Filter news by:

Director fatigue - a growing challenge in 2011

3 November 2011

During 2011 we have been witnessing several cases of “director fatigue”, where a business reaches a point in its development when the management /owners no longer have the appetite to continue battling.  Some of these businesses have historically been enormously profitable, but increasing headwinds, no real upturn in the UK economy and no route for future growth are presenting a huge challenge to management and other stakeholders.  This article examines one of the possibilities for shareholders in such situations. 

Picture, if you will, an owner managed business that has provided a living to its owners over a number of years, possibly decades.  It has been variously profitable and loss making during its life.  Now the owner cannot see any way forward for the business beyond a long hard slog of increasing input prices, static or reducing sales, and decreasing margins.  Additional capital or cash may be required to fund capital equipment or cover short term losses, and the owner is not attracted by the idea of pumping more of their ‘children’s inheritance’ into the business.  What is the responsible owner  to do? 

This situation is facing an ever increasing number of our banking clients’ customers. Relationship managers have been telling us, “last week, I received a liquidation notice from one of my customers and I hadn’t seen that coming at all. When I was at my recent review meeting with the customer the bank account activity was fine, turnover was around the same levels as previously”, and so on. 

An increasing number of businesses with a positive net asset position are now choosing to proactively close down rather than trade on in such challenging markets.  This generates risks for all stakeholders, and is often undertaken by owners without seeking any professional help. 

We have considerable experience of working with businesses that are uncertain whether to go down this route, and if they decide that enough is enough, helping them to close down with the minimum risk possible to them and the bank. Ideally, this would also include safely extracting capital from the business afterwards. 

The most commonly used process is a members’ voluntary liquidation.  Although governed by the insolvency act this is not an insolvency process, rather a brake on unscrupulous companies removing capital without adequately dealing with creditors.  The process is relatively simple, requiring the directors to swear a statutory declaration of solvency, and the shareholders to pass resolutions to place the company into liquidation, appoint liquidators, and give those liquidators suitable powers. 

Unfortunately, the simplicity of the legal elements of the process leads many to conclude that the entire process is as simple.  Sadly it is not. 

Prior to swearing the declaration, directors are required to make a full inquiry into the affairs of the company to make sure that it can meet all its liabilities, including any contingent ones.  Any subsequent failure generates the assumption that the directors did not make a full inquiry, or if they did, they made a false declaration.  This can carry criminal sanctions. 

We have helped directors of many companies to ensure that they do not leave any creditors behind inadvertently.  One additional benefit of our methodology has been to occasionally uncover previously forgotten assets, including freehold property, intellectual property, and contingent assets. 

The secret of a successful close down and subsequent solvent liquidation is effective planning.  All the heavy lifting needs to be done well before the liquidation is proposed. 

Management need to consider how best to realise any remaining assets within the business, be they stock in trade, work in progress, or fixed assets.  We have assisted management teams to dispose of pools of assets, using a range of techniques and processes, ranging from an accelerated merger or acquisition of the entire company, or more likely its business and assets, to a simple instruction to a local auction house. 

Various tools are available to the liquidator that are not available to management generally, including the helpful disclaimer process for disposing of onerous property, particularly long leases.  Blending these tools in an innovative manner can help a business to exit gracefully, whilst preserving as much value as possible. 

In summary, it is vital that bank relationship managers ensure, in these challenging times, that they seek to understand in detail how a business is currently performing and more importantly how it will perform in the short and medium term. It is this visibility that will reveal a potentially “fatigued” director/owner who may wish to exit their business and hopefully enable the bank to add value to them by ensuring they seek professional assistance to guide them through what can be an emotional and complex planning phase,  while also ensuring any risk to the bank is minimised.

For further information, please contact Simon Glyn using the online form below.