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Is A Perfect Storm Brewing For Family Firms?

Family businesses are warned of a perfect storm brewing as quarterly rents fall due later this month and the furlough scheme ends in October, whilst protections from personal liability for directors are also set to be lifted.

Insolvency figures released by the Government’s Insolvency Service show a 33% fall in company insolvencies in the five months since the start of lockdown (April to August 2020) compared to the same period last year. However leading restructuring and insolvency professional, Oliver Collinge from PKF Geoffrey Martin is warning of a perfect storm facing family firms across the country.

Quarterly rents are due at the end of September putting cash flow pressure on businesses that are already struggling, particularly in retail and hospitality, and the government’s furlough scheme also ends next month. The end of the Brexit transition period in less than four months is also likely to place additional pressure and costs on companies that trade with the EU.

Despite these looming financial pressures, government measures introduced to shield directors from personal liability during the Covid crisis are due to expire at the end of this month. Wrongful Trading legislation, temporarily suspended in March to give directors the confidence to continue trading through the lockdown, is being reintroduced in October. This means that directors who are unsure of their company’s viability but continue to trade face potential personal liability if their company ultimately becomes insolvent.

Oliver Collinge, Director at PKF Geoffrey Martin & Co said:  “Today’s insolvency figures may appear counterintuitive to many given we’re in the middle of a pandemic, but they are primarily a result of the huge effort made by government to support businesses through lockdown and we expect the trend to reverse sharply over the next few months. With quarterly rents looming and as government life support is withdrawn, we anticipate a spike in companies in financial distress, particularly in hospitality, leisure and retail. Many normally successful family firms are beginning to experience financial pressure and companies in areas of the country where local lockdowns are in place will also be at particular risk.”

“The government’s interventions and the general climate of leniency from HMRC, suppliers and lenders are beginning to recede, but proactive planning and actions at this stage can prevent a challenging situation from developing into a critical one. Relying on existing cash reserves in the hope that things will return to normal soon is a high-risk strategy.”

Family-owned businesses are advised not to bury their heads in the sand and instead seek help from professionals. By planning for a variety of scenarios including further Covid restrictions, preparing realistic trading forecasts and having up-front conversations with suppliers, landlords and lenders, firms will be better placed to navigate the challenging months ahead.

For some businesses, when the furlough scheme comes to an end, a reduction in headcount will be unavoidable. Quite apart from the emotional challenges of making redundancies, in many cases there’s also a large cash flow impact. If redundancies are necessary, businesses may be able to claim financial assistance from the Redundancy Payments Service (part of DBEIS) to help pay for them.

Oliver Collinge added: “It’s undoubtedly tough out there for many family companies. However, there are a wide variety of options and support available to businesses; don’t leave it too late to explore them. Having a restructuring professional guide you through the process can be invaluable in getting the best outcome and will also help you understand and mitigate your risk as a director.”

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