Are your clients zombies, and what should advisors look at doing to bring them back to the land of the living?
Zombie – Pronounced – Zombi
1 a corpse said to be revived by witchcraft, especially in certain African and Caribbean religions.
Informal -a person who is or appears lifeless, apathetic, or completely unresponsive to their surroundings.
a computer controlled by another person without the owner’s knowledge and used for sending spam or other illegal or illicit activities.
2 a cocktail consisting of several kinds of rum, liqueur, and fruit juice.
MUCH HAS BEEN WRITTEN in the last few years about the rise of the “zombie” company, a term first used around 2002 to describe Japanese companies kept on life support by the government, and latterly used in relation to US companies in receipt of bailouts from the government. In recent times, the term has been used to describe UK companies that are, at best, “treading water” and, at worst, slowly sinking.
These companies are typically burdened with debt, most of which was accumulated in the more free and liberal times before 2008, which they continue to service with no real prospect of repaying it at any time in the foreseeable future. It is inferred that these businesses, which could number as many as 5,000, pose a real burden on the UK economy as they are constantly chasing marginal business in the hunt for the next week’s cashflow. They also stifle innovation and the creation of new break-away businesses.
While the UK government has not directly supported this culture with hand-outs – save, of course, the notable exception of the UK banking industry – it has indirectly supported the culture by allowing Her Majesty’s Revenue & Customs to assist struggling taxpayers with Time To Pay, thereby becoming a major lender to the tune of some £7.7bn.
We have just had the seasonal results and forecasts arguments game played out in the media. The UK economy is recovering … oh no, it isn’t … oh yes, it is! For many finance directors, the picture is not clear. Is the business surviving against all odds: successfully fighting fires and keeping the wolves from the door, or is the business a dead man walking: hamstrung by historical debt with no real chance of recovery?
Are you a corporate zombie?
Thanks to Hollywood, most people can identify a zombie: grey pallor, ragged clothes and lurching gait. It is far more difficult to identify a zombie company, but signs include servicing debt and surviving rather than making profit and moving forward; constant monthly pressure on cashflow; struggling to pay the rent and VAT every quarter; and management spending most of its time dealing with problems rather than planning for the future.
The banks can only be held responsible for failing businesses for so long. At some point, attention has to focus on the fundamentals of the business and deal with structural, operational and financial issues before any progress can be made.
It was once said that most business failures occurred because of bad management. It was also said that there are more business failures on the road to recovery than there are on the way to the recession.
Obviously, the depth of the last recession, coupled with an almost stagnant economy, has caused businesses to fail, but just as many are failing now due to bad management as ever.
Finance directors that are content (or relieved) to meander along in the hope of a fundamental upswing in country’s economic fortunes to put their business back on a profitable footing may have a long wait. And when that change does happen, will the business be in a position to cope or will it be outdated, or servicing a market that no longer exists? The failures of both HMV and Blockbuster are products of a change in the marketplace.
Now is the time to tackle difficult problems. If FDs do nothing, then the chances are that the business will become another statistic.
Although the banks are no longer throwing money around as they used to, there are opportunities to restructure businesses. For example, there are more asset-based lenders with more products that can help free up some capital to plug the gaps, reduce other borrowing, or purchase needed equipment.
FDs that recognise these signs should take a critical look at the business and ask themselves whether parts of it can be changed or developed. Does some of it require hiving off or closing down? Look at, or even talk to, the competition – the chances are they are experiencing exactly the same issues. If they aren’t – why not? It cannot be all down to price. Consider a merger or pooling of resources. In many industries and in particular professional services, mergers and takeovers are a natural step for succession planning or growth.
In summary, FDs need to take action to keep the business alive, and not joining the ranks of the slow moving, living-dead zombies.
John Dickinson is an insolvency practitioner and partner in accountancy firm Carter Backer Winter LLP (“CBW”)