Lessons from Thomas Cook, for those looking to buy a business from administration

If you’ve just bought a business, or are considering buying a struggling company, there are lessons to be learned from this story of mis-management. Let’s take a look at the reasons behind the collapse and examine what to look out for to avoid falling foul of the same problems when taking over an existing business.

Why didn’t Thomas Cook go into administration?

Thomas Cook has been operating for 178 years in the UK and had a solid reputation, 21,000 employees around the world, including 9,000 in the UK, and was a household name. Despite all this, it was announced in September 2019 that it would go into immediate compulsory liquidation. Staff were made redundant overnight and were left to try to claim their redundancy money through the insolvency service. No administrators were called in. There was no hope left.

Now, there is a little bit of good news for many of those staff, as every Thomas Cook branch in the UK has been bought up by independent travel agency chain Hays Travel, which claims it may be able to save 2,500 Thomas Cook jobs through re-employment. So, if this side of the business was desirable to a buyer, why didn’t Thomas Cook go into administration, along with the likes of Laterooms.com and Flybmi, who had similar offerings and similar challenges. There are a number of reasons:

1. It was just too large and too complex
Thomas Cook’s enterprise consisted of a range of different business areas, including an airline, a retailer and a tour operator. Assets ranged from hundreds of high street retail branches to 100 aircraft and nearly 200 hotels and resorts around the world. The scale of the business was astronomical, but the scale of the mismanagement and the debt hole it found itself in was just as astounding.

Pulling off a successful administration is all about the ability to secure funding from a firm like KPMG or PwC who is willing to bankroll a struggling business while a buyer is found. With a funding gap totalling some £3.1bn, the enormity of the problem, as well as the scale of the management job at hand, was most likely way too much for any professional services firm to even consider.

2. Mis-management
The likelihood of administrators stepping up to the task would have been far more likely if its senior managers had taken opportunities to sell parts of the business at an earlier date. For example, Lufthansa tried to buy the airline division of the business in 2018, but the board didn’t take the opportunity.

In fact, since the collapse, it has emerged that several other offers had been made from prospective buyers for various parts of the company, all of which were turned down after discussions between the board and the lenders. There was also a chance to enter into a company voluntary arrangement with its landlords, which would have seen it close some stores a few years back, but this was another missed opportunity. These decisions turned out to be disastrous.

3. Debt
Then there was the level of debt the business was relying on simply to remain operational. It has emerged that this totaled some £3.1 billion. Senior managers were over-leveraging Thomas Cook’s cash pool to the point that it was borrowing billions and suffering enormous losses.

Borrowing isn’t, in itself, a bad thing. However, Thomas Cook’s vulnerable financial situation combined with the impact of an increasingly digitised travel marketplace, left it with nowhere to go. And there was of course the added pressure of the £20 million in bonuses that the leadership team paid itself over the two years prior to collapse, which didn’t help!

How can you recognise a struggling business that can be turned around?

Thomas Cook’s demise acts as a useful reminder of the fact that not all struggling businesses can be saved. When looking for an opportunity among businesses in administration, it is vital to spot signs that a business is a viable turnaround prospect. These may include one or more of the following:

  • A business that has clear savings that can be made
    If it is easy to see where money is being wasted and where cutbacks can be made, you could be onto a winner.

  • A business with a strong staff
    If staffing issues haven’t been a problem and the business has retained its experienced employees, this is a great asset to help you get the business back on track.

  • A business where there are clear management problems that can be solved
    If the business clearly failed due to mismanagement and you have experience in overseeing similar companies, you may be able to solve the fundamental problems relatively easily.

  • A business that still has a healthy turnover
    If a business is still bringing in money, it means it has customers who are likely to stick around providing you can see out a purchase and transfer seamlessly.

  • A business that has underlying operational profitability
    Many a time a business has collapsed because of cash flow issues, debt financing obligations, outsized overheads, inflated management costs – yet the underlying margins are strong.

  • A business that can slot into your existing business portfolio
    If you already run businesses similar to the target business, you may be able to leverage synergies that can reduce costs, create efficiencies and provide new revenue streams with very little effort on your part.

  • Thomas Cook’s senior management team were undoubtedly to blame for the collapse of a historically successful British company, leaving thousands jobless and many holidaymakers stranded overseas. Lessons can certainly be learned from this epic tale of corporate greed and poor leadership.

    However, when there’s a loser, there’s often a winner and this time, the winner might just be Thomas Cook’s much smaller rival Hays Travel, which has managed to bag itself 550 high street branches and thousands of highly experienced staff to boot. We hope, for their sake, Hays Travel can make a success of picking up the pieces.

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