Testimony to business turnaround success - Cape Times June 2016

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THE turnaround of Eagle Software’s fortunes is a good example of a successful business rescue operation. Eagle Software was founded in February 1995 by five IT industry experts to offer specialised information technology consulting to the South African large scale private and public sector computer departments. The company revolved to specialise in providing world class, high-end software solutions for AG technology users.

In its prime, Eagle Software employed more than 50 staff with a turnover of R50 million. However, according to Alastair Macduff, chief executive officer at TMA-SA, and leader of the business rescue division of Unleash together with his partner Keith Fairhurst – which carried out the turnaround operation, the IT industry is dynamic and competitive, and over the years there have been mergers and acquisitions among software suppliers resulting in a change in the business model by 2010 and reduced company profit margins for software resellers.

TMA SA article Cape Times page 9 -17 June 2016Other factors that contributed to Eagle Software’s financial distress were:

  • Reduced profit margins. Services revenues from the financial sector clients were reduced for the same reason.
  • Overheads – the company employed a very expensive pre-sales technical resource to bring the product to market.
  • Experienced technical staff members were retained on a permanent basis to support this anticipated growth.

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A major and very expensive ‘Proof of Concept’ exercise was undertaken for Standard Bank to prove the viability of a technology conversion that was not awarded. The working capital of R8 million in retained earnings had been consumed over the previous three years of economic slowdown and poor trading results.

The use of two trading companies resulted in the accounting system being overly complicated and management accounts were not produced on time. Monthly EXCO meetings were not held to review the financial results. Regular board meetings were not held. Clear lines of communication and responsibilities were not set. The decision making process was haphazard and lacked discipline.

Furthermore, according to Macduff, the products had become dated and the demands of the software market had moved on: “Eagle Software’s business model had not changed in nearly 15 years. The founding shareholders were no longer involved with the day-to-day affairs, formal board meetings were not held, and there were no nonexecutive directors.

“The original five shareholders had been reduced to two over the years and there had been acrimonious shareholder disputes with the result that the founders were burnt-out and exhausted. Macduff explains that one of the company’s US suppliers precipitated the business rescue appointment by threatening to place the company in liquidation unless the founders signed personal guarantees.

On the positive side apart from this one creditor, Eagle Software retained all its overseas suppliers’ contracts. No banks were involved in the business rescue and there was a strong loyalty among customers to the business founders. The MD personally contacted clients individually to explain the business rescue process with the result that Eagle Software did not lose a single customer.

Prior to the business rescue appointment the MD retrenched 35 staff members and retained a core team of eight. Macduff says in order to ensure renewal of the software licence renewal agreements with the various international vendors and to maintain an on-going relationship with them, the business rescue plan was based on the following elements:

The simplification of the accounting system to provide accurate monthly financial statements and the introduction of budgetary controls; a dramatic reduction of fixed overheads; a capital injection of R1m from the shareholders by way of a loan account; and a repayment plan over 24 months for unsecured creditors or an offer of immediate settlement of 20c in the rand payable 30 days after acceptance of the business rescue plan.

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