Turnaround and Re-Financing of distressed Education Provider

Background

Case StudyIn 2019, a UK educational establishment was facing a bleak future. The organisation had always relied upon donations from its charitable foundation to break even and access to these funds expired in 2019. The business model (expensively rented campus, small group teaching, low student numbers) was loss-making without external funding. The institution was facing immediate closure if a solution could not be found.

Challenges

The organisation had reached crisis point. It was hemorrhaging cash and would not be able to continue trading past January 2020, when a new cohort of degree students would arrive to begin their studies. An options report had been completed by an advisory firm which concluded that the organisation had a high risk of insolvency and steps should therefore be taken to immediately safeguard the interests of students and creditors. Only an immediate financing would provide the headroom to allow a sale or re-financing process to be conducted to secure the future beyond the short-term.

Senior FD-level support was immediately needed to stabilise the financial position and to ensure that value was preserved so that a positive outcome could be delivered.

No management information had been provided by the finance team for many months and the quality of the financial data in the financial systems was very poor. An audit report for 2018 was overdue and the 2019 audit was also looming with going concern worries and a possible impact on stakeholder confidence. The organisation had breached the terms of its regulator licences in the UK and the US as a result of serious financial breaches.

Without accurate financial data, the Board was unable to make the key decisions that were needed to safeguard the future of the institution. This needed to be swiftly rectified.

Approach

The initial focus was to stabilise the position and to provide the Board with clear, accurate financial information and scenario-based cash flow forecasts to enable swift decisions to be made. Forecasts needed to be compiled from incomplete records as the financial systems and ledger information was poor and highly inaccurate.

Early on a new PMO (project management office) was established to oversee the delivery of key strategic projects, which were required to preserve the value so that a buyer or external financer could be found.

Fortunately, a deal was struck with the organisation’s former backers, the charitable foundation, which would enable trading to continue for a number of months. This provided sufficient cash headroom for an accelerated sale process to commence. It also allowed for changes in personnel in the finance department which were needed to tackle the historic issues with the inaccurate and incomplete financial information.

I was able to provide the Board with detailed scenario-based projections based on integrated financial models; without an accurate view of when cash would run out, vital decisions surrounding the future could not be made. The cash position required weekly monitoring given the likelihood of the insolvency of the institution should no buyer be identified in the time available. External insolvency advisors were also engaged to provide this specialist support.

Working alongside the insolvency team, I supported the sale process by providing quality, detailed financial analysis and management information whilst driving delivery of key finance projects and working to resolve the historical data issues to enable the audits to commence.

Significant stakeholder management was needed at all stages given the precarious nature of the relationship with its regulators. Landlord negotiations were also lengthy as it was crucial that safe student accommodation would continue to be provided.

Solutions

In April 2020, following extensive closure planning, a financial support package was agreed with an overseas education group. This followed numerous conversations with interested parties, worldwide.

The deal provided an initial three-year financing arrangement which secured the future in the medium-term and allowed for a period of overhead rationalisation and income generation in order for the operating model to be changed to achieve break even on a standalone basis.

Post deal completion, I delivered a new five-year financial plan and a new financial budget for 2020/21 which was created following a detailed zero-basing exercise, needed to re-base the costs and deliver a break-even trading position within three years. During this period, cost reductions of c.30% were identified at cost centre level.

In July 2020, I helped the organisation appoint a new CFO to whom I handed over to.

Benefits

The organisation is now on stronger footing, despite recent events surrounding COVID-19 which has impacted the whole education sector.

Funding is in place to support three years of trading whilst a break-even position is delivered, despite the impact of COVID and students are protected from the threat of closure of their courses.

The organisation was able to negotiate an exit from its lease obligations from its main premises (which also provided student accommodation for over 300 students). This has enabled new, modern campus-style premises to be identified, at half of the cost of the previous site.

A new, fit for purpose finance team is in place and audits for 2018 and 2019 have been completed following extensive efforts required to rebuild the ledgers.

A new Board of Trustees, appropriately resourced and skilled, has been appointed to oversee the continued turnaround of the organisation.

Whilst the management team and Board have a lot still to achieve in order to reach the goals for the next three-year period, they feel that they have overcome a serious challenge and threat to the immediate future. There was huge relief amongst the team when a financing deal was secured and whilst there are more hurdles to overcome there is now real optimism amongst the team that the future is now a bright one.

EFM Expert: Jonathan Wheeler