A week ago Johnathan Goult called in the administrators to wind up his
business, NRS Retail, which specialised in revamping retail stores. After a
sobering Christmas when Goult and his financial director looked hard at the
figures, he realised they could not keep going.
Deciding to wind up the company, which employed 100 full and part-time staff,
was the hardest thing Goult has ever done. “I’ve put 80% of my waking hours
into that business for the past eight years,” he said. “Taking that decision
was like switching off the life support of a loved one, it was gut
wrenching.”
Despite his best efforts, a combination of the loss of a large contract with J
Sainsbury, severe margin pressure, late payment from remaining customers and
a reduction in bank funding made continuing to trade impossible. It was a
sudden reversal, said Goult. “Our figures up to March 2008 were fantastic.
We had a perfect unblemished record and never missed a beat in terms of
payment. It was a sensibly run business.”
Many other firms are succumbing to the downturn. The number of distressed UK
businesses more than trebled in 2008, an increase of 245% on 2007, according
to turnround group Begbies Traynor. “It’s more difficult out there than it
has ever been in my 20-year experience,” said partner Nick Hood.
Ceasing trading when he did meant Goult could protect his creditors, staff and
customers as far as possible. Not every business takes such timely action,
said Hood. “The biggest problem with small businesses in financial
difficulty is the tendency to panic allied with the tendency to find the
biggest pile of sand they can to bury their heads in,” he said. “The key to
dealing with a situation like this is admitting you have a problem in the
first place and seeking help.”
Action taken early enough can sometimes fix the problem, said Hood. “Being a
busy fool in a crisis is a sure way to the financial cemetery. If your
customers are not paying you enough, get rid of them.”
Taking hard decisions is vital when your firm is under threat, he said. “It’s
going to be grim. I often hear people say we need to keep staff for when
things pick up again, but you need to cut fixed costs.
“Challenge every cost in your business. Do you really need to run your wife or
your son’s car on the business? That kind of lifestyle way to run a business
is an easy way to run into trouble with your bank. They are looking for
every excuse to cut back lending. Don’t give them one.”
Working out how much time you have to act will also make a big difference to
the chances of survival, or at least to an orderly winding up which will
leave you, your staff and suppliers with something, said Martin Austin at
turnround specialist Tenon Recovery.
“Analyse what has happened to get you into your current position and quantify
how much time you have to remedy the situation. Be mindful of your fiduciary
duties, too, to avoid wrongful trading. Get a specialist in to help you.
Work out with them who or what is critical to your survival, whether that’s
your bank, landlord, suppliers or staff.
“Your plan should include daily, weekly and monthly hurdles, with key
objective points. Review it at least twice a day. If you haven’t achieved an
objective identify the consequences: can you live with it, is it serious,
what are the implica-tions? Use the turnround expert for sensitive and
delicate negotiations, they have the experience.”
A commonly used means of rescuing a business is a prepack administration in
which a business owner agrees with the insolvency practitioner to take the
company into administration and buy back its assets at a discount while
agreeing a percentage pay-out to the creditors.
Despite its controversial nature, a prepack administration is often the best
way to save a failing business, said William Flatau, at First Finance, a
broker. “Is it fair to walk away from all this debt? The alternative is for
the company to collapse, and for the creditors to get nothing. With a
prepack, all parties agree the best way to allow the company to survive,
saving jobs and keeping the business flowing for all stakeholders.”
Administration is not the only option. Some find investors to help them rescue
the business in return for an equity stake, said Flatau. “Turnround
investors are often entrepreneurs who have themselves been in financial
difficulty in the past. Turnround investors do not rely on lengthy due
diligence and endless warranties. They have a gut feel for a management team
and invest with a strong dose of tough love. They will often take a majority
shareholding in the company, but they will let the entrepreneur earn back
the equity if the turnround goes to plan.”
Striking a deal with turnround investors is a last resort before liquidation,
said Flatau. “Most firms approach this kind of investment when they can’t
borrow from the banks, and existing shareholders have thrown in their hands.
There is nowhere else for them to go.”
Tenon Recovery’s Austin said administration was a gruelling process and not
for every business owner. “Ask yourself is it worth the pain, the anguish
and the stress? Are you up to the fight?”
