Is administration the end of business?

By Kevin Peachey Personal finance reporter, BBC News

Retail is likely to be one of the sectors worst hit, experts say

You'll never see an entrepreneur wearing a sandwich board and predicting that the end is nigh.

Those who have set up their own businesses tend to be among the worst at foreseeing their collapse, experts say.

Perhaps it is the emotions involved, maybe selective blindness of the facts, or above all it could be the fear of failure.

But with the economic downturn continuing, it could soon be time for many to face those demons and accept their business is in trouble.

Facing collapse

One of the key barometers of the economic climate is the number of businesses going into administration.

I am pretty sure that during the next 12 months we'll be in some fairly choppy waters Alan Bloom Ernst and Young What administration means for you Wrapit collapses

This is the point at which outside experts - the administrators - come in and take on the role of the directors.

Any action from creditors is frozen as the administrators to try to save the business, sell it or close it.

The latest figures for England and Wales revealed that the number going into administration in the three months to the end of June rose by 9.2% on the previous quarter, from 859 to 938.

After a revision of the numbers, the Insolvency Service says that the latest figure is 60% higher than the same period of 2007.

But, if analysts prove to be correct, a big rise is still to come.

"I am pretty sure that during the next 12 months we'll be in some fairly choppy waters," says Alan Bloom, global head of restructuring at Ernst and Young.

The first date to look for 29 September.

This is the next "quarter day" when retailers have to pay the next three months rent to their landlord, and which can prove the final financial straw for some.

There has been lobbying from some retailers to pay monthly, rather than quarterly, rent to ease the hit.

After this date retailers will also be entering the critical pre-Christmas quarter which Mr Bloom expects to be the toughest for many years.

Spending

But it is not just retailers which will be affected by the tough months.

Wrapit collapsed leaving hundreds in fear of losing their wedding presents

With household finances being squeezed by food and fuel, consumers' discretionary spending is likely to be drawn in.

A number of furniture companies have felt the pinch with some going into administration as people spend less on improving their homes.

Mid-range travel companies, the motor retail and leisure sectors will also face tough times, according to Geoff Carton-Kelly, partner at administrators Baker Tilly.

This, alongside the downturn in the property market and advertising spending, has led to his prediction that the number of businesses going into administration will rise by 50% by halfway through 2009.

During the high-profile collapse of wedding list company Wrapit, the business's bank and main creditor HSBC was accused of withholding credit and debit card income, with a Wrapit director saying this caused a cash crisis.

The bank said it had done everything it could in the preceding months to assist the directors.

And Mr Carton-Kelly says that the banks, despite their own lending coming under pressure owing to the credit crunch, "do not do rug-pulls anymore".

"The banks have armies of people to support businesses with a decent recovery strategy," he said.

"They are happy to work with a business's advisers to find a way through."

Early assistance

Both Mr Bloom and Mr Carton-Kelly have years of experience in dealing with businesses in administration.

Discretionary spending is likely to continue to go flat

Mr Carton-Kelly says he has dealt with businesses ranging from abattoirs to firms built on chemical waste dumps in his role as an administrator.

He has stood in front of hundreds of disgruntled staff and hired security to protect goods from unhappy customers.

Mr Bloom says that the complexity of business - owing to its increasingly global nature - makes it an art for them to survive in the current downturn.

"Lawyers and accountants should not run the world but I think a little bit of help from them at the moment will be a good thing," he says.

A different form of management is required in times of economic downturn, he says.

The duo agree that the holy grail is for entrepreneurs to seek external help early, giving a rescue package more opportunity for success.

And here's the good news.

Up to eight or nine out of ten businesses survive in one form or another, according to Mr Bloom.

A good chunk of these are the result of "pre-packs" - when a business secures a buyer when it knows it is heading into administration.

Aware of the growing numbers of companies facing collapse, investors are lining up funds to buy businesses for a bargain as they enter administration.

For those which are not bought as a going concern during administration - which typically lasts for six to eight weeks - the administrators oversee the sale of assets.

Staff are among the hardest hit when a business folds, sometimes only having a few weeks or days notice before losing their jobs.

"The problem is that this often happens with enormous speed; the good bosses will help cushion the blow," says Sarah Veale, head of equality and employment rights at the TUC.

Strict rules govern how administrators dish out any money that is left in a business.

Customers, suppliers and contractors - known as unsecured creditors - are towards the back of the list with the taxman. At the front is the bank, with staff just behind.

These can be difficult negotiations to deal with for the administrator - but a job that is predicted to become a lot busier.

E-mail this to a friend

Printable version