The last Woolworths stores closed their doors yesterday as just one of a series of massive businesses collapsing in the economic slowdown. Peter McCusker discovers what choices are available to struggling businesses

LAST year saw company after company going into administration in a last ditch effort to sell their business as cash-flow was hit by the looming recession. But experts fear 2009 will see many more businesses going directly into liquidation.

In 2008 the number of companies described as being distressed more than doubled as directors struggled to find ways to meet debt repayments and battle against falling sales.

The latest figures available show that, here in the North East, the number of companies going into administration has risen by 50% year-on-year.

With the country heading into recession, and cash and confidence draining out of the economy, more managing directors are expected to choose liquidation in 2009, accepting there is no way of securing their company’s future.

Simon Lundy, of the Newcastle office of insolvency experts Begbies Traynor, has worked in business recovery for over 30 years and says this is the worst economic situation he has witnessed.

“We are heading into a severe recession. This is far different to any other recessions I have witnessed. The problems with the banks and bank lending is something which we have not experienced before.

“In many cases there is not going to be the chance for companies to carve up their business. In many cases there is little or no confidence in the future as consumers have stopped spending.

“Then, even if the company is confident, it also has the problem of securing funding from the banks and that route does not seem to be available either.

“In many cases companies are going to be left with just one choice, and that choice is to close the business down.”

Here in the North East there have been a number of high-profile administrations in recent months including Newcastle-based Arctic Windows and the Officers Club, the Cramlington-based clothing retail chain.

In the case of the Officers Club a new company was formed out of the remnants of the old one by the same management team. This so-called pre-packed administration allows directors to jettison loss-making parts of a business, along with its debts, while almost immediately setting up a new one to take over the profitable operations.

Mr Lundy said in many cases such moves are the only viable alternatives. “It is better than closing the business down. It means there is still a business there and the new company will be preserving jobs. In the long run it may even be better for the creditors.”

Mr Lundy said new rules which came into force on January 1 legislate for administrators to provide greater disclosure on what steps have been made to sell the business, or restructure its operations. He said he had not yet had any complaints from any creditors as a result of a businesses being reborn in a new form.

Colin Stratton, the regional chairman of the Federation of Small Businesses, likewise said he had not yet been approached by any of his members with similar concerns.

He said: “Cashflow is vitally important at a time like this and I expect to see many of members turning to factoring organisations in the coming months.

“Factoring companies are popular as they charge a premium for chasing the recipient companies for payment while guaranteeing the cash to the supplier.”

Begbies tend to work with SMEs employing between 20 and 200 people, with a turnover of between £10m and £15m, and Mr Lundy says it is hard to find any sector that is not affected by the downturn.

Mr Lundy added: “There is a general lack of confidence across the whole economy and no-one knows what is going to happen, just how bad it is going to get.”

Alan Kelly, a partner at Tait Walker accountants in Gosforth, believes the problems in the economy are set to last until well into 2011.

He said: “We are witnessing increased volumes of businesses with problems, and with the economic situation set to deteriorate further, we have not seen the worst of it yet.

“Administrations allow viable businesses to start again. There is still money available and there is still some appetite in the market for asset-based lending.”

One of the problems administrators are having, which is exacerbating the problem of selling the businesses, are the difficulty of determining the value of assets.

Mr Lundy recalls how he was unable to even to get a second-hand furniture company to come and collect, free of charge, office chairs, tables and equipment from a business which recently went under.

Mark Firmin, a restructuring partner at KPMG in Newcastle, has been leading the firm’s restructuring in the region for the last two years.

Last year he handled the administration of stock-market listed Sunderland company ScS and its subsequent sale to private equity firm Sun European Partners.

He said: “It’s a fact that we have entered difficult times but there are a number of steps management can and should take to address the double whammy of a tightening of both lending and spending.

“Given we’ve all enjoyed 20 odd years of a benign economic environment, it’s understandable that some management teams will not necessarily have the skills to effectively steer their business through a downturn so calling in advisors who specialise in stabilising and turning around organisations makes a lot of sense.

“The worst thing a management team can do for their business is nothing. Sticking their head in the sand when the finances start looking tricky will only reduce the options available to them and any advisers they may bring in later, whereas a restructuring professional brought in at the first warning signs has several routes open to them for re organising the business.”



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