Avoid falling into the zombie company trap

Keith Steven explains what the term means, and the rescue options available for a business.

 ‘Zombie company’ is a term that’s been used for a few years now in media and business circles to describe a company that is essentially neither alive or dead – in essence, very much like a zombie.

Reports over the last year have shown a decrease in these companies, but due to various reasons, many do still exist.

This article explores the traits of a zombie company, and how to avoid falling into the trap of becoming one.

What is a zombie company?

A business would be a described as a zombie company if it only pays interest on debt owed, rather than any debt itself. The company is still trading and running operations, but it is unable to expand or grow. Simply treading water, it is unable to make a profit, but isn’t in enough trouble to close down.  

There is no spare cash to invest or grow, and it’s difficult to hire more people. On the flip side, it’s likely no redundancies need to be made. It is also the case that the company can’t afford to make anyone redundant, as it simply doesn’t have the spare cash for redundancy payments. As such, it can be caught in a catch-22 position, unable to boost productivity.

Many economists believe that zombie companies are stopping more successful businesses from expanding by taking up market share and preventing the economy from improving. Past lack of productivity in the economy has also been blamed on zombie companies.

The cause of zombie companies

  • Interest rates: these have been low for a long time, so it’s easier for struggling businesses to make payments. When the rate rises in the future, it’s predicted that there will be more companies in financial distress. It doesn’t look like rates will rise any time soon, though, so a lot of companies are sitting quite comfortably.
  • HMRC/government: in recent times, HMRC has been cracking down on tax avoidance and targeting individuals and businesses that appear to be running away from their obligations. While this is important, companies running up debt perhaps have a little more legroom to fall behind with payments, and have more opportunities to reach negotiations with HMRC to pay back debt.
  • Banks and lenders: lenders want to retrieve as much debt as possible, so will endeavour to avoid administration or liquidation if there is a more suitable option and a chance of recovery. It can be difficult to find buyers for companies in administration, so banks may want to wait and see if companies can turn themselves around.

Don’t fall into the trap

Find ways to pay off or reduce the company’s debt. Look at ways to cut costs and improve cash flow by introducing a daily cash flow model, selling assets or negotiating rent costs with the landlord.

In order to thrive again, action must be taken. There are various informal and formal turnaround methods that can help the company’s finances, allowing some much needed breathing space and a chance to pay back more than just the interest on the debt. The sooner financial problems are dealt with, the better.

Refinance options

There is huge competition for business lending at the moment, given banks’ reluctance to lend, so there may well be a better deal for business debt out there. Perhaps take a look at alternative providers who may be happy to take over the existing debt on better terms.

Rescue options

  • Time To Pay (TTP): an informal arrangement with HMRC, whereby VAT or PAYE debt is paid back in affordable instalments over a year. This can ease financial pressure on the business and allow time to focus on other aspects of the company in a restructure.
  • Company voluntary arrangement (CVA): a formal deal between the company and its creditors. A proportion of debt is paid back over a longer period of time (usually three to five years), while some is completely written off. The business continues running and directors stay in control of the company.

Over 75% of creditors (by value) must approve the CVA for it to go ahead. Often it is seen as a better solution than administration or liquidation, because creditors get a better return, with continued business in the future.

About the author

Keith Steven is a managing director at KSA Group Ltd and has been rescuing and turning around companies since 1994. He has worked for insolvency firms, turnaround funds and venture capital investors, and is the author of www.companyrescue.co.uk. You can follow Keith on Google+.