De-mystifying insolvency
5/12/2008
Not a day seems to go by at the moment without a story of another business hitting the wall appearing in the national papers. Though times are busy for insolvency practitioners (IPs), the aim is always to rescue a company in trouble; ultimately no-one wants to see a business fail. There are a host of treatments we can apply to a struggling business now, particularly since the Enterprise Act, that do not entail winding it up, if only we were involved sooner.
Confusion surrounding the insolvency process and management's fear of what the repercussions could be if they seek advice from a corporate recovery professional, mean that many owner managers leave it too late to get help. There is a misperception that asking an IP for advice will automatically lead to the business being closed down.
On the contrary, our priority, and that of all corporate recovery firms, is always to try and save a business if at all possible. A number of firms now offer turnaround services, which include interim manager support, proactively managing VAT/PAYE arrears and re-financing programmes. Where we are referred to a struggling business early enough, more often than not we are able to apply a turnaround initiative that puts the company back on a steady footing.
For an owner manager watching an ever decreasing sales pipeline, a falling working capital number and a cost base that remains stubbornly high, it is clearly very easy to fall into the "hoping for the best" trap; because the alternative to things not getting any better is too awful to contemplate. Sadly, it is exactly this reaction that is most likely to lead to the failure of the company.
Tough though it is, in today's climate, it is far better to seek advice at the very first signs of trouble. Caught early enough, a business with a strong proposition and decent management team is very likely to be saved using a turnaround strategy.
Even if a formal insolvency process becomes necessary; because turnaround measures are not enough to cover a significant debt or the loss of a large customer, it doesn't always mean the end of the road for the company.
An administration is designed to give the business some breathing space. It allows the company to restructure and together with the IP, management can identify the best path forward. Nine times out of ten the aim is to trade the business as a going concern, while seeking a buyer. And there is certainly plenty of appetite for this type of deal in the SME community. We are frequently fielding enquiries from opportunistic entrepreneurs looking to expand their own operations via acquisition.
Alternatively, it could be it makes sense for the existing directors to buy the business out of administration. Provided robust due diligence is carried out, the market value for the company is achieved and the interests of all stakeholders are considered, this can often be the best outcome. It allows the business to continue trading, so satisfying creditors and maintaining continuity for customers and suppliers.
Now more than ever, managers need to be made aware that rather than putting companies down, corporate recovery professionals can actually help to save a business.
Paul Reeves, Director - Leonard Curtis
