Going for broke

Business has never been busier for UK insolvency practice Begbies Traynor as increasingly numbers of UK companies collapse under the weight financial pressures. CXO meets the firm’s executive chairman Ric Traynor to get the inside scoop on how many businesses are going under.

“Going to your bank for more borrowing is a non-starter, unless you're a very large customer”
-Ric Traynor, Executive Chairman of Begbies Traynor

There are few people who know more about the effects of the credit crunch on UK businesses than Ric Traynor. As executive chairman of one of the UK's largest insolvency practices, Begbies Traynor, his speciality is the business of bankruptcy. And in today's economic climate there is plenty of business around.

Begbies Traynor's latest Red Flag Report, which monitors companies over a year old with assets over €11,940 paints a very gloomy picture of the UK economy revealing that few businesses will emerge unscathed from the looming recession. According to the report the number of "distressed" UK businesses more than doubled since the start of the year and 4566 companies faced "critical" problems - i.e. county court judgements of over €5,970 or winding up period actions - in the third quarter of 2008 compared to only 791 in the same period last year. Meanwhile the number of companies with "serious" problems - those with a court action or poor or outdated accounts - doubled from January to the end of September 2008 to 58,564.

But, says Ric Traynor, the worst is yet to come: "Don't be of the mindset that this is a bit of a blip and within 12 months we'll be back in the good old days of 2007," he warns. "I think we're talking about four or five years until we see a decent amount of growth. In terms of recession, actually going backwards, you're looking at all of this year and into 2010. Then there will be a period of flat or no growth. The first half of next year after Christmas up to the mid-year will be the worst affected. There will be a lot of job losses."

The worst affected sector so far, he says, is the construction industry as long-term contracts come to an end and new ones fail to materialise to take their place. Begbies Traynor's report claims that 163 construction companies faced critical problems in the third quarter of 2007 and in the same period of 2008 1055 companies faced critical problems - a 547% rise. "If you go back a year or so ago construction companies were working on specific contracts. What's happened now of course is that there are no new ones," says Traynor. "In the short to medium term, four to five years, the industry is going to struggle. You will see smaller companies collapsing, particularly in the current situation where there's so little in the way of additional capital around." He goes on to say, however, that in the long-term larger construction companies will survive the storm, provided that they take measures such as shrinking their workforces and sitting on existing landbanks.

The full effects on the retail sector will be felt he warns, in the early part of 2009 when some brand names are expected to disappear from UK high streets completely. Only 48 companies faced critical problems in the third quarter of 2007 and 323 faced critical problems in the third quarter of 2008 - a 573% rise. "After Christmas the cupboard will be bare and there's every chance that a lot of retailers will downsize and close unprofitable branches. There will be some well known chains that will disappear without a doubt."

While retail and the construction sectors are the most well publicised casualties of the credit crunch, Traynor says no industry is now immune from the effects of the economic decline.

He warns that traditionally 'safe' industries are now also under threat - including IT. This, according to the Red Flag alert was the worst hit of all UK industries in the third quarter of 2008- the reason being, says Traynor, is that it is catching up with other industries, having remained strong until recently. The third quarter of 2008 saw a 627% increase in IT companies with the most severe difficulties compared to the same period last year. In the second quarter of this year there was a 42% increase in the number of companies facing severe difficulties. "The IT industry has been pretty resilient to date because it learnt a lot from the dot.com bust so it changed to a large extent from just doing one-off assignments to having longer-term contracts that clients and customers were locked into. "This would have made it a bit more resilient than perhaps it would have been. But it has now started to play a bit of catch-up." He warns that IT companies could exacerbate the problems they are facing because they are in denial over the situation so are slow to implement the necessary measures to protect themselves. "There's evidence of many IT companies being in denial of a deterioration in trading and being slow to take cost cutting action. This only shores up problems for the future and may make them more vulnerable to acquisition by larger more established IT players, further feeding the recent wave of IT industry consolidation."

Neither, says Traynor, are mining and other excavative industries safe. "If you'd asked me three months ago, I would have said IT has fared pretty well, and I would have mentioned some manufacturing and specialist engineering industries, mining and similar excavative industries. "Now all of them are suffering." Traynor advises that the best way for companies to protect themselves in this harsh economic climate is to plan well ahead and this includes preparing for what to do in the worst-case scenario. "Plan properly, and don't be a hostage of fortune.  "Sit down and think about what the future could be and where the funding will come from to run the business. Include in the plan a worst-case scenario. Think about how you would cope in that scenario."

He urges companies to plan early when it comes to what cost cuttings to make - particularly when it comes to cutting jobs. "Start planning to get rid of those costs now even if you don't do it right now because there are lead times involved with people.

"Put everybody on notice in case you need to make them redundant." As well as being open with members of staff about possible cutbacks, Traynor says companies should ensure that suppliers, their bank and business partners are kept well informed of any developments facing the company. Attempting to conceal information about any problems the company is facing will only lead to greater problems further down the line. "What companies need to do is to be as open as possible with suppliers, bankers, customers and employees and just let them know what the position is. Don't give anybody any big shocks - that's the worst thing you can do in this situation. Some companies keep quiet and hope that bad news will go away. It won't. I just gets worst."

The result of not keeping banks and suppliers informed of financial difficulties a company is facing is that they are likely to withdraw any support or terminate existing business relationships, warns Traynor. He says: "In this economic situation, if you give people shocks, there's likely to be a knee jerk reaction from them whereby people try to grab their money back or their stock back or freeze the overdraft and put you into some kind of insolvency procedure."

One of the toughest challenges businesses will face is actually securing finance - either to expand their business, pay suppliers or pay off debts. In the absence of freely available bank loans, companies will have to rely for help on third party financing or even bailouts from the personal savings of the company directors themselves. Traynor says "Going to your bank for more borrowing is a non starter, unless you're a very large customer and the bank is into you for so much that it doesn't have a choice. You're almost certainly going to be looking at third party finance. For most companies you're looking at things like directors' personal savings. Directors may be able remortgage their home or use their pension funds to invest in their own business." He warns company directors to think carefully before taking such a step however: "These measures should be taken in conjunction with good advice," he says. "The last thing a director should be doing is throwing potentially good money after bad. If the business isn't viable anymore then it should be dealt with appropriately."

While Traynor advises companies to approach the current economic conditions as if they are permanent he describes the situation as a "natural shake-up" which will result in positive growth over the long term. In the meantime, businesses caught in the eye of the economic storm should take preventative measures now to ensure they don't end up a statistic in Begbies Traynor Red Flag Alert report.