Property of Pitcher Partners :: January 2014 by Pitcher Partners

JANUARY 2014

PROPERTY OF PITCHER PARTNERS

ÂŠ Pitcher Partners 2014

Inside Cover: Brisbane, CBD

Above: Melbourne, CBD

CONTENTS 5 WELCOME 6 COMMERCIAL SNAPSHOT 8 RESIDENTIAL SNAPSHOT 10 COMMERCIAL RESIDENTIAL PREMISES – A CHANGE IN ATO VIEW 13 WHAT KEEPS SME BUSINESS OWNERS AWAKE AT NIGHT 14 Taking Australian development expertise into AsiA 15 Snooze and you lose – entrepreneurs learning to save themselves

PROPERTY OF PITCHER PARTNERS / JANUARY 2014

WELCOME By Andrew Beitz, Pitcher Partners, Adelaide At Pitcher Partners we have a passion for the property industry. We are attuned to the needs of all players in this complex and exciting sector – owners, developers, investors, builders, valuers, agents and debt/equity participants. We have a well-established and proven track record in contributing to our clients’ success based on our extensive knowledge and our intimate approach to servicing our clients. This issue of Property of Pitcher Partners includes the first of our residential and commercial snapshots where Matt Whitby of Knight Frank gives us in-depth analysis and trends of both these sectors. These snapshots will feature in each issue giving you a great reference document to turn to every six months. We take a look at the Australian Taxation Office’s change in view issuing three new public rulings on the GST treatment of residential premises, commercial residential premises and long-term accommodation in residential premises and the effect this will have. We review the results of a recent survey conducted by Pitcher Partners of over 300 property and construction clients finding that governance is among the top issues keeping business owners awake at night, along with access to finance, raising capital, cashflow and tax and regulatory compliance matters. Journalist Nigel Hopkins talks to Executive Chairman of Pomeroy Pacific, Dug Pomeroy about the potential to take Australian development expertise into Asia and the challenges and benefits in doing so. Finally corporate turnaround in Australia was once the domain of publicly listed companies, driven by groups of debt and equity holders. We have seen small to medium-sized enterprises become more sophisticated in their approach to business decline and have four key tips to help with a successful turnaround. We welcome your feedback – if you have any suggestions on articles you would like us to cover in future editions please send them through to anna.kelly@pitcher-sa.com.au

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Diagram 1 â&#x20AC;&#x201C; Commercial property value cycle

High Activity & Price

NSW

VIC

Increase in Activity & Price

QLD

Decline in Activity & Price

Low Activity & Low Price

NSW 6

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Commercial Snapshot By Matt Whitby, Head of Australian Research, Knight Frank All major CBD office markets in Australia recorded negative absorption and declining effective rents over 2013, driven amongst other things by the Chinese slowdown, a general lack of business confidence and the dampening impact the drawn out Federal election campaign had on tenant decision making. Tenant demand remains soft and vacancy rates have been rising, however with the supply pipeline in most markets benign over the next two years, there will only be modest upward pressure on vacancy rates in 2014. If tenant demand conditions are to materially improve, we need to see a sustained pick up in fulltime jobs, which will be driven by persistent strength in business confidence and an upswing in business credit. Post the Federal election and with the stimulus of historically low interest rates washing through the economy, there are tentative signs that this is beginning to occur. Contrary to conditions being experienced in the leasing market, the depth of interest and competition amongst buyer types is strong, highlighted by 2013 office, retail and industrial transactions significantly exceeding the 2012 calendar year totals, although partly boosted by several portfolio sales. Competitive pricing tension emerged in 2013 as domestic investors have become more active as the lower cost of debt has assisted in making acquisitions accretive. In the office sector, Melbourne, Sydney and Brisbane CBD’s all recorded over $2 billion of sales in 2013, with Melbourne CBD the most invested city in 2013, however, Perth also recorded a standout year in a historical context. Domestic institutions accounted for 63% of deals, up from 56% in 2012 and against the 5 year average of 50%. Despite offshore investors being increasingly outbid for prime, passive CBD assets, they continue to remain active participants, making up 32% of sales by value, however they have shown a greater risk tolerance to non-CBD prime assets and thus have been more successful in outbidding local investors in that sphere.

Prime office yields have now firmed by between 50-75 basis points over the course of the tightening cycle that tentatively commenced around three years ago. When compared with the key global gateway city prime office yields, which have firmed by 200-250 basis points over the same period, it highlights that relative yield spreads remain favourable in a global context. Looking forward into 2014, it is anticipated that were an “upper prime” asset sold in the current market, a further re-rating or tightening would be experienced, particularly assets with stable income streams. Assets with income or expiry risks are being judged more harshly, given some below the line adjustments for factors such as rental reversion, incentives and any applicable vacancies. The outlook for property investment is more positive than twelve months ago, notwithstanding the weak underlying fundamentals. Indeed, if anything, demand for prime office, industrial and retail property in the major capital cities is likely to strengthen over the coming year. Yield compression is already being seen in those parts of the market which have, to date, attracted more limited investor interest, such as non-core or suburban markets and more “value add” opportunities. With any further compression in yields needing to come from improved fundamentals, the steadily improving economic backdrop and financial markets should stimulate occupier activity and rental growth should begin to emerge more widely from 2014. As the underlying fundamentals improve and interest rates begin to rise again, the window of opportunity for investors to acquire high yielding, non-core commercial properties is beginning to close. The next six months will be the time to secure the right asset, locking in the historically low debt costs before the turning point, rather than wait for the market to become crowded with bidders once the broader recovery in prices is underway.

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QLD

Diagram 2 â&#x20AC;&#x201C; Residential property value cycle

High Activity & Price

NSW

Increase in Activity & Price

Decline in Activity & Price

VIC

SA WA QLD Low Activity & Low Price

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Residential SNAPSHOT By Matt Whitby, Head of Australian Research, Knight Frank Over the past six to nine months the residential market has experienced strong sales price growth and increased transactional volumes for both off-the-plan, existing product and development sites. This growth has been most notable in Sydney, Melbourne and Perth with dwelling prices up 12.5%, 6.6% and 8.9% respectively over the past 12 months. Sydney has been the star performer in 2013 and interestingly, established house prices have outperformed units clearly (13.3% vs 9.2% year to November 2013), while Melbourne has remained very resilient as demand for both development sites and dwellings has pushed home prices higher in the 2013 calendar year to date, after a modest softening in late 2012. The improved performance has been predominately driven by the historically low interest rates as investors have been the main buyer type, however a general undersupply of dwellings, strong interest from off-shore developers and investors and volatility in share markets have contributed to the recent rally in prices. The segments of the market that have experienced the most pronounced growth and strongest demand over the past year have been inner city apartments (15 km radius) in close proximity to a major transport hub/ railway station and well serviced by retail and commercial facilities with employment and education hubs nearby.

Well located apartment projects which meet buyer demand in terms of size, product mix and finish and are appropriately priced are selling well. While we expect this to continue over the medium term, a broader price recovery across the established housing markets and outside of the inner city hubs is also taking hold.

Residential development After several years of funding challenges for developers, during and post GFC, activity within the residential development sector is trending upwards with a number of significant sales indicating the depth of the current market and creating higher benchmark prices. In 2013, a significant resurgence in demand for residential development sites has occurred, largely underpinned by growth in residential prices, particularly inner-city apartment values. Due to this demand, the economic “highest and best use” of development sites are increasingly being slanted towards residential rather than commercial, particularly within and adjacent to the main CBD markets. Other obvious drivers have been the lower interest rate environment, significant undersupply of housing and an increased willingness of banks to lend and recycle debt capital.

Appropriately priced, well located sites with development approvals (DA’s) and close to transport hubs are in high demand and subsequently are selling quickly and have achieved strong price growth when compared to only six months ago. Conversely, outliers which don’t fit these criteria have had protracted selling periods and inconsistent price results. Developers remain discerning in their choice of sites and those with DA’s in place, hence mitigating planning risk, are the most highly sought after as banks are continuing to enforce relatively strict lending criteria such as 50%+ presale levels and 100%+ debt cover ratios prior to lending. Chinese property investors have been very active in global residential (and commercial markets), spurred on by a stronger Renminbi and a desire to gain exposure to safe haven cities, with the likes of Melbourne and Sydney high on their list of preferred markets. This demand is now broadening to include not only Asian buyers (Chinese and Malaysian predominately), but domestic listed and experienced local private developers. We also anticipate Brisbane to begin to attract increasing investment from offshore players as the future supply pipeline in Sydney and Melbourne is building and Brisbane prices become relatively more attractive.

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COMMERCIAL RESIDENTIAL PREMISES – A CHANGE IN ATO VIEW By Craig Whatman and Ann Sewell, Pitcher Partners, Melbourne The Australian Taxation Office (“ATO”) has issued 3 new public rulings which set out its view on the GST treatment of residential premises (GSTR 2012/5), commercial residential premises (GSTR 2012/6) and longterm accommodation in residential premises (GSTR 2012/7). This article focuses on GSTR 2012/6, which discusses the important distinction between residential premises and commercial residential premises. This ruling is likely to have the biggest impact on serviced apartment operators and suppliers of employee accommodation.

Background GSTR 2012/6 provides a detailed analysis of the definition of ‘commercial residential premises’ in the GST Act for the purposes of determining whether there is an input taxed supply of accommodation in residential premises or a taxable supply of accommodation in commercial residential premises. In particular, the ruling considers whether different types of premises are ‘similar to a hotel, motel, inn, hostel or boarding house’, which is the test to determine whether they are commercial residential premises for GST purposes. The ATO states in the ruling that premises should be classified by their physical characteristics, considered with other objective factors such as how the premises are operated, zoning and planning permissions. As a consequence, the ATO accepts that premises may still fall within the definition of commercial residential premises even if they are not operating at the time of supply. In line with the previous ruling, the ATO still lists the eight characteristics which are commonly found in commercial residential premises. However, following the Federal Court decision in ECC Southbank Pty Ltd as trustee

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for Nest Southbank Unit Trust v Commissioner of Taxation [2012] FCA 795, the ATO no longer focuses on occupants having the status as guests as a key factor which (in addition to at least some of the other seven factors) must be present before premises can fall within the definition of commercial residential premises. Furthermore, the ATO does not consider that the services provided by an operator have to be akin to the level of services provided by a hotel or motel in order for the premises to be similar to a hotel, motel, inn, hostel or boarding house. Rather, whether premises are, or are similar to, a hotel, motel, inn, hostel or boarding house raises questions of fact involving matters of impression and degree. The ATO also lists an additional nine negative factors which, if present, point to premises not being commercial residential premises. These factors focus on the accommodation being supplied under terms that are more akin to a residential lease. The ATO considers that while the absence of any of the factors does not mean that the premises are not commercial residential premises, their absence does support the conclusion that the premises are better characterised as commercial residential premises.

Development of the ATO’s view Over the course of the public rulings issued by the ATO, the ATO has consistently focused on a list of eight characteristics which are commonly found in hotels, motels, inns, hostels and boarding houses (and premises similar). However, the ATO’s focus on which of these factors is integral to the determination of premises as commercial residential premises has changed in the new ruling. The following table summarises the development of the ATO’s view between the date the original public ruling was issued in 2000 and the date of the new public ruling.

Practical Issues for Serviced Apartment Operators

GSTR 2000/20

GSTR 2012/6

Objective test which considers the physical characteristics of the property and how it is operated.

Objective test and 8 factors remain consistent.

ATO lists 8 characteristics which are commonly found in premises which are, or are similar to, a hotel, motel, inn, hostel or boarding house.

However, an additional 9 negative factors introduced which point to premises not being commercial residential premises.

ATO considers it would be common (but not necessary) for all 8 characteristics to be present. Matter of examining the extent and manner to which the characteristics are exhibited and the overall character of the premises to determine whether the premises are within the class of a hotel, motel etc.

ATO still considers the 8 factors to determine whether premises are, or similar to, a hotel, motel etc.

ATO focuses on multiple occupancy and occupants having the status of guests as key determining factors

Following the decision in ECC Southbank, the ATO no longer considers that occupants having the status of guests is a determining factor.

ATO focuses on services needing to be akin to those found in a hotel, motel etc. (e.g. on-site restaurant, room service etc.).

Level of services required no longer needs to be akin to those found in a hotel, motel etc. It is sufficient if some services are provided (e.g. breakfast basket, on-site gym).

Owners who supply their unit or apartment through an agent to a guest will always be making a supply of input taxed residential premises.

Remains consistent.

However, no one factor is determinative and the assessment involves matters of impression and degree, depending on the facts and circumstances of a particular case.

To be taxable, the supply must be made by the operator of the commercial residential premises in its own right.

Strata and other separately titled residential premises retain their character as residential premises when individually leased or sold and are input taxed, regardless of whether they are located within the precincts of commercial residential premises. However, if the premises are leased or sold with sufficient commercial infrastructure, then the supply will be a taxable supply of commercial residential premises.

The ATO focuses on different outcomes depending on whether there is a single or multiple lease arrangement.

Depending on the manner in which the arrangements are structured, under the ATO’s view in the new ruling the provision of accommodation in serviced apartments is now much more likely to be treated as a taxable supply of accommodation in commercial residential premises. This represents a significant change from the view in the previous ruling that applied to serviced apartments, GSTR 2000/20. The supply of accommodation in serviced apartments is generally a profitable enterprise when it is operated with sufficient scale. Accordingly, the ATO’s revised position that the supply of accommodation in serviced apartments is more likely to be characterised as a taxable supply for GST purposes can have a significant impact on the operators’ net GST position. While the upside for any operators building new serviced apartment complexes is the ability to claim input tax credits in relation to their construction costs, for operators that have already built and are now operating their serviced apartments, the downside is that they must now pay 1/11th of their accommodation revenue as GST to the ATO. However, there may still be an opportunity to restructure the manner in which the accommodation is being provided in order to achieve a different GST result, given the ATO’s focus in the ruling on the supply of the apartments and commercial infrastructure through single versus multiple leases and supplies of the apartments through an agent.

Example 14: Multiple leases – if apartments are supplied to the operator under individual leases, separate to the commercial infrastructure, the supply of the apartments will be input taxed. The supply of the commercial infrastructure will be taxable. Example 16: Single lease – In contrast, if the apartments and commercial infrastructure are supplied under one lease, it is a taxable supply.

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Single versus multiple leases The ATO considers that separately titled apartments can be combined with sufficient commercial infrastructure so that, as a whole, the premises can be operated similarly to a hotel, motel, inn, hostel or boarding house. On that basis, the ATO considers that the single supply by way of lease or sale of premises without sufficient commercial infrastructure will not be the supply of commercial residential premises. However, if the multiple premises are supplied to an operator together with the commercial infrastructure under the one lease, regardless of whether they are separately titled, this will be a supply of commercial residential premises. In coming to that view, the ATO adopts the reasoning of the Full Federal Court in South Steyne Hotel Pty Ltd v Commissioner of Taxation [2009] FCAFC 135 and considers that a supply by sale or lease of part of a building cannot be characterised by reference to another supply.

Diagram 3a below illustrates that while the supply of accommodation by an operator to a guest will always be a taxable supply where the operator leases a number of apartments and combines them with commercial infrastructure in order to provide the accommodation, because the apartments are supplied by the owners to the operator under separate leases, each supply from an owner to the operator will be an input taxed supply.

Supply through an agent In addition, a supply of accommodation in an apartment by an owner through an agent will always retain its character as an input taxed supply of residential premises. To be a taxable supply of accommodation in commercial residential premises, the supply must be made to by the entity that owns or controls the premises. This is illustrated below in Diagram 3b.

Suppliers of Employee Accommodation The ATO has also shifted its view in respect to employee accommodation. The ATO’s previous view was that, generally, accommodation provided by an employer in premises controlled by them or their associate was usually an input taxed supply of residential premises. In the new ruling the ATO considers that the supply of employee accommodation may be either an input taxed supply of residential premises or a taxable supply of commercial residential premises, depending on the circumstances. Given the change in view, the ATO has included transitional rules to address those circumstances where taxpayers may be disadvantaged as a consequence of having entered into contracts on the basis that the supplies would be input taxed.

Diagram 3a – Single versus multiple leases Taxable supply of new residential premises

Developer

Taxable supply of new residential premises

Input taxed supply of residential premises

Owner

Developer Owner The owner won’t be entitled to ITCs on the acquistion as it relates to the input taxed supply of a residential premises to the operator by way of lease The owner won’t be entitled to ITCs on the acquistion as it relates to the input taxed supply of a residential premises to the operator by way of lease

Input taxed supply of residential premises

Taxable supply of accommodation commercial residential premises

Operator

Taxable supply of accommodation commercial residential premises

Guest

The operator also leases the commercial infrastructure and then lets out the apartment to guests

Diagram 3b – Supply through an agent

Taxable supply of agency services by the Agent to the Owner. Owner is not entitled to input tax credits as the acquisition relates to the Owner’s input taxed supply of residential premises to the Guest Taxable supply of agency services by the Agent to the Owner. Owner is not entitled to input tax credits as the acquisition relates to the Owner’s input taxed supply of residential premises to the Guest

Developer

Taxable supply

Owner

Agent

Guest

Owner

Agent

Guest

Taxable supply

Owner not entitled to input tax credits on the acquisition. Supply of the accommodation by the Owner, through the Agent to the Guest, is an input taxed supply of residential premises Owner not entitled to input tax credits on the acquisition. Supply of the accommodation by the Owner, through the Agent to the Guest, is an input taxed supply of residential premises

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WHAT KEEPS SME BUSINESS OWNERS AWAKE AT NIGHT By Nick Bull, Pitcher Partners Melbourne

Adam Smith observed this as far back as 1776

“being the managers of [shareholder’s] A recent survey conducted by Pitcher Partners money rather than their own…it cannot be of over 300 property and construction clients expected that [management] should watch found that governance is among the top issues over it with the same anxious vigilance’. keeping those owning their own business awake at night, along with access to finance, As an assurance partner, it is incumbent raising capital, cashflow and tax and regulatory upon us to ensure, as close as possible, the compliance matters. functional alignment between the interests of business owners and the activity of As the fast-paced evolution of businesses management. Owners need to know they can continues, and owners are faced with their rely on their managers to provide them with burgeoning business, tighter access to accurate and reliable information on which to finance, more stringent regulations and base their decisions and that the managers are new IT risks introduced every day, there is an truly in control of the business. They want to increased focus on governance, a growing demand for risk management strategies and a be left to work ON the business, and not IN the business. strengthened reliance on assurance programs to deliver value and growth. Academic research confirms that organisations that undertake assurance programs … “significantly outperform their counterparts over the long-term, both in terms of stock market as well as accounting performance”

By partnering with an independent, experienced and trusted assurance partner, owners will know the decisions they make will be based on the most up-to-the-minute and rigorous information available.

For the middle market, especially family businesses and private companies, growth HBS Working Paper July 2013 by Robert G. is often exponential and while there may be Eccles, Ioannis Ioannou, George Serafeim good people in place, practices and procedures are more fulfilled out of necessity rather than Assurance is all about building sustainability within the business and for the middle market, good planning. This can leave the business that means best practice that is ‘fit for purpose’ susceptible to things like fraud, misleading reporting or manipulation of results and and delivers ‘better practice’. And, the best eventually result in losses to the company, or approach to take is a ‘practical’ one where you loss of value in the company. answer the “how do you know…?” questions before they become problematic. For any business that has growth aspirations, Truly effective governance requires owners, managers and their assurance advisors to work together and ensure the business is stable and on a level footing. Inherently conflicted interests have always created an underlying tension within corporations.

it is critical the right ‘better practice’ processes and procedures are put in place, overseen by people with the right skill sets.

Take for instance a CFO that has been in the role for 15 years or so. He, or she, is a trusted employee who has a thorough understanding of the processes and controls in place. The business is growing rapidly and the owners can’t “be everywhere”. The CFO comes under some personal financial pressure, and so begins a long history of abuse and misappropriation using corporate credit card fraud. Or, it may be where people without the right skills and experience are placed in a position of financial control and, perhaps inadvertently, report incorrect results and findings. Or, it may be within an expanding company comprising separate business units that report to a centralised head office, with each under significant duress to perform that leads the management of one unit into fraudulent activity to boost profit and protect their share of the bonus pool. Often these situations are not isolated to just one or two clients – and the only reason they are detected in the first place is because some type of crisis has occurred. Unfortunately many of these war stories are only detected once reaching crisis stage. But this is where assurance and ‘better practice’ really pays off – where the value is created – the solution costs less than the downside risk. Combined with governance and risk management, assurance will provide companies with: Better Practice Better Decision Making Better Performance

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Taking Australian development expertise into Asia By Nigel Hopkins, Journalist When Pomeroy Pacific Executive Chairman Dug Pomeroy gave a presentation at a property seminar in Kuala Lumpur last year (2013) it was primarily aimed at attracting offshore developers keen to invest in Australia. There was a good reason for this. As Melbourne-based Pitcher Partners Director Andrew Clugston put it: “The Australian property market is fraught with danger for the uninitiated and costly errors are all too common for offshore developers.” It was a similar message to the one already promoted in China by Pitcher Partners and its affiliate firm Baker Tilly, in association with Knight Frank: “Matching offshore developers keen to invest in Australia with the local knowledge of Australian developers and consultants is a logical solution for both parties.” But for project and development managers such as Pomeroy Pacific, this is increasingly being seen as a potential doorway to Australian development consultants winning work in countries to the north of Australia. “There are certainly major cultural differences between the Westminster way of doing business and Asian protocols and expectations,” Mr Pomeroy said. “That’s why it’s important to have good legal and accounting representation to understand the structures and laws you have to work with.” From Pomeroy Pacific’s point of view, an opportunity exists in providing property management services that are not readily available in those countries by way of project management offices and expertise. “We’ve already been asked to do a shopping centre development in Malaysia,” says Mr Pomeroy, “and we are involved in a development project in Mongolia.” He said many development companies within Asia undertake development within their own company, using their own expertise which, while it may appear reasonably broad, really isn’t: “It’s often very limited to the specific field in which that company works,” he says.

“A company such as ours has a broad understanding of all the various disciplines that exist within any development, whether it be marketing, structural, civil, architectural, interior design. We bring to the table a vast amount of knowledge and experience in these areas that Asian companies could easily tap into from an international point of view, not just from a very specific country point of view. “We can look at any project analytically as to what the client wants to achieve from the project and take it through the process to achieve that outcome. Each project is very different, but at the end of the day each client has an expectation for that project. This is the common thread for all projects wherever they might be, and in order to achieve that success we take a set of protocols that ensure the project is monitored so that it delivers this desired outcome.” Mr Pomeroy says his company’s involvement in a project in Mongolia has to deal with issues such as power supply and other services, not to mention the fact that they are having to build in winter temperatures of minus 40C, so they are very aware of the issues that exist in that country and the solutions they have to find are very specific to that environment. “The variety of projects we’ve done in Australia have often required international solutions,” he says. “For example, when we did the Ashburton aquatic centre at Boroondara in Melbourne’s east, the largest in the Southern Hemisphere at that time, we were the first to bring into Australia a swimming pool system where the floor could be raised and lowered to change the pool depth. When we undertook the US consulate in Melbourne there were very project specific requirements that could not be found in Australia. We have the ability to bring a wide range of expertise that very few project management companies have in Asia. For them to keep it in-house is not really an answer because they may not be aware of all the other opportunities to provide cutting-edge solutions that exist worldwide that we’re constantly confronted with.

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Mr Pomeroy says that with the shopping centre development in Malaysia they are looking at different techniques used worldwide and a specific level of expertise is required to do the job. “I do see Asia as a new opportunity for Australians – but it’s a tough market to get into because they have traditional methods that they are accustomed to,” he says. “It requires a leap of faith but also patience and some trial runs, with some Asian companies using Australian expertise just as they’ve done with architecture and design, structural engineering and various other services.” Pomeroy Pacific also specialises in working with Asian investors looking to invest in Australia, and that, in turn, provides a further opportunity. “When Asian investors come to Australia they bring with them their own methodology and try to use the same model that they do in Asia,” Mr Pomeroy says. “They find they have great difficulty because they don’t have a local project development manager and they don’t have the in-house ability to work through all the various layers that we have in Australia.” The Asian developers that are coming into Australia have been very successful in their own countries, and their formula seems to work so they don’t quite see the need to change in Australia. What they may not realise is our highly regulated system requires a much greater consultative process, necessitating numerous consultants to provide various reports to regulatory bodies including banks and a highly documented sales and marketing package that must withstand legal scrutiny. All this needs great skill in management while the project unfolds from concept to completion. This is where we come in. This is also why Pitcher Partners in association with Baker Tilly have been so active in talking to potential investors in Malaysia, Singapore and China. “We’re committed to ensuring the experience of off-shore developers and investors in Australia is a positive one by avoiding common errors,” says Pitcher Partners Director Andrew Clugston. “This can only be achieved through the provision of proactive advice well before any site is acquired.”

Snooze and you lose – entrepreneurs learning to save themselves By Daniel Cooksley, Pitcher Partners, Sydney Corporate turnaround in Australia was once the domain of publicly listed companies, driven by groups of debt and equity holders. Now we see small to medium-sized enterprises more sophisticated in their approach to business decline, and their financiers more comfortable and capable of monitoring a controlled turnaround process. This process is time-critical, requiring urgent cash and stakeholder management. It requires finding the source that caused the current unenviable position, which needs an objective and an unbiased approach to diagnosing the business’s financial, operational and strategic positions.

Here are four ways that may help small business owners sleep at night.

1. Be proactive to critical issues Those that snooze will lose so be proactive to critical issues. Turnaround advisers face many time-critical issues, particularly in the early phases of turnaround where cash and stakeholder support are needed. Indecision at this time can be fatal to the chances of a successful turnaround, as it creates uncertainty among key stakeholders as to an owner’s appetite and ability to deliver results.

2. Be realistic about outcomes The need for cash may mean the need to dispose of non-core assets or putting in place divestment strategies to refocus on core business, so be realistic about the value of those assets. The turnaround adviser will usually get professional valuations of these assets. It may be that these values do not meet the expectations of an owner, but there is no time in turnaround for a long, drawn-out marketing and negotiation process to achieve an owner’s desired results. A director owes a duty of care to a company’s creditors and shareholders to obtain proper value, and that is why valuations are important. There is also an obligation to act in the best interests of those stakeholders and unrealistically holding out for the best and, quite likely unattainable, price is not generally the best solution.

3. Trust your adviser The existing owners and management may know the business better than anyone, but that is often the problem. Small business owners can be too close to their business and fail to recognise the need for improvement or change, so it’s probably best you listen to your trusted advisor. It may be the environment that has changed, possibly through advances in technology or social factors, which has resulted in a need to change “the way that business has always been done”. Don’t disregard the advice of a carefully selected turnaround adviser who will understand the need for change and likely know the right people for the job.

4. Stick with the turnaround The turnaround process is not just about establishing normality. Long-term change and process improvements are essential for future growth, cash flow and profitability so it’s important to see the process through to the end. While the role of the turnaround adviser will likely lessen during the latter phases of a turnaround, there is still a role to be carried out. The turnaround process can be long and difficult but, if successful, will be morally and financial rewarding.

PROPERTY OF PITCHER PARTNERS / JANUARY 2014

Adelaide Andrew Beitz Principal, Chair South Australia Property Committee Telephone +61 8 8179 2848 andrew.beitz@pitcher-sa.com.au

Perth Leon Mok Executive Director Telephone +61 8 9322 2022 mokl@pitcher-wa.com.au

Brisbane Nigel Fischer Partner Telephone +61 7 3222 8444 nfischer@pitcherpartners.com.au

Sydney Deborah Cartwright Partner Telephone +61 2 9228 2240 dcartwright@pitcher-nsw.com.au

Melbourne John Brazzale Managing Partner, Co-Chair National Property Committee Telephone +61 3 8610 5110 john.brazzale@pitcher.com.au

Newcastle Greg Farrow Managing Partner Telephone +61 2 4911 2000 greg.farrow@pitcher.com.au

Melbourne Telephone +61 3 8610 5000 partners@pitcher.com.au

Sydney Telephone +61 2 9221 2099 partners@pitcher-nsw.com.au

PERTH Telephone +61 8 9322 2022 partners@pitcher-wa.com.au

Adelaide Telephone +61 8 8179 2800 partners@pitcher-sa.com.au

Brisbane Telephone +61 7 3222 8444 partners@pitcherpartners.com.au

NEWCASTLE Telephone +61 2 4911 2000 greg.farrow@pitcher.com.au

The material contained in this publication is general commentary only for distribution to clients of Pitcher Partners. None of the material is, or should be regarded as advice. Accordingly, no person should rely on any of the contents of this publication without first obtaining specific advice from one of the Partners of Pitcher Partners. Pitcher Partners, its Principals & agents accept no responsibility to any person who acts or relies in any way on any of the material without first obtaining such specific advice. ÂŠ Pitcher Partners 2013 PrintPost Approved PP381827/0043 Pitcher Partners is an association of independent firms. Liability limited by a scheme approved under Professional Standards Legislation.