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A Salutary Tale

As one of our clients is currently in legals for a £500k investment, I am compelled to write about another client who recently closed their doors and called in the Administrators.

This business failure is particularly sad for several reasons: it was a husband & wife owned company, grown from nothing to deliver a number of very successful years, suffered from several factors outside of their control which impacted on margins and the ability to make profits, but most of all it is sad because the failure of this business was completely avoidable.

We were approached over a year ago to help deliver new equity into the business. The reality of the situation was that investors were being asked to pay down supplier balances, deal with an HMRC Time To Pay arrangement totalling close to £1m and back a business not forecasting to make profits for another 2 years.  And yes, we can deliver investment solutions to situations like this, especially when the history has been so good, the balance sheet positive and top line sales holding up. But investors are business people and clearly would have wanted both a significant stake and level of influence on how the business was to be run. The owners weren’t able to get their heads around this and thus any equity solution fell away.

That old “which would you prefer” phrase – some shares in a larger successful business or 100% of nothing, comes to mind.

The final point to make here is a simple maths one: any Time to Pay arrangement agreed over one year, means you have to make that much net profit in said year, otherwise you will fail to make all payments, and keep up with current liabilities as & when they fall due. If you know you won’t make that level of profit, then you need an additional solution in the form of new money. Otherwise you will run out of cash some way through the period. Selling equity at this point may not be ideal – we all get that. But if it’s a choice of an equity partner or failure…..

Onwards and upwards…..

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