BUSINESS START-UPS: From an Insolvency Standpoint

Unfortunately, there is no denying that the vast majority of Companies that are placed into an insolvency process (like Liquidation or Administration) are companies which are in the first 3 years of their trading.  Therefore, if you are a business start-up, you should ensure that you structure your company and perform your duties in such a way, that you minimise the risks of this happening to you.  Here are my top ten business start-up tips on what you should consider so that insolvency is not your destination:-

WHAT WORK SHOULD YOU TARGET?

Other than the very general reasons of low sales and high costs, the biggest cause of insolvency is bad debts.  Therefore, to avoid this, credit checks should be done on the companies you consider working for, to wean out the high risk ones.  Also, you should spread your risk by ensuring that no 1 customer makes up too much of your overall work.  If they do, and they do not pay, or you lose their business, it is very difficult to replace this in the timescales cash flow allows.

WHAT SHARE STRUCTURE?

Careful consideration should be given to who the shareholders of the start-up company should be, as there is no getting away from the fact that companies are often closed due to fall outs between shareholders.  For SME’s the aim should always to have fewer directors and shareholders, simple share structures, and if there are only two shareholders, one should have a controlling share.

LIMITED COMPANY, PARTNERSHIP OR SOLE TRADER?

Consult with your accountant as to what set-up the start-up business should be.  This should be decided based on the tax benefits and risk of personal liability.  The last thing that you would want would be to have to take on risk and debts personally if this can be avoided or incur unnecessary tax costs.

IS THERE SUFFICIENT CASH FLOW AND FUNDING?

Ensure that the future cash flow of the business is carefully forecasted and updated regularly and that sufficient funding is in place to properly capitalise the business.  A failure to do this can often result in good businesses closing due running out of cash.

 ARE THE RIGHT CONTROLS IN PLACE?

Ensure that you have put in place all necessary controls for monitoring the performance of staff, the quality of products & services offered, and that each employee is aware of their responsibilities.

 PREPARE AND REGULARLY UPDATE A BUSINESS PLAN

A business plan enables the writer to focus on what their goals are and monitor their performance in achieving these goals, which gives focus on the key issues when growth occurs.

DO YOUR ASSETS NEED PROTECTING?

If the business start-up in question is one which holds assets, then it may be worth holding these assets separately in a holding company  This way they  are protected and do not need to be bought back from the insolvent trading company through the Insolvency Practitioner.

 ARE YOU RECEIVING THE BEST PRICE?

Time should be regularly attributed to reviewing the costs which the business is incurring so that the business is always receiving the best deals.  Overtrading is a massive cause of business failures (where business increase their turnover but make less money due to the proportionate costs spiralling) therefore monitoring break even points and taking advantage of all cost savings is a must.

HAPPY?

Time should be taken to regularly thank all customers for their business, employees for their work and suppliers for their products & services as stakeholders that feel appreciated are far more likely to either re-order or continue their good work.

USE THE PROFESSIONALS

It should go without saying that should a task arise that is beyond the knowledge of the stakeholders then they should use their professional advisors.  Insolvency Practitioners often will provide free advice initially and therefore if debt issues arise, talk to them as their advice could be the difference between closure or recovery.  Know your limitations and get help early if needed.