Saving insolvent companies needs both a restructuring and business plan

Following the demise of Rok and Connaught, a third national building maintenance company, Kinetics Group, has gone into administration with 500 employees being made redundant leaving a skeleton staff of 50 to deal with its five sites.

Insolvency practitioners Begbies Traynor were appointed as administrators in July and attribute the demise to the loss of key contracts and delays in payments by customers.

The background to this dramatic failure seems to be rather complicated. In June 2011, there appears to have been an attempt to save the company through acquisition of the business and assets of a number of its own subsidiaries by a newly formed subsidiary SCP Renewable Energy Limited (SCP).

It is not yet clear if the acquisition took place before or after these companies were placed in liquidation or administration and a further complication is SCP Renewable Energy Limited’s status, referred to by the administrators as a newly incorporated company owned by Kinetics. But this name is not listed at Companies House.

In my view it is clear that the June restructuring was flawed. What exacly was the role of the various stakeholders? Did they ensure that viable restructuring and business plans were in place as a condition of their approving the acquisition?

Is this an issue with the sale of business and assets by an administrator, where the administrator is not responsible for the ability of any purchaser to run or fund the acquired business?

Administrators rarely save a company as a going concern, so their only real objective is to maximise realisations for the benefit of creditors.

How to protect Personal Guarantees when a company is insolvent

Many insolvent companies are being run to avoid the triggering of personal guarantees given by directors and owners.

Most personal guarantees are provided to secured creditors such as a bank to cover loans or overdrafts that are already protected by a debenture which provides for a fixed and floating charge over the company’s assets. In such cases the personal guarantee is often only triggered by liquidation when the bank is left with a shortfall.

In view of the above I am astonished how many directors plough on, stretching payments to HMRC and extending unsecured creditor liabilities without fundamentally improving their company’s financial situation via a company voluntary arrangement (CVA).

Secured creditors stand outside a CVA and therefore they have no need to call upon a personal guarantee.

I would urge all professional advisers, including accountants, lawyers and consultants to learn about CVAs since they are such a powerful tool for saving companies and in so doing avoiding personal guarantees being triggered.

Many companies for sale turn out to be insolvent

Many companies are being listed for sale through brokers with high price tags based on very tenuous valuations, where the owners have been deceived into thinking they will be paid a huge amount for their equity.

However, on closer inspection it turns out that many of them have a Time to Pay arrangement with HM Revenue and Customs or are in arrears with the Revenue and are stretching their trade creditors. All too often they are insolvent but don’t realise it. 

This over indebtedness is becoming a serious concern among potential investors because often the company they want to buy is operationally a great business and for trade buyers a perfect fit with their existing businesses. The problem for investors is how to protect their own interests and avoid contamination.

Very often, even experienced executives lack the knowledge and methodologies for assessing a company they want to buy, let alone knowing how to sort out the indebtedness once due diligence has revealed its extent.

In my view, potential investors can work with incumbent directors to reach agreement with creditors that protects all parties by enhancing the prospect of a return to sellers and avoiding cross contamination.

One method I use is an investment, conditional on approval of a CVA by creditors thus leaving finance agreements and any liabilities in the target company. It also allows creditors’ issues to be addressed where they are not normally consulted in a pre-pack. For the investor, this can be structured to give them security and control if they so wish.

As a rescue specialist I would advise owners trying to sell a business in difficulty to employ their own turnaround advisers before putting the business on the market.

Companies are failing to manage Debt Collection and Credit terms

Many companies are risking their own solvency and ability to carry on trading because they neither manage their debt collection proactively nor have clear procedures for setting and imposing credit terms with their customers. Consequently they are suffering from late payments, or worse having to write off invoices due to bad debts.

They compound the problem by extending credit to customers who turn out to be a bad risk.  If a customer is itself borrowing money under a factoring or invoice discount facility then the company is depending on their customer’s customers thus creating a pack of cards that if recoursed as a bad debt after 90 days could bring down everyone in a supply chain.

I believe the root of the problem to be the company’s own credit management where I find that very few companies have a robust system in place.

The key steps are to do a credit check on any new customer, to set limits, manage them and regularly review customers’ credit levels.

Getting paid however requires more than just a credit check, it involves starting management of invoice payment long before it is due. Checking the invoice is approved for payment for example, will avoid discovering that the order was not fulfilled exactly as required, or the invoice has not been received! 

Paperwork is crucial. There should be a procedure in place whereby the delivered/ completed order is signed for/ off with a clause on the document that includes written confirmation that the customer’s requirement has been satisfactorily fulfilled.

In addition companies also need late payment procedures. If an invoice remains unpaid after the due date, a robust system for managing late and non paying customers should include putting a stop on processing any further orders and debt collection that may result in litigation, and enforcement if necessary.

HMRC Insolvency and Enforcement workload

The HM Revenue and Customs insolvency and enforcement department in Worthing appears to have an increasing workload.

I believe there are several likely reasons for this. Businesses are continuing to withhold payment of PAYE and VAT liabilities, using any cash available to prop up their businesses. Fewer Time to Pay arrangements are being approved by HMRC and a lot of TTP arrangements are failing. The Revenue have also have resumed using seizure and distraint as a method for collecting overdue tax.

HMRC in Worthing are picking up the pieces, which probably explains the large number of Winding Up Petitions that dominate the Companies Winding Up Courts.

The only options for saving a company with a WUP are either paying the undisputed amount due or a Company Voluntary Arrangement and the Courts are generally happy to adjourn the Petition at the first hearing to allow time to either pay the bill or propose a CVA.

There is considerable evidence that HMRC are supporting the rescue of companies via CVAs although their focus is on proposals being realistic and incorporating fundamental change to ensure survival rather than continuing the old business model.

I am not yet clear whether the upsurge in HMRC Worthing’s activity relates to the traditional post recession increases in company failures when the market begins to grow, or whether the downturn is continuing and companies are just not able to hang on any longer.

However all of us in the restructuring profession must urge the directors of companies in difficulties to act urgently if they are to save their company, and that they or we as advisers keep HMRC fully informed of progress during the development of rescue plans.

Don’t Waste Your Money Marketing

When business owners run short of cash they get desperate. They pretend nothing is wrong and often they pick up marketing ideas. These activities would have been helpful at an earlier stage. Applying them indiscriminately without understanding the context of how the concepts work as part of a strategy late in the day is disastrous.
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Small Business Marketing Needs Innovation and Commitment

It is a natural reaction in tough economic times for businesses to look at their various activities and identify costs that can be cut back.

One area they traditionally prune is the marketing budget but this can be counter-productive for small businesses that need to protect their sales revenue, retain existing customers and keep the orders coming in.

A business rescue adviser brought in to help a company in difficulty will closely examine spending and in the process help develop a new business plan which will include innovative marketing aimed at generating sales at a lower cost.

In situations where a number of businesses are failing a small business also has to think carefully about remaining visible or risk potential and actual clients assuming that it has ceased trading and look around for an alternative supplier that has remained visible.

There is some evidence that small businesses are becoming highly innovative about their marketing. Instead of employing an in-house marketing team, for example, they are outsourcing their marketing and buying services only as and when they need them.

Joining a business networking club is one example of a cost effective trend that has been growing for some time.  But it is not a short term fix and many businesses leave it too late, joining only when they realise they are in trouble.

Networking needs commitment and it takes time to get to know the other businesses represented and understand exactly what they do. It works on the truism that ‘people buy from people’ and there needs to be trust as well as synergy.  This is unlikely to happen in less than six months of becoming a member of a club.

Too often people frantically try to sell their services rather than listening and learning about the other businesses in the club. It is vital to follow up with every member once you have joined and learn more about each other even if you can’t immediately see any synergy.

Are Estate Agencies Safer Businesses Now than they were in 2008?

The sub prime mortgage crisis that precipitated the 2008 global recession led to plummeting property prices, very limited mortgage lending, repossessions and to a dramatic slump in the housing and commercial property markets.

Estate agencies were among the first businesses to feel the effects of the crisis. By December 2008 an estimated 40,000 employees had lost their jobs while around 4,000 estate agency offices -approximately one in four – had closed.

The smallest agencies, of perhaps four or five branches or less, were worst affected particularly if they depended solely on property sales.

So is the worst over now for the estate agency business? Not if the most recent information on the housing market is any indication.

Gross mortgage lending declined to an estimated £9.8 billion in April 2011, down 14% from £11.4 billion in March and the number of mortgages approved for house purchases hit a new low in April, at 45,166, the lowest April figure since records began in 1992.

The Council of Mortgage Lenders predicts that the numbers of homes repossessed will rise from 36,000 in 2010 to 40,000 in 2011 and 45,000 in 2012 and the online housing company Rightmove reports that average unsold stock rose from 74 to 76 properties per branch, reaching the highest ever level for May.

Although the housing market varies significantly in different parts of the UK, with London booming and East Anglia holding steady while the north suffers there is also evidence that the demand for rented property and buy to let property is rising along with rent levels.

None of this suggests that the business of estate agency is likely to be any more secure for a few years yet.  If the High Street agents are to survive they need to revisit their business models, diversify their activities into letting, make use of online marketing and be sure they are up to speed on all the regulations governing landlords’ and tenants rights’ and other property letting regulations.

It is obvious why Bank Fees are High and Business Lending is so Difficult

The figures for January to March showed a shortfall of 12% against the £19bn that represents a quarter of the annual £76bn target agreed with the government under the Project Merlin scheme for lending to smaller businesses.

Only 16% of FSB members had approached banks for credit and 44% of those had been refused, including some seeking credit to fulfil firm orders.

Growing businesses need working capital to fund the goods, materials, marketing and staff for new growth. While some of that can be obtained by borrowing against the sales ledger (through factoring and invoice discounting), the banks are seeing them as too high risk.

This is actually a reasonable response by the banks where businesses have been clinging on by their fingernails since the 2008 recession and, having used up most of their working capital on paying down old loans, are therefore according to the bank models seen as at high risk of insolvency.

It is a vicious circle. Less working capital means businesses neither have sufficient funds to buy materials to fulfil orders nor are they adequately capitalised to justify new loans.  This is why it is very common for businesses to go bust when growth returns following a recession.

Once banks are realising that a company with outstanding debt is in difficulty, they are providing for the bad debt by adjusting their own capital ratios to cushion against increased risk and in anticipation of the new Basel lll rules requiring bank Tier 1 capital holdings (equity + retained earnings) to rise from 2% to 7% to be phased in from 2015 to 2018.  

The result is higher fees and higher interest rates to businesses and it is no surprise that some companies already seen as a bad risk cannot borrow money, even when orders are rising.

Businesses that have used their land and buildings to secure loans or mortgages may also face huge risk related costs due to the bank’s exposure because banks already have so much commercial property as security that cannot be either leased or sold. The bank will therefore impose penal fees in a bid to recover the provisioning costs.

It has never been more urgent for businesses to mitigate this catch 22 by calling on expert help to look at fundamental solutions and recognise they will not be able to borrow money to limp along as they have been for the last two years.

Franchising Can Be Great if You do the Research and Check the Small Print

Many people dream of owning their own business and in the current economic climate are finding themselves pitched into starting up perhaps before they are quite ready.

A franchise often comes with an established brand, support in training, promotional materials and advice so it is tempting to see buying into a franchise as a safer option than going into business completely independently. 

But sinking savings or redundancy payments into any kind of business is a risk and a franchise is no different.

The big danger in taking on a franchise is getting a false sense of security that someone else is responsible for your business. They aren’t and a business plan is as important for a franchisee as for an independent trader.

Also, while the franchise provides support, it may also impose limits on independent action in order to protect its brand and reputation. The most successful franchises have tested their business model and methods and incorporated these into the package. It can happen that a franchise has failed because the franchisee has failed to follow the advice.

In a recent case of a franchise business in difficulty one of the biggest issues was that the franchisor declined to take any legal steps to protect its intellectual property or its franchisees’ rights.  

The franchise model offered complete geographical coverage and each local franchise unit’s success depended on the whole network‘s efficiency, but there was nothing to stop people who had gained privileged knowledge within the franchise from setting up in competition.

It is essential when setting up any business to scrutinise any legalities required, take advice and to negotiate. Until comfortable with the terms do not buy into a franchise.

Essentially, yes, a franchise can be a very good business opportunity but it does not eliminate much of the risk inherent in setting up a business and needs the same preparation work as for any business start-up.