Luke Johnson: Turning bust into boom

The serial entrepreneur on turning businesses around, and why he's dreading the Olympics.

by Luke Johnson
Last Updated: 09 Oct 2013

I am appalled and fascinated by insolvencies. I have bought a number of companies out of administration over the years, and the process is usually a mixture of chaos, opportunity and tragedy.

As I write, I'm awaiting a call from an administrator to tell me whether our bid for a bust business has succeeded. Typically, little guidance is given to buyers as to price; there is almost no chance to do any due diligence, and certainly no warranties are ever supplied to acquirers. The entire sequence unfolds in days, not weeks, and all the insolvency practitioner really wants to know is that your cheque will unquestionably clear. There is no time for spurious buyers who don't have the cash.

This means that, unless you're an insider, knowing when to strike and how much to pay is very difficult. Inevitably, firms that go bankrupt have problems, yet the information available before you make an offer is normally superficial - so how is one to plan the turnaround?

Yet there are bargains to be had. I bought a high-end bakery business out of administration a couple of years ago - it returned the entire cost in profits within the first year. In that case, I had just five days to mount an offer. But we were able to fold the assets into a much bigger group I owned, so the challenge of running the bakeries was less of an issue.

Even so, we were held to ransom by certain key suppliers, and faced employee claims that by law remain an obligation, despite all other liabilities falling away.

I enjoy the drama of trying to save companies that go broke, but the loss of jobs is sad indeed. So often, such failures could have been avoided if management had sought help sooner. I sense that this year will be a busy one for those who go fishing in such risky but rewarding waters.

I recently attended a slightly surreal Labour party event above a Turkish restaurant in Covent Garden. It was organised by Chuka Umunna, the shadow minister for business, and was meant to be a gathering of entrepreneurs who support his party. Sadly, the richest of them, Nigel Doughty, had died the week before. I had been asked to address the meeting about my idea for a Start Up Act and, in a spirit of enquiry, accepted the invitation.

The biggest element of my proposed Start Up Act would be an exemption for smaller companies from most employment legislation, which I believe inhibits entrepreneurs from hiring, thereby contributing to the menace of unemployment.

Unfortunately, Umunna is an employment lawyer by profession, and the profitability of his legal speciality is a direct result of the explosion of tribunals and claims now suffered by business. So I was not surprised when he responded to my remarks by defending regulation, and said the problems bosses faced were all due to a lack of understanding.

The real lack of understanding is among those on the left. They think Britain can comfortably remain a prosperous nation even though we are burdened by high taxes, high costs and a high level of regulation. The edifice of our welfare and workers' rights was built up during the easy times, before ferocious competitors such as China, India, Brazil and others entered global markets. And these newly capitalist nations are only just beginning to make their impact felt on the world's economy.

It is quite obvious that Britain has been living beyond its means and that as a consequence we must make huge and painful adjustments to our way of life if we wish to remain a first-rank player. Our society must work harder for longer, study more and become much more productive. This means slashing the dependency culture that took hold during Labour's time in power.

All of this would help make the UK a more attractive destination for capital and talent - vital ingredients if we are to revive our industries and create jobs.

The fairly modest public spending cuts so far proposed under the Coalition's austerity programme should be just the beginning. Unless we entirely rebalance the economy towards the private sector and away from state-sponsored largesse, we are destined to a future of decline and impoverishment. My recent experience above the Turkish restaurant suggests the Labour high command simply doesn't have a clue.

I have always hated being a sporting spectator and am dreading this summer's Olympics. I prefer to participate - and I predict the entire jamboree will be a nightmare for Londoners. Our restaurants will do badly because the regular tourists will not visit, and our staff and suppliers will have a struggle getting to our establishments, thanks to an invasion of ghastly VIPs taking over our roads. Plays I've backed in the West End will also suffer, since the Olympic freeloaders won't be coming for the culture.

London is the world city and didn't need this spectacle to feature on everyone's map. We have better heritage, shopping, eating, museums, galleries, clubs and shows than virtually anywhere else on earth. Who actually cares about a few silly races, almost none of which we're likely to win? The British invented almost every sport going, from football to rugby to cricket to golf - and we do pretty well in most of them. Isn't that enough? (You must be joking, Ed.)

The billions of pounds of taxpayer funds spent on giant venues are certain to be wasted money - just at the moment when it can be least afforded. The entire affair is yet another disastrous inheritance from Tony Blair and Ken Livingstone. Thank God they are both out of office.

 

- Luke Johnson is chairman of Risk Capital Partners

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