For a man who is hugely successful, Richard Branson has had his fair share of business failures. Probably the most notable was Virgin Cola, part of Virgin Drinks. The company launched in 1994 and was an almost immediate flop. If you’ve ever had the misfortune to drink a Virgin Cola (as I did on one of his airplanes) you’ll know it’s like drinking fermented fizzy piss. You feel you’ve been cheated out of a decent drink as you're staring down the toilet.
But failure does not deter Sir Richard – he learns and he moves on, as the dozens of his successful businesses attest to. I’m going to say this a few times, but if failure is going to lead to your eventual success, you have to learn the lessons and move on.
Businesses usually fail because they run out of cash – they can’t generate money fast enough to pay creditors, cash from sales isn't coming in fast enough and at the same time shareholders are reluctant to put more money in to bolster the balance sheet. Then either the directors will agree that the business can’t pay its bills, and so is insolvent and must not incur more debt, for which the directors may be personally liable, or a supplier, who has not been paid, may start a winding up petition to either force payment, partial payment or end the business with a bankruptcy order.
You need to take action before that happens.
An example - let’s suppose your business makes pasties. It’s called Pastylicious and your company is registered as Pasties of Cornwall Ltd. Everyone loves the different pasty fillings, from beef and onion to your latest vegan gut cleanser - tofu, carrot and brussel sprouts. Each pasty generates a positive gross profit (as well as a nice full tummy) but your distribution costs are too high and you’re not being paid fast enough by your customers. You’re not the market leader and your prices are under pressure from one of your competitors. You are running out of cash.
You judge that the underlying business – your delicious pasties – are worth saving. But the business needs to be financially restructured. You could go for an administration. This means the business is closed and its assets are sold, usually for a nominal sum. From the sale proceeds the administrator handling the liquidation pays the suppliers a % of what they are owed (including the tax man) and your shareholders lose their investment because the business is worth nothing.
However, the closure and sale of the business can happen at the same time on the same day, and the new owner of the business is, well, you. Or to be more accurate, your new limited company called Pasties of the Westcountry Ltd, trading as Pastylicious, because you purchased the brand from the administrator as part of the deal. Your new balance sheet is clean and you have no debt. You either go to your previous suppliers and agree terms for them supplying the new business (don't expect generous credit terms), or get new suppliers. Some suppliers will be more difficult to replace than others, so before the business goes into administration you need to be clear who you need to hold on to. Your customers may not know that the business has been restructured, and probably don’t care. Your employees (you need to be mindful of a thing called TUPE, the subject of another butt) will receive their future salaries from your new company. Employees who have come across from the closed company may be on the same or different contracts.
You are starting afresh having left your financial troubles behind. Onwards to your new Vicar of Dibley range with the introduction of the Marmite and cottage cheese variety.
One more word about administration. I’m a strong believer that a business needs to behave in an ethical way to survive. You have to be honest with people who have put money into your business, including suppliers. Talk to them about what’s happening and the cash problems you’re having. Many will be supportive because they want your future business. Some will not be. If your cash problems are insurmountable you may be able to rise from the ashes with a shiny new business by taking it through a financial restructuring process.
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