Rising costs squeeze already strained businesses

As 2015 gets underway, it is becoming clear that UK businesses are under mounting pressure as rising costs close in on all sides. But while business owners are doing all they can to keep things going with increasingly limited cash flow, buyers are waiting on the sidelines with a net to catch those that might not make it through.

More than half (59 per cent) of SMEs in the UK have said that they experienced increasing operating costs during the last quarter, with 58 per cent stating that this has had a negative impact on their cash flow. These figures, from the latest Close Brothers Business Barometer, highlight the timeless pain that cash flow problems can bring; even in a growing economy, mounting costs can upset the most carefully planned business when reality hits.

Mike Randal, chief executive of Close Brothers Asset Finance, commented: “Operating costs have increased significantly over the past few years, and are arguably one of the most difficult things for small business owners to manage in the current climate.”

He added that the situation is already leading to “increased pressure on already-tight margins and it is entirely possible that operational costs will continue to rise for the foreseeable future”.

So what does this mean for business buyers? Essentially, it pushes things in their favour. As cash flow problems worsen, a firm's need for additional financial input grows and buyers have the option to acquire assets or even an entire bolt-on business at below market value.

The key here is to spot things at the right time. For some buyers, snapping up a company that has already entered administration might be part of their strategy. While for others, getting in just before the crisis hits will offer a range of opportunities when it comes to setting a new course for the business and its assets.

As in any area of business, there are a variety of methods to approach the matter, but if timing is particularly important then monitoring winding-up petitions is one of the best ways of ensuring you're informed as the cracks start to show within a potential acquisition target.

Those who are closely in tune with the industry will hear the grapevine rumours that often start to spread when companies begin a cashflow crisis. Ask your sales force: they are your eyes and ears and will usually know when one of your competitors is in trouble. Suppliers will often moan when they haven’t been paid; trade customers are often pressured to settle as soon as an invoice is due for payment.

However you choose to approach things, there is a strong chance that distressed opportunities will be on the increase in the coming months; cash flow is often acknowledged as one of the key causes of business distress, and indicators suggest that financial conditions are tightening from the supply angle.

The benefits of the situation for buyers are clear – namely, they have a chance to get a below-market deal on some valuable assets. But the flip side of buyers stepping in to snap up distressed companies and their assets is that the businesses that have fallen victim to cash flow problems can address debts owed to creditors or even get a fresh start, albeit in a new form.

One firm that unfortunately didn't get this opportunity is Bristol-based security firm, Dixon Security Ltd, which was forced to appoint administrators on 9 January this year after severe cash flow difficulties prompted the firm to cease trading.

All 17 staff members at Dixon lost their jobs and the company's assets will now be sold on as part of the administration offering potentially valuable assets at low prices for buyers. But it is sad for the employees and a lost opportunity for the owner and for buyers that the company did not take earlier action either to shore up working capital or to explore sale options.

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