The future of three high street names, Internaçionale, ModelZone and Dwell, were left hanging in the balance this week after they collapsed into administration.

KPMG head of retail David McCorquodale believes Peacocks has a future under new owner  Edinburgh Woollen Mill

The word ‘administration’ brings a chill to the heart of most retailers, however it may not mean the end. For some, it can offer a vital lifeline to turn around a beleaguered retailer.

Life after administration is a rocky road to recovery though. It is difficult to think of many retail businesses which have gone on to have a long and prosperous future after collapsing into administration.

There are positive signs from some retail collapses however. TJ Hughes, which was acquired by supplier Lewis’ Home Retail in August 2011, has started expanding again from six to nine stores and KPMG head of retail David McCorquodale believes both Blacks and Peacocks have a future under new owners JD Sports and Edinburgh Woollen Mill respectively.

However, it is a long, arduous journey to get back on track. Retail Week takes a look at five key areas retailers need to work on to secure a future post an administration.

Regaining stakeholder support

Many of a retailer’s key stakeholders including landlords, suppliers, and lenders could be left out of pocket following a collapse, so the company needs to work hard to get them back on side.

Perhaps surprisingly, Gavin George, managing director of restructuring firm GA Europe, which acquired footwear business Shoon out of administration last year, says suppliers are usually the easiest stakeholder from which to regain support. “It doesn’t help them to lose a sales channel,” he says.

George says he assumes that 50% of suppliers will insist on payment up front post-administration, although it can vary depending on the strength of supplier relationship. “With some suppliers it [payment periods] can go back to 45 or 60 days immediately but with others they need two years of statutory accounts.”

However, buyers should be very conservative in their assumptions about credit, according to Deloitte partner Lee Manning.

With rental charges one of the biggest overheads a retailer has, many will seek reductions from landlords following an administration.

Buyers of collapsed retailers, be it a new party or its previous owner, gain a license to occupy stores post-administration which George believes forces retailers to begin negotiations with landlords. It also gives the landlord a chance to “test drive” the new business before deciding to whether to stick with the new owner.

Sports Direct, which snapped up young fashion chain Republic out of administration in February, tried to convince landlords to accept revised terms of half the existing rent or 15% of store turnover, whichever is the largest.

However, it is understood that not all landlords played ball and the retailer is in the process of closing 20 stores.

McCorquodale says: “Mike Ashley has opened a big debate over whether a fixed rent is right for a building. Unfortunately a retailer can only tackle this when they’ve gone bust.”

Buyers must be prudent in rightsizing the business warns Manning, who says that former owners tend to have a “glass half-full mentality”.

“They think that marginal stores could get better, whereas an outside buyer is more objective and is not interested in stores which they’ll have to finance,” he says.

Manning highlights footwear group Stylo, which operated Barratts, as an example where not enough store pruning jeopardised its survival chances. The group had around 400 stores when it plunged into administration in 2009, with the management, led by Michael Ziff, buying 160 stores. However, it collapsed yet again in late 2011 and Ziff and his company bought back a slimmed down 89 stores.

“It’s a high class problem to have too few stores,” says Manning.

New management teams must also engage with both lenders and credit insurers, although George says that realistically owners should expect to be operating post-administration without both cover or overdraft for two years.

Building the right management team

It is crucial that the buyer, whether it is private equity or a retailer, puts the right management team in place to help rescue the business.

“They need people around them who understand that cash is king,” says Clarity Search managing partner Fran Minogue.

“To lead the business they will want someone that understands cash flow, is pragmatic and can deal with a rapidly-changing agenda. You will get some people who enjoy the ride and others who don’t.”

Minogue explains that the emotional ties from the previous management team can be a hindrance to the process due to the difficult decisions that may have to be made, such as store closures and job cuts.

She says: “If you are putting someone new in to run the business who has no emotional attachment they will understand the objectives of the new owner and feel more comfortable taking the appropriate action. But it can be very difficult for an existing chief executive to get rid of 200 people that have worked for you for the past five years.”

BDO business restructuring partner Danny Dartnaill says one of the difficulties is whether the existing management team can accept that they may have be partly to blame for the administration.

Top of the agenda would usually be making sure the rescued company has the right finance director, says Dartnaill.

“The finance director is absolutely crucial. If you’ve got a strong finance director you need to ensure they can change to the new business and are able to manage costs tightly,” he says.

Minogue adds: “If they [the new owner] feel comfortable with the finance director they will work with him.”

Minogue says HR, operations and finance teams are key as the new owner will be looking at cash and stock and how to pay the rent on stores.

“Operations directors work hand in glove with HR because if they’re running down stores they’ll need to redeploy staff.”

Most commentators are agreed though that it is important to keep the best of the existing staff to ensure that knowledge of its inner workings is retained. Incentives are usually offered, such as equity in the business, to ensure senior management are committed.

Repairing the brand

A retailer’s brand is inevitably damaged by the administration process, even a short-lived pre-pack, according to McCorquodale.

However, Manning argues that winning the customer back is actually one of the easier challenges post-administration. “Customers are loyal to a brand, not to an owner,” he says.

Communicating with your customers and letting them know that you are trading as normal post-administration is crucial.

Many buyers make the mistake of assuming customers in an area where a store has closed will migrate to their nearest store or use a different channel such as online, says George. Owners should contact their customer base to tell shoppers about the new business and George recommends offering a discount for their first order to form a connection with the revived business.

One of the most damaging aspects of administration on a brand is customers losing out on monies on gift cards, which are often given as Christmas or birthday gifts. This has garnered many column inches in recent collapses such as Republic and Jessops.

Although new owners have no legal obligation to honour gift cards it is a thorny issue according to McCorquodale.

“The trouble for buyers is that they might not know what honouring gift cards will cost. Many people don’t use them or have lost them so it’s difficult to factor in. But it’s an easy PR win for new owners,” he says

Staff morale

Management also have the challenge of regaining the trust and faith of a large retail workforce to re-energise the business. After often arduous administration processes which can involve large numbers of redundancies, wage cuts and restructuring, staff can be disenfranchised and easily lost.

George Wallace, chief executive of MHE Retail says: “Getting the team behind you is a significant issue,” he says.

“You also have to have great communication, be honest with staff and engage effectively.”

Wallace says communicating with a workforce which can often be spread over more than 100 stores has become easier with improving technology. “You can get the word out very quickly now and use an intranet or social media to engage staff,” Wallace says. “Digital communication allows you to run quick regional competitions, employee of the months and charity events which can make customers fell part of something. It’s not just about pay.”

Iceland founder Malcolm Walker, who turned around the frozen food specialist from what he describes as “near bankruptcy” on returning to the business in 2005, agrees morale is about more than just pay.

“You do not pay lip service to it, you have to believe in it,” says Walker whose company is among the Sunday Times Best Big Companies to Work For list. “When I came back morale was on the floor. We had 60 stores which did not have managers. We had good people leaving in droves, it was awful.

“I decided to put some pride back into the business. At head office we cleaned the carpets and replaced the blinds. In the stores half the lighting had gone so we replaced that and got the chewing gum off the floor. It was simple but it restored pride and then we brought up pay rates.”