What is the impact of the collapse of a larger business on a smaller one?
What will be the impact of the collapse of a larger business on a smaller one? It can be quite dramatic.
These group of stakeholders are their trade creditors. Generally it is assumed that the largest companies do not trade with smaller owner-managed business directly. However, the supply chain further down the line may well include small and medium sized enterprises.
Is your business in one of these supply chains?
Knock-on Effect of the Impact
If so will the collapse have a knock-on effect in the coming months for your business?
In the past this has happened to my clients who operate in the retail sector and dealt with large retailers, Woolworths, for example.
I am sure those businesses who are selling to the wider airline and travel industry will already be looking at the stability of their customer base.
Lesson to be learnt from the Impact
There are lessons to be learnt. All businesses looking to protect their value and ultimate succession must consider their business strategy and crisis planning.
What are the key steps to mitigate the Impact?
Here are six key steps.
I would recommend all businesses should take these steps and review the impact of the collapse of a larger business and how its insolvency could potentially have on their own future trading relationships.
- Understand which sectors and which particular companies your business is ultimately reliant on. Keep up to date with industry reports, company financials and predictions for their future trading expectations. I can provide you with sector providing these details if you require them.
- Diversify your customer base into different sectors so you are less reliant on any particular risk.
- Consider building a recurring revenue stream where your customers require your services on regular intervals.
- Look at those companies who are either your direct customers or their customers. Can you identify where cash flow or profitability may become an issue. Take action to review your own trading terms with them. Ensure your credit control is organised and thorough. Have you ever considered a trade indemnity or credit insurance policy? You need to abide strictly by their agreed credit limits. It is something worth considering in the light of protecting the value of your business. I can introduce you to insurers who provide this cover.
- Review your own cash flow requirements. Plan ahead with projections and ensure you have the correct facilities for your business’ financing needs. These needs include both working capital and growth finance. It really is not difficult to do this and, having done it for myself, I can help you in this task.
- Look at your own sector’s ‘growth curve’. Consider when the ideal time would be to achieve an exit. Ideally you want to place your business in a good position to obtain the highest multiple and the most interest from any purchasers. I have some really useful Exit Planning tools and the Business Sales Process to help you here.
The sectors and the businesses within them need to recognise what is happening. They will need to evolve. Economic conditions, lifestyles or generational preferences and technological advances change without us noticing. These changes are becoming faster and some even occur on a daily basis.
If we, as business owners, do not manage these changes in a timely way, there can be disastrous consequences. The “head in the sand” is an option and many people take it. I have seen it all too often and as a result have seen really viable commercial businesses go under.
Thomas Cook, Carillion and Nokia all struggled for years. Kodak did not recognise the impact of digital technology. They kept hanging on but eventually they and just others lose their fight.
The collapse of Thomas Cook was more a failure of corporate finance than a failure of the travel industry.
Ryanair boss, Michael O’Leary once said British Airways is “a pension fund with wings.” In his Agenda column in The Sunday Times Business News (22nd September 2019), John Collingridge commented, “…then Thomas Cook has a long debt pile with hotels – £1.7 bn at the last count.”
Thomas Cook was paying high-interest debt and was charged £150 m last year. Consequently, it was stymied in investing. Decisions should have been made to shrink the number of shops. Hays Travel who has now purchased 555 of the shops, believe there is a future in the high-street travel industry. They may buck the trend where the world is moving on-line. If one of your customers had been in the same position as Thomas Cook, how much credit would you have advanced to this business?
One of the problems with Thomas Cook was it had been supported by its lenders.
Although it was paying high interest rates, the environment of really low interest rates has allowed other businesses to avoid taking these painful decisions. How long can they survive with falling consumer confidence? The weakening economy will expose these companies. Are they in your supply chain? If so, then you really need to know who they are. Consequently you will then know the risks of continuing to trade with them on existing terms and be in a position to mitigate those risks by changing the terms of business.
As a result of the weakening of high street trading, John Lewis has reported a half-year loss of £25.9 m – the first in its history.
The group’s total debts have increased to more than four times its annual cash flow. With uncertain times ahead as the UK undertakes the complex process of leaving the EU, John Lewis’s management say they need cash to reduce this burden.
This company did not compete with Samsung and Apple.
It simply didn’t adapt according to the market and the consumer’s changing wants and needs.At one time it dominated the market till 2007 with a massive 49% market share. But in subsequent years it was 43%, then 41%, then 35%. The reason was the iPhone.
Samsung on the other hand knew that they had to adapt to compete in the market after the release of the new i-Phone in 2007. So they cleverly placed bets on multiple platforms like Android and Windows Phone and even created their own OS, Bada, in case everything else fails.
Market Sector reports may help to identify such issues in your sector.
So what is it you should be doing to protect the value of your business?
What have Carillion, Thomas Cook and indeed these other company failures and problems have in common with owner managed businesses?
If they were your customer, or your customer’s customer in your supply chain then would your business be in trouble too? I really do recommend you check out the financial and indeed commercial viability of your customers and, indeed their customers. Likewise if you are dependent upon one or a few suppliers, then the same process needs to be undertaken. Once this exercise has been done you can assess where your business stands.
As a practising Chartered Accountant and ex-auditor, it pains me to see the perceived failure of auditors to spot errors. The accounts of Patisserie Valerie, Carillion, Conviviality and Bargain Booze are examples where it is alleged the audit process may not have been at expected standards.
So, can you rely on the accounts?
The answer is somewhat. You must bearing in mind that not all accounts are audited. There are statutory exemptions which allow companies to file unaudited accounts.
However, there are subjective values for assets such as stock, work in progress or contracts where revenue is recognised over a period of time and not when cash is received. As a result, these figures are capable of different measurements and where there is no audit or proper independent examination these figures could have been massaged to present position not matched by reality.
Cash is a figure which is unlikely to be subjective.
Cash is King
How many times have we heard this phrase but how many sets of company accounts show how the amount of profit made in a period has affected cash? Not many since it is not a requirement under the Companies Act to produce these really useful statements for smaller companies. If you are unable to work this out from the accounts filed at Companies House then ask an accountant to do so. It may raise several questions which you are at liberty to ask your customer or supplier.
If you do not ask, you certainly do not get.
In that case, if you want to continue to trade with them and they with you then at least you will be justified in asking for a variation in your terms of trade such as “It is cash up front, on delivery or whatever.”
Help is at hand
An examination of the accounts of your customers and suppliers would add value to protect your business. It could help you to protect the value of your business by giving you the ability to change the terms of trade with them to your advantage. If you wish, I can provide that analysis for you.
Business owners should use the collapse of Thomas Cook and the experiences of these other failures as an opportunity. It’s time to look at your company and those sectors which it is reliant on. To assess the risks, I recommend you take steps to avert future ‘big-name’ collapses affecting your own stability.
So what should you do?
Apart from looking at the cash position of your customers and, indeed, suppliers, the obvious thing is to keep you ear to the ground. So, make yourself leave the office, verify gossip, go to trade shows and talk to people in your industry.
To be sure you are maximising the value of your business on a sale, you need to be on the lookout for risks.
I am fortunate in that I am able to walk in the hills. A rucksack is carried and contains enough equipment for me to survive overnight. Likewise, there is a ‘phone which is kept but is not relied upon as I might lose it or it might get wet. It is easy to say: “That will never happen to me”. The risks of a broken leg or ankle in wet conditions are really high so I mitigate these by having enough equipment to survive. Do you have that equipment for your business to survive?
So, as a business person, you must take the view that there is a risk a customer or supplier could go under. What provision will you make to mitigate the risk?
As you can see from this paper, there is now a genuine risk the value and smooth sale of your business could be severely affected by problems in your supply chain both out of and into your company.
Elsewhere on this website I have spoken about the timing of the sale itself. This can be crucial.
Bearing in mind this process can takes months and moreover it is not something that can be rushed into. It requires a business that is sustainable without you the owner. In other words it has to be sellable in the first place. Moreover, it will mean the systems and processes are in place and so you, the owner, will not be working in the business and can be in a position to spot and mitigate the risks..
If this paper is of interest to you then I would be very happy to chat it through with you and see if it is something that works for you and your company.
I look forward to hearing from you.
If you would like to read more of the Overview of Selling a Business, please return to this page on the website.
Andrew is the director of Assynt Corporate Finance Limited and an Accredited Member of the Association of Crowdfunding experts.
Previously a partner and head of corporate finance at Baker Watkin LLP, Andrew has more than 35 years of experience in all forms of corporate finance across many business sectors.
Andrew is also the Chair of Governors at a local school and an Assessor of Expeditions for The Duke of Edinburgh’s Award.
You can find out more and connect with Andrew over on LinkedIn.