What to do when your business is struggling

If your SME is faced with difficulties, it’s time to take advice – and make some tough decisions

For many small businesses, the past 18 months have been a fight for survival. The pandemic has provided challenges few SME owners could ever have imagined, placing finances under severe pressure and forcing entrepreneurs into making tough decisions about their future.

At the beginning of 2021, the Federation of Small Businesses (FSB) estimated that 250,000 SMEs would fold this year without further assistance from the government. The FSB’s report found that 23% of small firms had cut the number of people they employed, while 58% of businesses were forecasting a decrease in profitability over the course of the year.1

Understanding your options

But what should you do if your SME is struggling? Sometimes, it can feel like the whole world is against you, but there are often more options than you might think, especially when you take sound business advice from an adviser such as St. James’s Place or ourselves.

“Entrepreneurs should review whether there is real and sustainable value in the company that means it could be sold as a going concern, and business advisers are here to support in defining what value might exist for potential interested acquirers,” says Andy Benson, one of our Business Growth Advisors. “This would start with a desktop valuation process, along with a session to understand where the business is today and what it offers a potential acquirer going forward. Starting this process as early as possible is key to maximise the chance of realising good value.”

Now is a good time to take a dispassionate look at your business and its prospects. Many of the government’s emergency measures designed to see businesses through the bleakest months of COVID-19, such as business rates holidays, are now coming to an end. The Job Retention Scheme, which has seen 11.6 million workers furloughed since March of last year, finished at the end of September.2 Many of the emergency loans provided, which let businesses delay repayment for a year, are now falling due. One option is to consider winding down the business through an insolvency process (see below). However, there are often other options to review before getting to that point, such as a sale or management buy-out (MBO).

Andy says: “Any entrepreneur can assess if there are any suitable candidates from within the current workforce to take over or buy out the owner and continue the business going forward. This type of MBO is perhaps the easiest and most convenient for all.” Whatever your decision for the future of your business when it is faced with difficulties, it is important to understand your own personal finance options, including pensions and potential loss of income.

How insolvency works for small businesses

There are two formal definitions of insolvency. One is that you can’t pay your debts as and when they fall due. On that basis, a lot of businesses do technically find themselves insolvent. The other is that your assets are worth less than your liabilities. If there is any danger of either situation, it pays to talk to a qualified expert as soon as you can.

There are about 1,200 licensed insolvency practitioners in the UK. To find one in your area or to seek information about the process, you can consult the government’s Insolvency Service website.

One common mistake made by entrepreneurs is to think that talking to an insolvency practitioner means your business is doomed. However, this is far from true – they can help you restructure all or part of the company, save jobs and make decisions that point to a bright future, according to Lyn Green, Head of Operations at the Insolvency Practitioners Association (IPA).

“The most important thing to do is get advice early enough from a qualified expert,” says Lyn. “Often, people will talk to an insolvency practitioner at the last minute, when perhaps they’ve already spoken to their accountant or lawyer, who do not always have the detailed expert knowledge required and aren’t able to point them in the right direction.

“If you seek advice when you’ve got a winding-up petition, you’re not giving the insolvency practitioner much to work with because your options become more and more limited the closer you are to formal insolvency. Talking to someone early in the process can change the outcome completely.”

When is the time to make that call? Most business owners have an instinct for when the company is struggling. Technically, the time to seek advice is when you are struggling to meet your liabilities on an ongoing basis, suggests Lyn.

“People who seek advice often feel they are to blame,” she adds. “In a lot of cases, it’s other circumstances – events beyond their control, the market, the economy – which have caused their business to struggle. But people see it as a failure and there comes with that a danger of avoiding seeking help.”

This article is written for the St James’ Place Entrepreneurs Club newsletter. The opinions expressed by third parties are their own are not necessarily shared by St. James’s Place Wealth Management.