American business has a different view and regards a business failure as merely a stepping-stone to success. In fact, many US venture capital houses will not look at an entrepreneur unless they have failed at least once (with someone else’s money).
Similarly the Japanese have regarded a man’s vision as at least as important than his achievement. Now European research suggests that there is more than anecdotal truth to such approaches.
So how do you ensure your business misstep rises phoenix-like from the ashes rather than becoming an albatross round your neck?
We need of course to assume that the original business has failed other than as a result of fraud, wrongful trading or other misdemeanour by the management. In such cases, the winding up of the company does not necessarily absolve the directors of further liability. Here we look at cases of genuine business failure without fault and a legally “clean” business available for restart.
Debts and Finance
The key emotive characteristic of a business restart revolves around debt. If the business in question has failed due to an inability to meet its financial obligations, it will almost certainly leave some or all creditors at least partially unpaid.
The degree to which creditors will look at the business failure as merely unfortunate, rather than incompetent and uncreditworthy in the future, will depend on:
a) the financial effect it has on them,
b) the relationship the creditor has with the business owner and
c) their own business outlook.
A business which collapses under debts can often still raise finance after re-establishment, if previous debts are written off and it now represents a less risky operation. In addition, suppliers and lenders may well regard the management team of a recovered business as being more experienced and less likely to fail again.
However, the relationship between business and creditor (whether a financial institution, Government entity, staff member or supplier) must be based on pragmatic honesty and the business should have demonstrably tried to do the right thing before failure. It will also need to demonstrate a financial model now able to fund finance sustainably from revenue.
Being able to raise new finance also offers the chance to make good some or all of the debt obligations owed to creditors of the previous business, but care needs to be taken not to confuse sentiment with prudent financial planning.
From a purely commercial point of view, if repaying some or all of the debts of the previous business gives you a sufficiently large competitive advantage, then you should consider doing so, but if the advantage is minimal and you are not obliged to settle it, then sentiment should not drive you to do so. However, not being ostracized by your local business community can be a legitimate concern.
Resurgent businesses must ensure that the reason for the original business failure was not a fundamental flaw in the model itself – Adequate cashflow finance in order grow to profitability can be addressed to make a fundamentally viable business work. However, a loss-making model can’t be fixed by financial engineering alone.
Here objectivity is key. Focus on what works, not what you think should work, and don’t be afraid to take a leaf out of the book of your competitors – their failures and successes can be instructive, too.
Restarting the company.
Depending on how the previous incarnation of the business came to an end, the underlying business is often available to be bought. An administrator may prefer the certainty of a swift business sale, even to the previous owners on deferred terms, in order to recover some money quickly for the creditors, rather than hold out for more later which may not materialise.
The business can then be transferred into a new company set up quickly and cheaply online, ready to trade as soon as the bank account is opened.
Business restarts are a pragmatic result of capitalism in action, which ignores sentiment and focuses on the aim of allocating capital to its most productive use. Nothing, especially not business, is perfect and debts can go unpaid even in the best-run businesses.
While it is difficult to reconcile a business failure with a successful restart when people lose their jobs, debts remain unpaid and the original business owners seem to prosper, it is important that viable business models survive even in the ocassionally faltering hands of their original owners, so that eventual growth can occur.
If administered properly and promptly, the costs of business failure are far outweighed by the dividends of such eventual and more likely success. This is a pragmatic reality, which has been embraced elsewhere in the world and badly needs to gain support here in the UK.