More than one in ten (11%) UK businesses is a zombie business at the start of 2019, according to the Business Distress Index produced by the insolvency and restructuring trade body R3.
The figure rises to 16% of businesses in the North East, according to the Newcastle Chronicle, and the state of many more UK businesses is graphically illustrated by research from Begbies Traynor’s most recent Red Flag Alert, which showed that the number of businesses in “critical” distress leapt by a quarter to 2,200 in the fourth quarter of 2018 while those in “significant” distress remained roughly flat year-on-year at 481,000.
A zombie business is generally defined as one that is only able to pay the interest on its debts, not repay the principal debt.
As such, economists argue, these businesses act as a drag on investment, productivity and the economy, because they do not have the available capital to invest in new operations, products, or services, while the investment tied up in them is denied to other, nimbler companies.
Also, it is argued, many of them are only surviving because of the continuation of the very low interest rates that Central banks put in place in the wake of the 2008 Crash. Indeed, the BIS (Bank for International Settlements), the umbrella organisation for global central banks, has argued that the steep increase in the numbers of zombie companies has been “one of the dangerous by-products” of persistent low interest rates.
Is there any point in trying to rescue zombie and critically distressed businesses?
Inevitably all this supports the doom and gloom merchants who are predicting an imminent recession exacerbated by Brexit uncertainty, a decline in globalisation and ongoing trade wars.
Ric Traynor, executive Chairman of Begbies Traynor, suggests that in today’s world businesses need to be able to change direction quickly.
“Far too many companies have been caught out by an unwillingness to rapidly evolve and adapt to the new climate we are in,” he says.
We would argue that before such businesses throw in the towel completely it is worth getting help from a turnaround and restructuring adviser.
They will conduct a thorough and in-depth review of the state of the businesses and identify its weaknesses and strengths and may be able to offer solutions, some of which may involve radical restructuring and reorganisation to fundamentally change the business.
This may involve slimming down the business to a core activity that is profitable in a way that justifies investment in a new strategy that becomes the foundation for future growth.
We have some Guides that might help here such as a Guide to Productivity Improvement. Do look up our library of Guides at: