Is your accountancy practice infected by zombie businesses?
April 29th, 2019
“It’s a terrifying sight”, my accountancy colleague told me: “They come lurching through the door, rotting clothes hanging from their bodies, bony fingers clutching the latest bank statements. These zombie businesses scare the living daylights out of me!”.
Ok, Ok. I admit it – I just made all that up. There are no reanimated corpses staggering around the Midlands, unless you include the Baggies back four, BUT – there are such things as zombie businesses and they may be infecting an accountancy practice near you.
In fact, it is almost certain that they are because, according to new research from insolvency and restructuring trade body R3 some 11% of UK companies are just paying the interest on their debt, rather than repaying the debt itself. Only being able to pay the interest is one potential sign of a so-called ‘zombie business’ – a company which is only surviving thanks to low interest rates but which otherwise might not be viable.
My last blog gave an 11-point checklist that accountancy colleagues should be asking the owners and directors of their client businesses, to help assess ongoing viability in the face of growing economic storms. I promised to tell you about other experienced eyes who had reached the same conclusions as myself – and this investigation into the rise of zombie businesses by R3 is it. It’s scary but trust me…you really should read on.
R3’s research, based on a survey of 1,200 companies (here) also found that other signs of acute business struggles are relatively widespread. One in six (16%) businesses are having to negotiate payment terms with creditors; one in ten (12%) are struggling to pay their debts when they fall due; and 8% would be unable to repay their debts if interest rates were to increase by a small amount. Which, by the way, is exactly what I was saying on this blog on 15 January last year (here).
Stuart Frith, President of R3, says: “Tougher trading conditions and much uncertainty over the future of the economy have contributed to a significant chunk of UK businesses finding themselves stuck in ‘zombie business’ mode.
“These businesses are capable of ticking along, but growth and increased productivity improvements are out of their reach for the time being. On the one hand, this means thousands of businesses are stuck in a position where they’ll struggle to deal with external shocks. This presents a problem if they all were to become insolvent at the same time. On the other hand, you have a significant proportion of businesses which are tying up investment and staff which could be used by more productive companies elsewhere in the economy.”
He rightly makes the point that, because of Brexit, some of that investment has gone into building up stock to safeguard against future risks. Investing in the stockpile puts pressure on cashflow and investment in other areas, while large stockpiles will take time to turn back into cash and are at risk of obsolescence.
“Rising interest rates will have also contributed to businesses stumbling into ‘zombie business’ status”, he adds: “The future for these zombie businesses is mixed. Some might eventually be able to restructure or find new investment. Others will run out of road and become insolvent.”
Now, after all that gloom, here is some positive news! The UK’s insolvency and restructuring framework is highly rated by the OECD for its zombie-busting powers, and the Government recently announced plans to improve the UK’s business rescue and restructuring options. The Government’s insolvency reform proposals (more on that in future blogs) could give insolvency practitioners more tools to help turn around struggling companies, and boost productivity.
We will, at times, be called in by a bank, owner, director or accountant of a business to assess its current position and form a view on what might happen in the future. Our Financial and Options Review (“FOR”) service provides an immediate snapshot of the solvency (or otherwise!) of the business and outlines what might happen in various insolvency scenarios, including possible personal liability issues. We will also give you a read of how “zombie-fied” the business may be!
Being aware of those scenarios allows the various stakeholders to act knowing they have as many facts as possible. A decision based on the whole picture is better than spending all your time on what’s happening now… Call us and we’ll talk you through it.