What happens to your business when the money runs out?

0:00Music.

0:12Julie Palmer: Being an entrepreneur is always a risky business, but for millions of self-employed people in Britain, owning their business is not just a revenue stream, but a goal. But what happens when the money runs out? This is a question that is relevant not just to small businesses but also to large ones and household names such as Claire's Accessories and Coughlin's Patisserie. When the money runs out, what are the risks? And is insolvency the only solution? I am Simini Kuriaku, editor of FT Advisor, and this is Margin Notes, the editor's podcast. This year we're dedicating the series to understanding risk in all its various forms.

0:52Julie Palmer: This episode is looking at the risks facing UK businesses today and joining us on the show is Julie Palmer. Julie is the managing partner for the South West region at the BTG, formerly known as the Begby's Trainer Group. She is a licensed insolvency practitioner and with over 30 years experience within the insolvency sphere, we're delighted to welcome her. So welcome, Julie. Thank you so much. Thank you for coming here. Before we get into it, I'd like to talk with you about the red flag report that BTG puts out. Could you explain a little bit in a nutshell sort of what it does and why you do it?

1:25So Red Flag, it's effectively a distress monitor. We've been running it now for over 13 years. It's a quarterly report. We look at distress business, but we actually look at good businesses as well, albeit Red Flag tends to get more associated at the moment with the distressed part of the cycle. We classify businesses showing significant distress into two different categories. One is critical distress and one is significant distress. critical distress we look at businesses that have had a winding up petition or a county court judgment over£5 ,000 significant distress is some form of distress but typically a CCJ a county

2:03Julie Palmer: court judgment of under£5 ,000 so one of those might be seen as slightly more serious than the other so perhaps significant distress possibly with a bit of work you could turn that around and critical distress it would require a miracle is that the sort of technical um it's certainly more serious. I wouldn't necessarily say it's always a miracle in all cases. And if it was the case, we'd be pretty worried at the moment because there's over 60 ,000 businesses showing signs of critical distress. What we do see, though, is typically more of those businesses fall over when they've moved into that critical distress space.

2:37So we see it as a little bit of a waiting room for insolvency, but not necessarily inevitable in all cases.

2:42Julie Palmer: Yeah, so we covered the red flag report as regular readers of FD Advisor. Well, no, we covered the red flag report earlier this year. And I think, was it over 600 ,000 businesses altogether were in some form of distress? Is that a record number? We've seen these sort of levels before, but it is running at quite a high, albeit not an all-time high. I think the last numbers were about 620 ,000 businesses showing significant distress, and then about a further 60 showing critical distress. To give you a little of context on that that's about one in 15 businesses in the uk so it's a worryingly high number that is a worry so how do companies then end up in significant distress let's start with that okay so um as i indicated they're typically showing a countical judgment of five thousand pound you might say is that a big issue for a company that has high turnover the issue though is information is so publicly available now that your suppliers your customers will see that you've had a CCJ.

3:41It could be something that's inadvertently happened that you've just not noticed or you've not dealt with a letter but it's on the public record so it needs dealing with very quickly and if it can't be dealt with quickly you will then tend to find that it's spotted and you will have problems getting credit, you'll find difficulties getting goods off your suppliers and if you have a customer facing business who are a little bit more alert to looking at the public record you may find they're a little bit wary about engaging with you.

4:07Julie Palmer: Right so it could cause reputational damage but it could also mean if you go to the bank looking for another loan to invest in your business they might turn you down because your credit report isn't great? Yes correct. And how long does it take for you once you've resolved that CCJ for that to be expunged? You'll normally get it off the record quite quickly within a week or so but the fact that you're not dealing with those sort of basic issues I think will remain a concern for anybody who sees this. And so£5 ,000 doesn't sound like a lot of money but if you have to pay it up quite quickly that could be quite problematic, particularly for small businesses, right?

4:40It can be. And what we tend to find where you see one CCJ, if it isn't just an error of something that's been overlooked, you will tend to see there's a bit of wall of distress building. So a little bit like London buses, when you see one, you tend to see quite a few come afterwards.

4:54Julie Palmer: Yeah, absolutely. And in terms of critical distress, how do sort of companies end up there? So if they have a CCJ that's over£5 ,000, that's ticking the box for critical distress. more worryingly if they have a winding up petition. That is very serious because if you have a winding up petition that's advertised and it typically will be advertised seven days after being served on the company, the outside world really does see that. Your bank sees it. And one of the big issues with your bank seeing it is they will typically freeze your account. So it makes it very difficult to trade your business.

5:26Julie Palmer: And who issues the winding up petitions? It can be anybody. I mean, typically it's somebody who's owed money, of course, by the company. that can be a customer who hasn't had their goods who's claimed the money back and is waiting to be paid it it can be a supplier who's supplied goods for trading who hasn't been paid their invoice value it can be a contractual claim it's somebody that you've fallen out with and has taken the dispute to that level where they've actually then looked to pursue winding up proceedings against the company and what are the steps involved before it gets to the winding up petition are there sort of different steps or can someone just immediately move to do that which could ruin you?

6:03There's a variety of routes but the most typical one is that you serve notice on the company, you give them 21 days notice in the form of a statutory demand that unless the debt is paid or disputed with a valid dispute you will proceed to winding up proceedings. You then issue a winding up petition against the company you service on them, seven days after that's been served that is advertised and at that point the advertising point it's when the bank accounts will be frozen right so we see a lot

6:31Julie Palmer: of companies 60 ,000 in critical distress and 620 ,000 I think in significant distress when are you at BTG called in not often as early as we would like our message to businesses always is the earlier you can give us a call the more tools we have at our disposal to try and save the business and save the jobs. I think it's human nature that nobody likes dealing with problems. So we have a term, struthius, which means ostrich-like, burying your head in the sand. We find too many directors still do that. The earlier that call is made and the earlier we can engage to advise you on your problems, but also hold conversations with other stakeholders, the greater the chance normally is that that business can actually be saved.

7:14And the other key thing we say to directors is by consulting with somebody like ourselves, it automatically gives you a sort of cloak of protection that if creditors are going to say that you've wrongfully traded your business you've taken advice at the appropriate time so the earlier you can take that advice the better.

7:29Julie Palmer: So a lot of people might think that insolvency practitioners are just called in as the last resort and they're just there to wind up the company and get it done and dusted but that's not always the case is it? No I mean we see companies at all stages of the distress cycle we can see them at the top of the distress curve when they make an early call that gives us a much better chance of getting them back up that distress curve and actually saving the business without an insolvency process. Having said that, the UK has a very refined form of rescue through the insolvency legislation. So insolvency necessarily isn't always bad news because we can often restructure a business through something like administration, company voluntary arrangement, a fairly new animal which is restructuring plans.

8:13Most recently you will have seen publicity on TG Jones which used a restructuring plan to remould its store portfolio and try and achieve the saving of the bulk of that business so we have this very sophisticated regime and again reiterate that the earlier that call that is made the more of these tools at our disposal we will typically have to save the business and save the jobs.

8:35Julie Palmer: But are you finding yourselves busier than usual? We are in terms of the inquiries at the moment one of the things that we're definitely seeing as more prevalent is HMRC are being more ready to chase the debts that are owed to them. I think it's probably a natural reaction to the imbalance that we've seen, albeit the last budget show the imbalance wasn't quite as bad as the government was saying. There definitely is this need at the moment to improve the exchequer's purse, and we are seeing that coming through in terms of HMRC, not agreeing to as many time-to-pay arrangements, not agreeing to such long arrangements, and definitely chasing debts more quickly than we've seen for, I would say, for a number of years, probably pre-financial crisis.

9:18So it definitely is a sort of shift of gears on HMRC's part at the moment.

9:22Julie Palmer: So do you think that HMRC has got more arrears on its books that it's going to be pulling back from companies very soon? When we last looked at the numbers, September 25, there was 27 billion was showed as owed by UK businesses. And that was about 2 million businesses owed that sum. I think inevitably the defence spending challenges that the incoming Prime Minister is going to be seeing, plus the usual demands that he has with the UK economy, that is an obvious place to look at where the money can be collected there to pay for the things he's going to have to pay and the promises that he's going to have to fulfil.

9:57Low-hanging fruit. Absolutely that.

10:00Julie Palmer: That seems to run counter intuitively to the government's pledge to get Britain working and to boost British businesses. if on the one hand the tax office is chasing people much more vociferously than it has done before but on the other hand the UK government's saying let's try and back British businesses it seems that we've got a bit of an imbalance here there's various ways you can look at this so on on the one hand we are seeing unemployment rates rising at the moment so your point is very valid that if a business is going under and those jobs aren't being saved through a rescue is there really a benefit in terms of pushing people onto the benefit system and increasing the strain on the you know the benefits for public purse so that is one argument on the other hand we do have this huge overhang still of what we've called zombie businesses post-financial crisis it's not a technical term but if you picture what a zombie looks like it probably gives you a good indication of what we mean by the term it means a business that's just staggering around it's not really prospering it's just hanging on for grim life we saw this zombie hangover post-financial crisis a number of factors contributed to it interest rates remained at an all-time low there was a lot of government support through things like time to pay schemes and also the banks were very supportive of trying to keep businesses alive so we saw businesses hanging on that normally would have fallen away as part of that sort of natural cycle and natural sort of selection of business failure.

11:24The challenge with that is by keeping those businesses that aren't particularly buoyant, they're not using the working capital very well, those businesses hanging on actually become a long-term drag and a drain on the economy. And by that working capital not being used very effectively, they're starving other businesses that might make better use of that. So it's not recirculating the capital, it's not recirculating the jobs. And there is a sense in which there's a natural level of businesses that should be allowed to fail for the economy to actually prosper it sounds quite counterintuitive but we've seen this through a number of recessionary cycles

11:58Julie Palmer: i see it's the difference between being alive and thriving isn't it very much so and not even alive some of them that just barely hanging on which is the sort of the zombie terminology hanging on with with debts around their neck and then of course we've had recent um government proposals recent government initiatives and legislation to increase the wage bill, to increase NI costs on employers. Tax take is going to be higher anyway. So that's, I guess, pushed quite a lot of companies over the edge, right? It has. We probably, the last six months, we've just begun to see the effects of that coming through.

12:35So the national living wage and the NI increases were really bad news for small businesses. Small businesses that were already struggling around the corner. They've also got the more demanding employment legislation. It's really tough being a small business owner and sometimes we just see that they don't know where to turn. So these extra costs and demands on a business have come at a really difficult time. If you add to that the fact that there is a bit of a, I would say, a crisis of consumer confidence at the moment. So people are tightening their belts, the geopolitical uncertainty. We've seen what that does to energy and food prices.

13:10They tend to be the two things that people can't do an awful lot about. They need to eat their homes and they need to buy food. And for some people, it's sometimes a choice between one or the other if they're having a really difficult time. So what they tend to do in times like that is they tighten their belt. We then see that effect on consumer-facing businesses. So at the same time as some of these businesses are having their own cost base increasing, consumer confidence is low and people aren't spending as much money with these businesses. So you tend to see that double whammy for those type of sectors that are consumer facing.

13:42Julie Palmer: And do you think the government's done enough or could do more to help the smaller businesses when it considers the cost of the wage increase and the cost of the NI increase? Do you think government's done enough or should it employ better carve-outs for smaller businesses? Perhaps it should do and I think as I indicated it is a difficult place at the moment for small businesses they sometimes just don't know where to turn. The overbearing nature of regulation, I know, is a real challenge for them. And that seems to be increasing at the moment rather than decreasing. What could the government do?

14:18Probably one of the most nimble support mechanisms has been the time to pay scheme historically. But again, that's double edged. If you're using that to keep businesses alive that should be left to fail, it's actually quite difficult to decide which of those businesses should be allowed to fail and which ones that you should be helping. But you do have that challenge that if you're pushing those businesses over and pushing people onto the unemployment market you know what what how are you really helping British business at all in the process or the economy yeah exactly

14:44Julie Palmer: and are you finding at BTG Group that lenders or private equity backers are becoming a bit more reticent about putting money into companies or are they being quite quick to pull the plug post-financial crisis we we certainly saw that the banks were criticized for what was called casino banking so post financial crisis the banks definitely became more cautious in lending to business particularly small businesses and particularly things like traditional overdraft based lending they just weren't as keen on that on that what we saw was a growth in the space that sat alongside that which was the peer-to-peer lending that became sort of very buoyant on the back of the fact that there was this sort of lending gap particularly to the SME market the challenge for peer-to-peer lending for directors is it typically comes with personal guarantees so that veil of protection of running your business through a limited company effectively disappears if you're giving personal guarantees all over the place particularly for any loans that are coming into the business so the peer-to-peer market definitely address that but it does come with risks for directors and we often see now if a business fails that they've given personal guarantees that will be pursued.

15:57With the banks, they were criticised for over-lending, so we can't really criticise them for being more cautious in the lending. What we do see, is the banks remain very supportive if the businesses do engage with them. They won't necessarily advance more money if their existing security is at risk, but they will try and support a business if it's taking the proper advice to see if some sort of rescue process or plan can be put in place for them.

16:27Julie Palmer: And do they tend to work better when companies like you are engaged? What can you do to help these companies? Most definitely. I think at that point in time, they see that the correct advice has been taken. They've got somebody to speak with. Often, particularly for small business owners, the supply of management information to your lender can be quite demanding. We can definitely help with that in terms of going through the forecast, sense checking them putting them in language that the lenders understand they just see that there's a sensible voice at the table that they can have an open discussion with rather than relying on what can often be quite historical management situation and management by definition they tend to want to take an optimistic view about things so we we don't often hear that the forward order book isn't healthy but when you explore and look into that in terms of but where are your signed orders that can often be a different story so there tends to be a bit of sort of jam tomorrow So optimism and we tend to be the sort of slightly more cynical, real people sat at the table in terms of what the real challenges actually are.

17:28Julie Palmer: And very emotionally charged as well. Absolutely. A couple of times I've referred to the fact that it's a difficult world for a business owner, particularly a small business owner. They carry a lot on their shoulders quite often when they come to us for advice and we come with a solution or at least an agreed direction of travel. one comment we often get is it's such a relief i feel i've got my life back i can sleep properly again it really is difficult when you're firefighting as a small business owner and you just feel as if you've got nowhere to go yeah you've put your life and soul into this business maybe it was your parents business or even your grandparents business you know you've got this big emotional and familial attachment to it correct and often the business will have ties in the community as well and there's that embarrassment factor but again the uk legislation is very adept You know, we do recognise that failure needs to be part of a process to learn to succeed sometimes.

18:18We try to follow the American model to encourage people to be entrepreneurs and give businesses a go. You know, small business owners really are the lifeblood of the UK economy. So they need that help and support. And we need to take away this sense of failure that can come when a business fails, which is why the UK regime has adapted, I think, to be really sort of flexible and, you know, suited in terms of actually trying to find a solution. to save these businesses where possible.

18:44Julie Palmer: Could it be even more flexible? Are there any things that you'd like to see sort of enshrined in legislature or perhaps carve-outs? It's always a difficult thing, isn't it, because you're trying to ensure best practice, but equally you want to save the businesses that should be saved. I would say probably the restructuring plans are a really good addition to our legislative framework in terms of saving businesses. I think we will see them used more and more typically in retail. We used to see company voluntary arrangements was a way of reducing store portfolios. I think restructuring plans will be the new animal in that space.

19:19The landlords don't always like it because it crams down some of the cross-claims. As a stakeholder group, they tend to be the ones who suffer because typically a restructuring plan for retail, as we saw with T.G. Jones, will reduce the store portfolio. But I think that probably will be a new animal in the space that we'll see used more and more. And initially, I think it was thought that it would be used for larger businesses but we at BTG we did the first restructuring plan in the SME space and I think we will see that used more and more.

19:50Julie Palmer: Yeah that sounds like a really positive way of sort of mitigating that risk and sort of getting companies sort of turned around. It sort of brings me on to something that one of your colleagues said to me I think last year that in a way you wish that you were less busy because it would mean that more British companies are succeeding. Is this just you being altruistic or is this generally what all the insolvency practitioners believe? We tend to find ourselves quite busy even when the economy is buoyant. You referred previously to the fact I've been doing this for over 30 years. There aren't many cases I've seen where bad management decisions haven't been a factor.

20:28You occasionally see a business where things have just gone against them and they've been very unlucky but quite often you can look at a point in time where you can say those decisions should have been made differently which again comes back to my point the sooner you can take get help for those decisions the better in terms of finding the right path going forwards um so i think businesses will always fail even in a buoyant economy um but but definitely when we see a recession we typically see more businesses fail albeit the last recession probably buck that trend because of the zombie business feature and the businesses that were just kept alive because nobody was actually pushing them over which hasn't been healthy for the economy so you don't you certainly see patterns through each recession but everyone equally tends to be different as well and when you add into the mix things like the geopolitical pressures we're seeing that is going to skew a recession that might be very

21:19Julie Palmer: different from the ones we've seen before exactly and of course you cover all sorts of businesses so across so many sectors on the one hand you could have a hairdressing firm or you could have a a restaurant or a cinema chain or you could have a financial services company itself is there sort of one or two common sense practical things that companies could do to make sure that they don't even get into that significant distress uh come back to the point of take advice as soon as you're feeling a little bit uncomfortable about how your business is doing uh that advice can take all sorts of forms it can be financial advice we can actually help in terms of the operational side of the business so take advice at the earliest opportunity um the other thing i would say is the old mantra i often repeat is turnovers vanity profits is sanity and cash is king so really look at the cash side are you driving your debt collections as hard as you can be are you being a busy fool that you win a new big contract and you think the business is going to kick up and be more successful if you're not looking at your underlying margins for that contract you could be a busy fool and working harder for the same or even less money if something seems too good to be true it probably is so if you're a construction business and somebody is offering you to tender outside of your typical catchment area why is that what are your risks what's it going to do to your margin so it's it's these standard housekeeping matters but they always come back to that mantra terno is vanity profit is sanity and cash is king so count the pennies and take care of the cash that sounds very very wise very wise um julie i could be talking to about this for ages because there's so many different things so many different aspects but unfortunately our risk is that we're going to run out of time okay so thank you very much for coming in to talk to us my pleasure thank you and thank you for listening until next time take care

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