9 Lessons and Laurels: a Christmas themed blog on the main causes of business failure

Regular readers of my blogs over the years will know that I never pass up a chance to use a musical analogy for business problems. As an insolvency lawyer with a second calling treading the boards, my legal practice and my music frequently vie for my attention: never more so than during the Christmas season.

On my desk at this minute are a useful piece of research commissioned by R3 (the Association of Business Recovery Professionals) into the causes of “business struggles” which I printed ahead of our Christmas meeting last Thursday, and the running order for the Paris Smith choir’s contribution to a 9 Lessons and Carols service which I sang in last night, at a lovely little 15th century church near Southampton. As I read from one document to the other, a number of (slightly peculiar) links began to form in my mind:

1. Joy to the World

The prelude to the “business struggles” survey was R3’s “value of the profession” research which revealed earlier this year that the insolvency profession rescues almost 7,000 UK businesses (41{ba3215b0bf35eaeb06be458b3396ffbfc50bb9db10c9ff1594dfc3875e90ea48} of those facing an insolvent position) and saves almost 250,000 jobs per year. To those who have been able to turn a bad situation around with the help of good advice, therefore, some joy may indeed have been brought to their world. By contrast, there has been rather less joy for insolvency practitioners themselves, with the advent of mandatory costs budgeting, an optional pre-pack pool and a raft of other new measures to contend with, not to mention the recent friction with the FCA over personal insolvency advice regulation. Seriously, best not to mention it. Such a high pace of change inevitably eats into the profitability of the profession. To their enduring credit, however, IPs are invariably still willing to pause long enough to take part in such an important survey, aimed at capturing the industry’s assessment – from the front lines – of why businesses come to them for advice and input.

2. On Christmas Night

In the first verse of this carol we are told to expect news not only of great joy, but also of great mirth. Given the association of this term with genuine merriment, this may have been a somewhat lame attempt to find a rhyme for the word “birth” when, surely, “earth” would have fitted well enough, but we wait now on tenterhooks for imminent (promised before Christmas) news of whether the government is going to continue insolvency litigation’s much needed exemption from the effect of the Jackson reforms, which allows IPs to recover conditional fee uplifts and insurance premiums from unsuccessful defendants whereas most court users cannot do this any longer. Independent research tells us that this exemption nets at least £160m per annum for the UK economy, and without it far more errant directors would get away with deviant behaviour towards their staff and trading partners. So perhaps the best we can say is that we are expecting some news. The latest I have heard is that the news, at best, is likely to be that government is holding the decision over again, but if (contrary to expectations) there is to be an announcement of a permanent exemption, I for one will be making all the merrier this Christmas.

3. The First Noël

Now for the first of our survey results. First amongst the reasons for a business struggling was a grouping of answers collectively known as “underperformance for one-off reasons“. What we are talking about here is something the management of the business was not expecting to be a problem, such as a particular product line which bombed, a manager who was allowed to become almost indispensable and who left and set up in competition, or a key supplier or customer who shut up shop. Whilst this news might do little to “certain poor shepherds”, who may feel they can do little to prepare for the unexpected, the reality of course is that if businesses actually plan for rainy days, they often fare better than others when things do go wrong, as they invariably will at some point. Precautions such as diversification of offering and routes to market, having proper and binding employment contracts, corporate constitutions, partnership agreements, as well as (of course) keeping a close eye on cashflow and keeping in close contact with your professional advice team can all help toensure that the temporary blip doesn’t lead to a struggling business.

4. Jingle Bells

This song (not actually a carol at all of course, but we got away with it) features the somewhat surprising, but enduring line, “Go it while you’re young” which on the face of it seems like good advice, in the sense of making sure you don’t wait until you’ve tried and failed, but adopt a long-term strategy from the earliest days of the business. The failure of long-term strategy came back as the second biggest cause of business struggles, so there is clearly merit in taking the time to get the strategy right and keeping it under constant review. Professional advice at an early stage can of course set us all on the right course, and if we have a clear aim in sight it should be apparent at an earlier stage if we’re going to fall short of the mark. Clearly the earlier we identify these things, the more we can do about them, so yes, let us heed these wise words. Then again the song also tells us to “Take the girls tonight”, so perhaps it is best not to take it too literally!

5. Silent Night

We often think the Germans are one step ahead of us in business. In truth, in the insolvency context the reverse is certainly true, with German professionals keen to shine their entrepreneurial lights in the UK given their own insolvency regime remains, by comparison at least, rather inflexible. However, I think our Teutonic brethren may have the edge in their version of Silent Night, which includes the lyric, “Alles schläft; einsam wacht”. This phrase means “all are asleep, alone wakes” (which then goes on into the next line about who is waking), and this for me sums up the third largest cause of business struggles, which is human error, or if you like, sleeping on the job. Most business people of course have no formal training of any kind which would help them to raise their understanding so they do not fall into the trap of sleepwalking their way through their business, but remain instead the one who watches, ready to address the problem or to ensure they do not miss the opportunity. For me, this is all about making sure businesses are able to bring the right skills to bear at the right time, to stay light-footed and objective, to stay on top of changing legislation so they are not caught out, and to make every effort to truly grasp the wider market in which they operate.

6. It Came Upon A Midnight Clear

It is often in the darkest watches of the night that a business gains clarity, of purpose and direction. If the fourth largest cause of business struggles is long-term fall in market share, it stands to reason that for these businesses the writing has been on the wall for some time. They may have failed to adapt to a changing market, or it may be that whatever they do within their existing skill set their offering will eventually become obsolete. Half the battle in terms of turning things around for such businesses is, in my experience at least, that they achieve this moment of clarity sooner than they otherwise would have done, lest they do not notice the darkness slowly creeping over them. Businesses who spend too long looking inward, where the chief movers in the business only circulate within a narrow group, will often fail to see when this is happening. That is where networking, particularly with peers and even competitors, can open our eyes to such things. If we don’t fancy self-help, however, we can always call upon professionals to come in and shine a light for us.

7. O Little Town of Bethlehem

The fifth largest cause of business struggles remains, perhaps surprisingly, failure to access finance. Of course, if we only look within our own ‘little town’ – our bank manager, our accountant, our existing circle of contacts – we will eventually exhaust our options, particularly if we face more than one challenge in succession. That is when it is necessary to head out of town a bit, to consider the availability of such sources as asset based lending, crowd funding, cashflow lenders to name but a few. Often all that a business needs to turn a corner is a temporary breathing space, which a short, sharp injection of cash (appropriately judged) can help them to achieve, so they can head off the struggles before they begin. Contrary to popular misconception, insolvency practitioners do not just help with formal reorganisations; if all that is needed is funding (whether to address an existing problem or to take advantage of an opportunity which might not otherwise be attainable), they can help us to access it. As an aside, but related to this point, Paris Smith has finally, after 197 years in Southampton, decided to spread its wings into another city; Southampton of course is no small town, and it will always be Paris Smith’s ancestral home, but opening up in new markets and really making yourself a part of the new community you are buying into there is simply good business sense. Fortunately for us we were able to access the required funding easily; others may need more help.

8. O Come All Ye Faithful

Pulling together the crowd of answers given to the survey leads quite clearly to a single conclusion for all businesses. Businesses struggle as often as not because of self-inflicted troubles, rather than simple market forces. The carol echoes this sentiment with the phrase, “begotten, not created”; business struggles all have an identifiable cause, or causes – they cannot be manufactured from nothing. Once we realise that our businesses need not struggle simply because we are victims of third party action, we can start to take matters back into our own hands, although we may have to recognise that this means a change to our management structure.

9. Hark the Herald

Finally, you don’t have to take my word for any of this. The research is all around us, if of course it is heralded from time to time by R3 and others with a significant voice in business affairs. We may not hear it amongst all the other white noise of industry, especially when business is good, but if we think our businesses may be starting to struggle, we should make sure we heed the advice, ideally before things start to slide.

If you are still reading at this point, I thank you very much for your patience with this analogy. It is Christmas after all, and a bit of artistic licence can hopefully be forgiven! I wish all of my readers a wonderful Christmas and New Year. Keep an eye out for our New Year edition, which will be a collaborative effort with my colleagues Clive Thomson and Phil Baldwin, inspired by the fact that damages claims against company directors are now freely assignable by insolvency practitioners and capable of being tagged onto disqualification proceedings. To do this we will be drawing on our combined 60+ years’ experience of defending directors from claims under some snappier version of: “What Seems To Be The Problem, Officer? 12 New Years Resolutions for company directors to reduce personal exposure to future insolvency events.” See you all in 2016!