Peter Godfrey-Evans, Restructuring Partner at Mercer & Hole, a long-established accountancy firm in Milton Keynes, looks at the solutions for businesses who are considering their options:
A recent survey by the Federation of Small Businesses (FSB) grabbed headlines in January when it proclaimed that around 250,000 small businesses are set to fail. It is a headline that demands closer inspection.
Whilst 250,000 businesses may potentially collapse, it is not necessarily the business itself that fails but the corporate shell – the limited company – saddled with unmanageable COVID-19 debt that is possibly beyond rescue. And that, I believe, is an important distinction.
What is the difference between the business and the company?
A business is a collection of skills, enterprise, hard work and demand, all of which can still exist irrespective of the wider economics. A business that was viable before the pandemic, can be viable again.
It is also important to remember that where a business is left to fail, there will undoubtedly be detrimental knock-on consequences in the marketplace around them. Consider the employment they provide; rent and rates paid; orders from other businesses and individuals; paid taxes; and pension contributions. If the business fails, every stakeholder associated with it loses.
If the corporate shell is wound up, the stakeholders participate in a distribution of what limited value remains within a dying entity. However, it does not have to mean the business – the collection of attributes previously bound together with the shell – cannot be freed to create value in the future.
So, what are the options?
It is, of course, possible to liquidate the company and punish the owner and managers. Stamp on the shell and dissipate the skills, enterprise, and hard work which previously created value for the community, leaving stakeholders to split what meagre value is left achieving pence in the pound return on their debt and losing a customer when the pandemic eases.
Or should we find a way for the businesses to survive and be able to thrive in the future, to continue to provide employment, pay tax, rent and rates?
The government has, since the beginning of the pandemic, done everything reasonably within its powers to protect businesses and give them a fighting chance. Strategies have included a combination of settling costs on behalf of businesses, such as the employee furlough scheme, the provision of grants and waiving of rates, the deferral of repayment of debt and the provision of cheap and accessible finance. Protection from action by creditors has also enabled many to survive. The latest lockdown has seen more of the same but going forward we need to see how realistically businesses can free themselves of the burden of the debt that they have been left with.
What is needed is a system which encourages entities to seek to form agreements with creditors to repay debts over time. If such an agreement cannot be reached, then steps should be taken to extract the business from the shell such that the entrepreneurship and hard work can create future value for the stakeholders associated with it.
Such a process will need stakeholder engagement and cooperation.
Businesses will thrive again
We must concentrate on finding ways to reach agreement that include balanced, fair debt repayment plans, or negotiate a strategy to lift the businesses out of the damaged shells so allowing the individuals behind those businesses to drive forward and continue to create wealth.
Viable small businesses can and will thrive again. They will provide employment, pay taxes, occupy premises, and pay rent and rates. They will order supplies from other small businesses and they will invest and create value in the wider community.
Exactly how that can be achieved remains a puzzle, but it is likely to include a combination of debt forgiveness and/or an extended payment plan, and a UK ‘bad bank’ to take on debt to allow the business to recommence trade. If that cannot be achieved, assistance may be required to enable previously viable businesses to be extracted from the damaged shell and be allowed to trade again within a new shell.
I am not convinced that further tax deferrals, rent protection, government guaranteed loans, or any extension of further debt will ultimately prove to be serviceable. I would urge the government to look towards new ways of supporting businesses.
Looking ahead in 2021 and beyond, 250,000 companies may fail, but 250,000 businesses will not fail.