The Decline of Business Turnaround Investment

The economic climate is currently relatively stable for the UK’s small and medium-sized enterprises (SMEs). Despite uncertainty surrounding the recent Brexit vote, concerns about rising commercial rents and energy bills, and the new national living wage, SMEs are in reasonably good shape.

How do we know? Well, the number of company insolvencies in the UK is down year-on-year, and the rate of liquidations is at its lowest level since comparative records began in 1984. That’s clearly good news, but when it comes to struggling businesses, as the ongoing BHS saga has shown, the next collapse is never too far away.

Investing in Struggling Businesses

The adage ‘one person’s misfortune is another’s gain’ is particularly well suited to the world of turnaround investors. Turnaround or business rescue investors are those who look to invest in failed or failing businesses in search of hidden value. Most distressed businesses, no matter how messy their financials might be, have some part that remains viable and can be salvaged.

This select group of investors has become an increasingly important source of cash in the UK’s company rescue industry. But with a number of high-profile businesses, including BHS, having been unable to find the investment they need in recent months, we’re left to wonder whether turnaround investment could be on the decline.

Is HMRC Making Life Hard for Potential Investors?

One possible reason for this decline could be the role HMRC is playing in business rescue situations. A recent survey of insolvency practitioners conducted by the insolvency trade body R3, found that 54% of the respondents believe HMRC makes it harder to rescue businesses than wind them up. On top of that, 71% said HMRC has made the insolvency process harder to manage in the last few years.

HMRC is a common creditor of businesses that are struggling in the face of significant financial pressure. In recent years, HMRC has moved towards giving businesses more time to pay their tax liabilities rather than shutting businesses down. However, it is also responsible for lengthy delays in the insolvency process which create additional costs for the insolvency professionals and lead to reduced creditor returns. Not exactly a turn-on for turnaround investors.

There’s also a lack of commercial decision-making capabilities that can undermine business rescue proposals. The result is that in many cases, businesses are wound up rather than investment being sought.

Fewer Companies are Becoming Insolvent

Although the inefficiencies of HMRC are making some turnaround investments less attractive, the main driver behind any decline in turnaround investment is simply the fact that fewer UK businesses are becoming insolvent.

As long as the businesses and jobs that can be saved are, then for now turnaround investors are still doing their part to protect the UK economy. It remains to be seen whether the EU referendum decision will result in a period of belt-tightening amongst business investors, though.

If you’re experiencing cash-flow difficulties and are worried your business could be insolvent, please get in touch with our experienced team of insolvency practitioners for a free, no-obligation discussion.