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Why insolvency is usually your last best chance

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Tuesday September 28, 2010 at 12:15pm

We all know that running a business is not easy, only those who have never had to suffer the burden of responsibility to employees, family and the bank, would think business owners reap easy rewards. With the potential rewards come personal financial risk, stress and a very steep learning curve. The reality is that we pay a high price to be in business and sometimes it gets the better of us.

When talking to clients in financial difficulty, the feeling of despair and failure is not uncommon. I quite like the American view that until you have a few business failures under your belt you are somehow not a rounded business person. Well this approach is probably not for us Brits but it does assume that insolvency is a last chance business tool to achieve better things.

If your business is in financial difficulty, insolvency or alternatively, pre-pack administration are useful options to consider. Business owners may not realise that it is potentially possible to prevent the main business assets, stock, goodwill and work in progress of the company being sold at knock down prices and lost in the wind-up process.

Proper and careful planning before-hand can ensure that the process is controlled, allowing the directors to salvage the key assets for use going forward. Indeed such planning is a legal requirement as it is an offence to trade whilst insolvent and the penalties are punishing.

Here are some things to consider:

  • Ensure you have a good idea of the cash flow and profitability of the company well in advance of the point when you actually run out of cash. 
  • Take advice early in order to plan for what looks like the inevitable day. With careful planning you may be able to trade through the problem without liquidation. At least knowing you have a problem gives you time to try and arrange additional finance if this is a possibility. 
  • If insolvency looks inevitable you will need to obtain a third party valuation of the business assets to determine their forced sale value. This process will help to determine the viability of pre pack administration rather than insolvency. 
  • Once the appropriate course of action is chosen, and assuming you are able to purchase assets from the Administrator or Insolvency Practitioner, you will find that your attention is now fixed on the new trading entity, funding for working capital and ensuring a smooth transition from the old company to the new.

Even when the business grim reaper seems to be knocking on the door there is usually a way forward. You just need be honest with yourself and to plan for it.

Andy Parker
Chartered Accountant

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Parker Chartered Accountants and Financial Advisors is the trading name for Parker Business Development Ltd (Registered No. 4116664), Parker Tax and Trust Ltd (Registered No. 06950353) and Parker Financial Planning LLP (Registered No. OC347027). Parker Financial Planning LLP is authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales – registered office contact details here