business needs to have funding immediately available. The discounted price is there for those who can act quickly and many offers fail because the buyer cannot show proof of funding. Upfront payments secure better deals than staggered payment.
Buyers need to ask themselves who is going to run the business? Consider bringing in a specialist who has a track record of turning businesses around.
Seek the help of a professional
Seeking the services of an advisor can be an important move. Buying a distressed business is different to a normal purchase and using lawyers and accountants who are familiar with the process and can deal with the liquidators will protect your position.
There are various types of sales from asset only to a going concern or a pre-pack (a deal for the sale of an insolvent company’s business and assets which is agreed in principle before the company goes into a formal insolvency process).
How do you find distressed business sales? Seek out business for sale adverts – the London Gazette lists insolvencies. If you are a supplier, look out for change of trading patterns and listen out for opportunities by keeping your ear to the ground.