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Zombie Companies - Is Your Livelihood At Risk?

Recent research from BDO shows that 1 in 6 UK mid-market businesses are at risk of becoming what’s known as a zombie company.

While not many business owners know what a zombie company is, it can spell disaster for the business and the livelihood of the business owner. Let’s start with the basics.

What is a zombie company?

In basic terms, zombie companies amble along without direction and without usable revenue.

While they might be able to generate income, they also carry a large amount of debt from where they have attempted to keep the business afloat. Any income generated is used to pay off the growing interest on the debt, but it is generally not enough to pay off the balance of the debt.

In other words, they have enough cash to keep operating, but not enough to grow and innovate. This can typically be seen in four different ways:

  • Overleveraging - taking on debt without the sustainable cash flow needed to repay it.
  • Poor cash flow management - not being able to align income with expenses, which is especially seen in volatile markets.
  • Market stagnation/disruption - declining product demand and the takeover of digital alternatives.
  • Outdated business models - ignoring current consumer needs and focusing on how you’ve always worked, because it’s always worked before.

How have zombie companies managed to keep operating?

This all stems back to the time when interest rates were low, and banks were willing to lend to unprofitable businesses. The overall idea was that the cash injection would allow the company to innovate and streamline, allowing them to become profitable over time.

However, rising inflation has eroded profit margins even further, meaning this cash injection has gone nowhere. Innovation is now even more costly, and businesses can’t afford the equipment needed to streamline their operations.

When looking at zombie companies in the grand scheme of things, it’s clear to see how keeping them limping along is stifling overall productivity in UK markets by impeding the growth of successful businesses and inhibiting job creation.

Can you help zombie companies by giving them more money?

While it may seem obvious that injecting more cash into zombie companies is the answer because it’ll wipe out the debt and give them breathing room, it’s not always that simple. Take the following example:

A small marketing agency has been limping along, servicing existing clients but not gaining new ones due to a lack of funds, which means they are unable to market themselves. An investor sees their work and believes they could produce amazing work that could change the shape of the industry; therefore, they agree to give them a cash injection.

The marketing agency uses this cash injection to promote themselves in the hopes of bringing in new clients. However, because they have been limping along for a few years, they are out of touch with the current marketing trends and haven’t been leveraging the latest software. Therefore, their attempt to market themselves flops.

This example could have gone either way; it could have been possible that the marketing agency brought in new clients and recovered. Either outcome is possible, which is why it’s seen as risky to invest in zombie companies and not many investors are willing to try.

How can you save a zombie company?

If you now feel as though your company is heading towards becoming a zombie, don’t panic; there are things you can do to try and reverse the process. However, it takes decisive action and an honest assessment of the underlying challenges.



The Issue

How you can reverse it

Struggling to keep up with debt repayments (could be displayed in your business as only being able to pay the interest and not the loan balance)

Renegotiate the loan terms with the provider; if that’s not possible, refinance the debt with a different provider.

If possible, look at interest-free periods and payment holidays. 

Products and services not driving growth (could be displayed as new client stagnation and feeling as though you’re going through the motions every day)

Take a long look at your products and services and see if any are not performing as well as you would expect. 

If you have any services which are not meeting market needs, cut them from your offering.

Costs and overheads outweigh revenue

If you’re not seeing new clients coming into your business and, therefore, seeing an increase in income, you need to look at how you can cut expenses.

Top tip: don’t fall into the fallacy that you can cut your marketing efforts. Although it might seem like an added expense you can do without, you still need to be attractive to new clients.

Declining customer engagement

Although it can be expensive in the short term, revitalising your brand can pay off in the long run by bringing in new clients. Shifting your branding focus can allow you to reposition your business and meet changing customer needs.

No clear strategy or leadership focus

It’s time to revisit your business plan. Are there areas you’re hitting, but others you’ve missed the mark on? Or are you consistently hitting the targets in it and think you need to aim higher?

Ongoing creditor pressure

No business wants to be in this position; however, if you’re out of options, look at a Company Voluntary Arrangement (CVA), which negotiates the debt and allows you to continue trading.

Persistent tax arrears

HMRC aren’t willing to let you off the hook for your taxes, and you don’t want to have the interest for overdue taxes adding up on you. If you find yourself in this position, it could be possible to look at a Time to Pay arrangement with HMRC, which allows you to set up a payment plan, rather than having to pay a large one-off payment for your tax.

If your business is at risk of becoming a zombie company, it could put your livelihood at risk unless you’re willing and able to turn it around. While it might seem as though injecting more and more cash into the company is the way to reverse the process of becoming a zombie, it’s not that straightforward; you need to take decisive action before it’s too late.

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