Acquisition top cause of business insolvency, Purbeck finds
Acquisitions that go wrong are a top cause of business insolvency, according to research from Purbeck Personal Guarantee Insurance.
Not being close to business financials due to an over-reliance on accountants, and bad debts or payment disputes, are also key reasons why businesses collapse, the study found.
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Purbeck analysed claims from business directors for personal guarantee insurance following insolvency and found firms window dressing their business to make it appear more secure than it actually is prior to acquisition can be common.
“Business failures can often occur after a business acquisition,” said Todd Davison, managing director of Purbeck Personal Guarantee Insurance.
“When a business goes through a leveraged buyout, where the target company to be acquired is loaded with debt to buy out the former shareholders, then this has an adverse cash flow and margin impact to meet the repayment obligations. It means an immediate deterioration of the balance sheet position. So, the new owners have to grow the business or deliver substantial cost savings through the business quickly, to avoid failure.”
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Purbeck said having robust due diligence processes including, arranging a financial audit, scrutinising the validity of future orders and analysing future staff and cost savings that can be made once acquisition has happened, can all help to avoid insolvency.
The company also advises businesses to keep a close eye on the balance sheet, as the research found that a director may often rely on their accountant for the day-to-day financial running of their business.
The research also found that a common theme amongst directors claiming on their personal guarantee insurance was an over-concentration on one or more customers who were late payers, which in due course, put a stranglehold on the creditor’s business.
“With personal guarantee insurance in place, however, the comfort of knowing that directors will not have to pay back business debt through their own finances, such as their home or personal savings can be hugely reassuring to small business owners,” added Todd.
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