Creative roadkill

No doubt David Reid would have been shocked had he looked in Galadriel’s mirror in March 2006 – when the company moved to its prestigious premises in Leith – to have seen himself less than two years down the line sitting at a creditors’ meeting for his own company. However Blair Nimmo, head of restructuring at KPMG Scotland, who has been handling company liquidations for 25 years – including the long running Faulds saga – says that a story such as that of 1576 is all too familiar, and could have been avoided if the company had paid attention to a few general principles, and taken measures to sidestep a few of the problems that are common to many of the companies who fail. Responsibility, he says, rests at the top.

“There are common strands to business failure, irrespective of what sector you are in. The most common being management, management and management,” he says.

“The professional services network are probably more adept than they have ever been at helping companies avoid it. 25 years ago, we were 95 percent formal insolvency practitioners. Now we are 65 percent or 70 percent advisory now. The trend has been to move towards helping people avoid it. But there is also an acceptance that insolvency is not the way to solve a problem, if it can be solved by other means. The key aspect of it is – like going to the doctor – the way to avoid anything horrible is to identify it early and get advice early; it is at simple as that.

“The most common problem we see are people who won’t admit to themselves that they have a problem. They’ll have their head in the sand. They may be in crisis management – firefighting – and can’t see the wood for the trees. They may not want to take advice because they don’t want to admit potential failure.”

Despite the relative health of the UK and Scottish economy over the last decade and a half – with the possible exception of the last six months – there seems to be a relentless roll call of companies who start out brightly, but wind up as casualties on the road to receivership. A deeper look behind the reasons for their failure reveals that there are trends common to the companies likely to become commercial roadkill, who leave a legacy that can take years to unpick.

Who would have believed that the Faulds receivership was still ongoing to this day and is continuing? Large or small, prestigious or small fry, the relentless churn of fodder companies who come and go, keeping the receivers in healthy business, are not applying basic business sense.

“What we find quite commonly is that the quality of the financial information and management system can be quite poor,” says Nimmo.

“Part of the reason companies leave it too late is that they haven’t got the management information systems to deliver the information they require early enough.”

It may seem an obvious step, but a surprising number of companies are floundering due to avoidable management problems that could have been anticipated and steered around. In order to prevent your company becoming one of the many casualties of commerce, you need to take the lessons that are to be learned from the failures of the past.

Blair’s Top tips to avoid becoming roadkill…

Step 1 – Admit you have a problem

The starting point is a thorough review, but that depends on how much time you have. Sometimes we are brought in so late that time has almost run out. People are fearful of losing control of their business. To a large extent our starting point is to help them manage their cash better. If they can do that it usually buys them a little more time. There is no point in us trying to help them restructure their business if the cash runs out in the midst of us doing that. Then, we go for a more thorough review of the business to identify the problematic areas that can be addressed.

Step 2 – Get a grip financially

People in the creative world have a tendency to be overly optimistic. While they are much more interesting and can do all sorts of creative things that accountants cannot, the downside is that sometimes they are not as in touch with the financials as they should be. You see a lot of busy fools doing lots of work and either not getting paid at all, or not getting paid adequately. They have no idea what it is costing them.

Their creativity is their main attribute. It may be that they haven’t got strong financial skills behind that. You do see people pulling money out the company that it was never generating in the first place, but more commonly their financial information is so poor, they had no idea whether the business was doing well or not.

Step 3 – Be realistic

They have to make sure their cost base is appropriate to their likely level of business, not the blue sky level of business. They are focused on great customer service, great creative thought, but at the end of the day great creative thought and customer service don’t pay the wages. They have to make sure they are doing work that is profitable, and they have clients that can and will pay.

Step 4 – Act fast

If you are carrying too many costs, if you have too many unprofitable customers, if you have too many bad payers, you’ll see it, identify it and do something about it. Caught early enough, most business problems can be sorted. It is more important than ever that you have strong financial systems and information, and that information is produced early and accurately, and that you don’t stick your head in the sand. For the most part, most issues should be capable of being spotted at an early stage, and there is a fair chance you’ll be able to do something about them.

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What lessons can be learned from those that have been forced to close in the past, though?

Faulds Advertising

Incorporated – August 1984

Closed – May 2003

Final year losses – £887,524

Faulds had been a classic adland success story for its first 17 years trading, picking up accounts such as Kwik-Fit, British Midland and Royal Bank among many others. A management buyout in 2001 was undertaken, and a London subsidiary agency bought with the intention of breaking into the London market. However, the loss of key accounts, coupled with the London subsidiary’s poor performance caused a significant shudder. Two rounds of staff redundancies followed to ease the pressure, but despite trading with a turnover in excess of £12m in its final year, the company was wound up. A dispute between the 100 percent shareholder and the receivers then followed as the ‘receivers report’ of 2006 detailed.

“As part of the Joint Receivers’ investigations into the company, it was discovered that £750,000 had been paid out of the company to its 100 percent shareholder, Dennis Chester. The Receivers considered that this payment was made at a time when the company was facing financial difficulties and so took steps to challenge the transaction.

“A legal action was raised against Dennis Chester for the sum of £750,000 on the basis that i) the company had insufficient distributable reserves to pay a dividend, ii) payment of this dividend caused the company to become unable to pay its debts as they fell due and iii) Dennis Chester knew or ought to have known that is was unlawful to make a dividend under these circumstances.

“The action was scheduled to call in Court on 29 March 2005. In the period leading up to this date a number of offers were received from Dennis Chester’s legal agents in an attempt to settle this matter out of Court. These initial offers were rejected as they were too low. The final offer of £640,000 in full and final settlement of all issues in the case was accepted by the Joint Receivers and the sum paid on 25 May 2005.

“Mr Chester has been disqualified (from being a director) for a period of 12 years from 19 July 2008.”

Conkerhouse

Incorporated – March 2000

Closed – April 2007

Final Deficit – £447,308

The e-business services company traded successfully for six years from both Edinburgh and Glasgow, before the directors (and a former director) obtained shares in a private capacity in the firm Run Deep, which provided “complimentary” services to the company. Conkerhouse and Run Deep thereafter worked together on common projects with the intention of a later merger, but by the end of the year, Run Deep’s financial performance suffered due to one particular contract, which resulted in cashflow problems that forced Run Deep into liquidation.

At this stage, Conkerhouse picked up Run Deep’s contracts, resulting in their own cost overruns and losses, and further disputes with subcontractors involved. Overlapping ownership of the content management systems between the two entities and also the liquidator led to further disputes, and as a result the company’s bank restricted their overdraft facility, and thereafter, Conkerhouse simply ran out of money. The receivers pinpointed the loss making contracts as a key contributing factor to the failure of the company, together with the directors’ disputes resulting in a “loss of focus” on the business.

Adrel

Incorporated – March 2003

Closed – August 2007

Final Year losses – £94,674

In its four trading years Adrel had turned inconsistent profits. A routine VAT review disclosed that the company had not charged VAT on postal services to their customers, despite this being widely recognised industry practice. Whilst making clear that Adrel had not gained (or sought to gain) from this, HM Revenue and Customs submitted a bill of £302,647, which in effect sunk the company, which did not have sufficient liquidity to make the payment.

Pillans and Waddies

Incorporated – 2001

Closed – September 2006

Final Year losses – £671,000

The high profile print group had been trading successfully as Pillans and Waddies for five years, although behind the scenes had been running at a loss for three of those. The business was restructured and refinanced in an effort to cut costs, and was also subject to a merger in March 2005, but continued to trade as a loss maker. The receivers were called in and were in discussions with over 30 interested parties who were considering taking the venture on and trading as a going concern in an effort to salvage the business. Despite what the receivers described as a blue chip client list and turnover ranging between £10m and £26m, the company was wound down and assets sold off at auction.

Ptarmigan Productions Limited

Incorporated – July 2002

Closed – May 2006

Final Deficit – £64,133

The Leeds based corporate event management company seemed to be solidly founded, carrying only modest debts and rental outgoings, coupled with a successful Christmas convert event portfolio which had garnered network television coverage over the previous three years.

However, the company seemed to overextend itself when it took on the management and design of the 2006 World Expo in Hangzhou, China, a 100 city showcase which was to be funded by corporate sponsorship and advertising at the event itself. Generous revenues streams were forecast, anticipated and envisaged, but not actually received, and the over-generous predictions of visitor numbers - and a terrible miscalculation about visitor willingness to pay additionally for event programmes- meant that the budget was never capable of being recouped. Miscalculating the finances of this single event broke the company.

The Northwest Enquirer

Incorporated – August 2005

Closed – September 2006

Final Deficit – £1,098,500

Launching and running a newspaper is notoriously difficult and always potentially a financial quagmire. The Northwest Enquirer launched optimistically in February 2006 with £800,000 available financing, with another £200,000 legitimately forecast to get the launch off to a millionaire’s start. The receivers tartly noted in their summary that “the directors and the company’s advisers believed the sum raised would be sufficient to see the company through to profitability.” However, some three weeks after launch, the company sales director left with immediate effect citing stress, a move which “created a massive problem”, according to the receivers, and the failure to replace the sales director with someone of sufficient experience or ability ultimately led to the unravelling of the entire operation. Advertising sales were massively reduced as a direct result, effectively crippling the company’s key revenue stream. Redundancies and restructuring followed in an effort to cut costs, but the company was effectively holed below the waterline, and an investor withdrew his financing as a result, causing more precipitous problems. Within six months the company was in liquidation and the Northwest Enquirer was no more.