Spotting company distress – and dealing with it

How do you know if your company is in distress?

If you’re in a cashflow crunch – creditors paying late, suppliers charging more and bills due – you may be feeling panicky. This is a perfectly natural reaction, but the worst thing you can do is put your head in the sand, which many people do.

With 2022 seeing the highest levels of business failure since 2009 and many commentators predicting things will get worse, the spectre of insolvency is hovering over many previously viable UK businesses.

But formal insolvency is a last resort for your business, a stage you’ll hopefully not get to if you act early.

So where do we start?

How many of the following apply to your business?

• Creditor pressure – you’re getting letters of demand from people you owe money to.
• Unpaid tax – you’re behind with your payments to HMRC.
• Getting paid late – you may invoice for a 30-day turnaround, but people are taking 60 days, 90 days or even more to pay you.
• Cash problems – your business may have money locked up in assets but have little liquid cash. Perhaps you’re a seasonal business or waiting on a large payment.
• Personnel problems – multiple open vacancies, open director positions or disaffected management can all contribute to business difficulties.
• Disputes – you’re currently in litigation involving your business (e.g. one of your creditors has filed a winding up petition)
• Punishing contracts – you have expensive fixed contracts or have perhaps inherited disadvantageous supplier contracts from a predecessor.

If you’re saying ‘yes’ to two or three of these, you have a few early warning signs. First off, don’t panic. Nobody’s expecting you to fix all this by yourself. That’s what professionals are there for.

Talking to a lawyer might not be your first thought. These seem like business problems and you might turn to an accountant. But in fact, early advice from a lawyer can make a meaningful difference to most of these issues.

Pressure from people to whom you owe money might seem like something you can’t do much about. But if you do end up going bust, all your customers, suppliers and your landlord will suffer too. It’s in their interests to keep you afloat.

If you’re getting those letters of demand, or letters before action (look for the words Without Prejudice at the top of the letter), having a lawyer answer them will give you immediate credibility, make chancers think twice and buy you some vital time.

Poor cashflow is what kills most businesses. You may want to give a major customer a bit more time to pay your invoice, but if you’re doing it with numerous customers, the aggregate effect could be disastrous. Having a reputable law firm handling your debt collection can nip this problem in the bud and bring in vital revenue.

If you have to make staff changes due to difficult trading conditions, you don’t want to be worrying about legal action due to poor employment contracts or directors’ agreements. This is a vital area to get right while the sun is shining. Many businesses don’t have employment contracts or are using old pro forma contracts which might not be fit for purpose. A legal ‘healthcheck’ can save hassle and money down the track and give you much more room for manoeuvre.

Supplier relationships can also be very tricky for your business. You may have old contracts which don’t do you any favours, or have inherited poor contracts from a predecessor. Renegotiating those contracts or solving contract difficulties can give you vital breathing space, and that takes good commercial lawyering.

Property is another area which can poleaxe a business, but if you go bust, your landlord will suffer as well. Think about renegotiating your leases as well as your other contracts.

And obviously, if you’re threatened with litigation, get in touch right away!

Some advice – debt collection is the obvious example – will bring vital revenue into your business, while other help – dealing with creditors, renegotiating contracts – will buy you much needed time.

Getting an audit of your employment contracts, meanwhile, is not only sensible but acts as a kind of insurance policy and makes taking action much more straightforward, rapid and less expensively.

When it comes to saving your business, the cost of instructing professionals shouldn’t be your first concern. You need to think about overall savings and the things you can’t put a price on – flexibility, freedom to act and providing you with a wider range of options.