Rachel Willcox 8 Feb 2018 11:09am

Pride before a financial failure

Encouraging ailing businesses to seek help sooner could help stem the tide of business failures in the UK – but first, those businesses have to admit there is a problem. Rachel Willcox reports

Caption: We don’t know how many businesses could avoid formal insolvency proceedings if only they held up their hands earlier

Even before the collapse of British outsourcing business Carillion, a piece of research published in September last year revealed some disquieting findings.The sense of shame British business owners experience over problems within their companies is leading to unnecessary insolvencies, it stated.

“Companies are in denial,” says Simon Underwood, a business recovery partner at Menzies LLP. “One of the biggest challenges is the stigma associated with a financially-challenged business. When it comes to the Great British entrepreneur, they have a very positive belief in success but they don’t know how to stop or where to go when they are in difficulty.”

Present danger

We don’t know how many businesses could avoid formal insolvency proceedings if only they held up their hands earlier; we do know awareness of the dangers can transform an unrecoverable spiral of problems into a short dip in performance. Bob Pinder, ICAEW regional director, says a focus on preventing failures from happening in the first place, alongside a robust insolvency regime, has to be a good thing. “The focus needs to be on restructuring, refinancing and turning businesses around. Of course, some businesses need to be shut, but others just need a second chance.”

But there is a danger the Institute’s warnings could fall on deaf ears: the Insolvency Service shows corporate failures are at a 17-year low. Experts say a spike in the last quarter was artificially skewed due to many businesses – 1,100 in Q2 2017 – opting for an insolvency process as a way around changes to IR35 tax legislation.

Although insolvency figures are commonly used as a barometer for economic health, policy stimulus since the credit crunch including low interest rates, the leniency of HMRC’s Time to Pay regime and growth of crowdfunding in the SME market has given struggling companies generous breathing space.

“Central banks have been busy printing money and need a return, so businesses that might previously not have been a viable proposition for a lender have received money – but cheap money has consequences,” warns Tyrone Courtman, an insolvency partner at PKF Cooper Parry.

Nonetheless, there is a distinct feeling among the insolvency profession that the tide is starting to turn as interest rate rises, the ongoing scourge of a late payment culture, and the economic uncertainty caused by Brexit conspire against British businesses to exacerbate an already challenging trading environment. And the growing trend among small businesses to take accountants out of the equation and turn to online accounting software for bookkeeping and accounts filing can lead to early warning signs of business failure not being picked up.

Commoditisation of the insolvency process means that many insolvency practitioners (IPs) have little choice but to embrace the shift in focus towards recovery and business turnaround. ICAEW’s research suggests that many are keen to rise to the challenge: two thirds of IPs surveyed by the Institute said they predicted they would spend more time over the coming two years providing financial advisory services; 63% envisaged spending more time helping to raise finance; and 63% looked ahead to offering more operational advisory services.

“A number of IPs have reinvented themselves as restructuring and refinancing professionals and that’s helping people to engage much earlier,” Pinder says. But while shunning the “I” word and rebranding your services will offer broader appeal, a change in name alone will only get you so far. “Some firms wait for the phone to ring but progressive firms are more proactive about identifying opportunities.”

Developing a network of professional contacts with privileged insight into a business’s state of health – typically banks, law firms and accountancy firms without in-house insolvency or business turnaround expertise – is a good starting point. “It’s about getting the message out to this network who might see clients struggling and could put them in touch with you,” Pinder says.

But navigating the psychological hurdles to early engagement remains a huge challenge. “If I knew what to say to make people take advice earlier I’d have patented the message. With microbusinesses, the failure doesn’t merit the hullabaloo,” Underwood says.

Colin Haig, an insolvency partner at BDO, says emotional intelligence is key to early engagement. “It’s about wearing out shoe leather but also being accessible and interested. Make it easy for people to engage with you and be credible rather than being seen as an undertaker in waiting. It’s around having something to say that’s relevant and of value when an opportunity to help arises, and being sensitive to the fact that it’s a scary place.”

Behind closed doors

Despite the constant desire to talk the business up, honesty sometimes begins to emerge behind closed doors, “but no one wants to be seen as deficient, even among advisers”, warns business psychologist and award-winning mentor Dr David Cliff. “Advisers need to be entrepreneurial and have a relationship with the client that is close enough to bring some challenge to the business. You need to agree up front what level of accountability they want you to have and how they want to be challenged, otherwise it’s a very shallow conversation.”

At Menzies, Underwood says just two members of staff are currently engaged in turnaround projects (dwarfed by the firm’s business recovery team of 30) and the thrust of the work typically hinges on sourcing distress finance, helping businesses to negotiate with creditors and undertaking industry reviews to open their eyes to the challenges they face. “It’s not big business because people are still in denial,” Underwood says. “I’m not convinced that there are many businesses that would survive if intervention occurred sooner.”

Courtman is more bullish about demand for the restructuring services his firm provides. “I’m well placed to make sure clients are not just another statistic. Over the course of my 30-year career I’ve seen every possible way a business can get into trouble. As you slide down the decline curve, industry expertise becomes less relevant and situational expertise becomes more important – they need someone who has been scrapping in the trenches, who knows the likely reaction of the bank, HMRC, creditors and employees, and can mitigate the effects.”

A range of services launched two years ago by HW Fisher to help ailing SMEs is already paying dividends. The firm charges between £5,000 and £10,000 to put together a financial and operation plan to address a business’s challenges. For a further fee, offset against the initial report charge, it helps put the plan into action. “Typically we’re dealing with creditor pressure, negotiating fixed costs such as utilities and IT, streamlining production cycles, analysing working capital to make sure it suits the profile of the business and looking to finance as a means to address cashflow,” explains Brian Johnson, a partner in HW Fisher’s business recovery and insolvency division.

All about trust

Johnson warns that the services are never sold under the banner of insolvency. “Initially it’s an internal sell with the audit partners at the firm. It’s tricky but it’s about trust. Often the partner will have known the directors for years and they want to be sure that it won’t undermine their relationship with the client,” he says.

Despite positive signs that the right help is available, it is clear that problems will not be solved overnight. At the same time, the market for pure insolvency work remains alive and well; a third of IP respondents to the survey said they felt that the greatest increase in demand over the next two years would come from formal corporate insolvency appointments.

In a damning prognosis, think tank The Resolution Foundation warns that Britain’s productivity levels are running at their weakest levels since the Napoleonic wars of the early 19th century, and there are suggestions that a stricter business regime would allow “zombie” companies to die a natural death for the greater good of the UK economy, rather than keeping inefficient companies ticking along and draining much-needed human resources. It is a thought-provoking, albeit politically unpalatable, concept.

Johnson also admits finding the skills needed to meet the demands of a burgeoning business recovery service is a challenge.

“We can source people to oversee projects but we work with third parties to plug gaps, particularly people who understand the wide range of financing solutions available but also HR experts who can go through terms and conditions of sale and employment contracts. It’s about bringing that level of expertise to the SME market and pricing it properly.”

Industry body R3 claims that for every one company that fails, a further two have been turned around, although admittedly war stories are thin on the ground. Duncan Swift, a partner at Moore Stephens and deputy vice president of R3, admits the industry needs to do a better job of encouraging, educating and engaging with businesses about the help available to them in times of distress: “It’s about helping business owners to have that lightbulb moment and realise there are solutions available to them.”

Fraser Dick speaks from experience. The MD of a business in the automotive industry, he says: “It’s crucial business owners seek early advice when they find themselves in a distressed situation. It enables the exploration of all solutions in depth before choosing the right path. Personally, I found the experience a huge education with many valuable lessons. Three years on I apply these lessons on a daily basis. It has allowed us to breathe with a consistent growth in profits.”

The UK is some way off emulating the US, where a business failure is more a badge of honour than an embarrassment – “fail fast, fail often” is the mantra. But there is at least a growing awareness among British companies that experiencing – and hopefully overcoming – problems is part and parcel of the business journey.