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Zombie companies back in focus post-pandemic
The Japanese recession of the 90s created a new type of company - the zombie. The term was applied to those firms supported by Japanes banks during the period known as the Lost Decade, following the collapse of the countryes asset price bubble in 1990.
Years later, during the 2008 credit crunch, the term regained popularity. Joining SMEs and FTSE 100 businesses came the zombie. They have traditionally sheltered in shadowy parts of the UK economy with much negativity surrounding them.
Of course the Covid pandemic has brought zombie businesses back into sharp focus, with concerns that the conditions created by the Governmentes response to the economic crisis has greatly increased the number of them.
With over £75 billion of financial support - just from the CBILS/CLBILS/Bounce Back Loan schemes alone - companies have been able to keep themselves going simply by accessing the schemes on offer. In addition, £70 billion of furlough support has allowed businesses to shield themselves from the pandemic hit.
Two recent Think Tank reports, from the Resolution Foundation and Onward, are now telling policy-makers to beware of the creation of a new wave of zombie companies as a result of the Governmentes interventions, with Onward estimating that over a fifth of UK firms (21%) now count as zombies.
Compare this with research by insolvency and restructuring trade body R3 in 2018 which was reporting the lowest ever incidence of zombie companies - less than 3%.
So while pre-pandemic many might have argued that these failing enterprises should be dead rather than lumbering on the sheer numbers of companies potentially facing that issue today make that totally unrealistic.
An alternative view we believe is that any functioning business albeit doing so without making any money can have a positive role to play somehow within the SME ecosystem. If theyre providing a product or service to another company, they must have a purpose and reason for being.
There are steps that can be taken and support that can be given to breathe life back into them. More often than not, there is a business of value despite the absence of profits and lacklustre financial performance and there is space in the market for it.
And there is plenty of ongoing economic pressure to prolong lacklustre performance. Rising inflation, fuel price hikes, supply chain issues, job market volatility, and a recession looming large all make bringing a zombie back from the dead all that harder.
So while many might seek to drive a stake through the heart of a business defined by the fact that it only generates enough money to pay the interest on its debts, not the debts themselves, we take a different view.
There is of course often some blood spilt as companies are restructured or assets sold to extract or raise finance in any business. There are sometimes mergers or acquisitions of less profitable businesses within the supply chain which, when brought together, become re-energised, reborn and most importantly financially viable.
We often look for suitable funders or provide support to chase any outstanding invoices and debts. In addition, we will work out why a clientes business isnt making any money despite turnover levels remaining healthy.
It usually comes down to being sufficiently aware of what the numbers are coming into and out of the business. And to moving quickly when the sums dont add up.
Many business owners and those advising them dont have a good enough handle on sales and more importantly profits ites an easy oversight to make. Theyre often so consumed with the day-to-day running of the business that by the time financial difficulties come to light, options are more limited.
However, that doesnt necessarily mean ites too late to bring a zombie company back to the land of the living.
Weve worked with hundreds of these types of companies over the years. One example was a bed manufacturer supplying a high street retailer.
They were introduced to us by a funder looking for answers. Straight away we undertook an exercise to determine how much it cost to make the finished product. Yes, the production facility was busy, staff worked tremendously hard and numbers in terms of product supplied and payments - were significant.
However, we quickly determined that the beds were being sold for less than it cost to make them, resulting in a loss. The more beds that were made, the greater the loss was despite the busy factory and workforce. Hard to believe, but true.
It's important for SME owners - and those financial advisors around them - to have the necessary specialist support at hand. A lot of the services and advice that non-performing or zombie companies require are specialist, technical and non-core. Getting the right people in early enough to help restructure and refinance, for example, will do wonders to help re-animate zombie companies while supporting the UKes crucial SME ecosystem.
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