In recent times, there have been a higher number of setbacks than successes in the UK business landscape. This economic strain has led to the notable increase in insolvencies across England and Wales – a trend that harkens back to the financial crisis of 2009. Another common term that has gained increasing attention is “zombie businesses”.

These are enterprises that operate on borrowed time, and on the brink of financial collapse. They continue to function, but their economic contributions are minimal. More often than not, they tie up resources and opportunities that could be better utilised. Amidst these challenges, distressed business acquisitions offer a hopeful solution for reviving zombie businesses. We’ll delve into the details in the article, and understand how this strategy fuels long term success.

What are Zombie businesses?

‘Zombie’ companies are those that can barely sustain their operations and pay off debts but lack the resources for growth. Substantial debts and an inability to accumulate surplus funds can also render apparently stable firms susceptible to unforeseen setbacks. In the current economic climate, there’s a growing concern about historically high interest rates that are making it difficult for businesses to sustain. 

These high rates, along with lenders’ outlook towards unprofitable businesses make the playing field even more challenging. Combining these factors, a company can remain in the ‘zombie’ category for an extended period. To effect a transformation, it would require either a profound shift in market conditions or seeking additional capital from investors.

The current state of zombie businesses in the UK

As of May 2023, in a range of 15,000 businesses with turnovers ranging from £10 million to £500 million, under 12% could be classified as ‘at risk’ of becoming or remaining ‘Zombie’ companies. This is a slight decrease from the 12.7% in January 2023 tracker, but still quite high for a developed nation’s economy. 

There are many possible factors that have contributed to this number, including

• Previously ‘at-risk’ companies experiencing a resurgence due to post-COVID growth 
• A renewed sense of optimism in the UK economy in the beginning of the year
• Zombie businesses ceasing operations or entering formal insolvency procedures.
• Fluctuations in revenue causing businesses to no longer fit the original data set.

The Leisure & Hospitality sector remains the industry most susceptible to risk. High inflation, and labour shortages impact this industry severely. This sector relies heavily on consumer confidence and discretionary spending, both of which are on the decline, particularly among households with lower and middle incomes.

In terms of geographical distribution, the prevalence of ‘at-risk’ businesses in the UK shows a relatively uniform pattern. Among the twelve regions, eight exhibit an ‘at-risk’ percentage ranging from 11% to 14%, while three regions fall within the 9% to 11% range. Northern Ireland, though an outlier with an ‘at-risk’ percentage of 5.9%, should be noted, although the sample size is relatively small.

Notably, Greater London, Yorkshire & The Humber, and Scotland emerged as the top three regions with the highest proportion of ‘at-risk’ business.

How to recognise a Zombie Business

Identifying a zombie business doesn’t always manifest with glaring red flags. Instead, it requires a keen understanding of various indicators that collectively signal trouble. One important sign is the presence of chronic losses over an extended period. If a business consistently fails to generate profits, it is worth looking into its performance and understanding why. 

Additionally, a lack of investment in growth initiatives is a clear warning, as it suggests that the company is stagnating and not positioning itself for future success. The accumulation of mounting debt burdens also restricts its efficiency and financial health. To effectively recognise a zombie business, it’s essential to combine these financial metrics with a comprehensive examination of its day-to-day operations. 

There are other key indicators of distress, including declining sales, that signify waning demand. Low liquidity also indicates a lack of readily available funds to cover immediate expenses, and an inability to meet debt obligations. It is also a good idea to check if the business is struggling to manage its financial obligations. All of these combined give strong clues about whether an enterprise is falling into the zombie businesses category.

Why should investors consider investing in Zombie Businesses?

When a distressed business returns to profitability, it often surpasses the initial investment, resulting in substantial financial gains. This profit potential is a strong motivator for investors.

But investing in zombie businesses promises much more than just profits. Here are some compelling reasons for investors to consider this approach: 

Undervalued Assets: Zombie businesses are often undervalued, presenting an opportunity to acquire assets at a fraction of their true worth. This can lead to significant capital gains if the turnaround is successful.

Reduced Competition: Many investors shy away from zombie businesses due to the perceived risks and challenges. This reduced competition means there is less demand for these opportunities, allowing savvy investors to negotiate favourable terms and secure more attractive deals.

Influence and Control: Investors often gain substantial control over the management and direction of zombie businesses. This influence allows for swift and decisive actions to address issues and implement positive changes.

Economic Impact: Successfully turning around a zombie business not only generates returns for investors but also contributes to economic growth. It preserves jobs, rejuvenates supply chains, and bolsters the local economy.

Adaptability and Resilience: Successfully turning around a zombie business requires adaptability, resilience, and the ability to navigate complex challenges. These skills can be valuable in various other investment endeavours.

Investing in and revitalising zombie businesses necessitates a strategic approach, focused on timely investments, expert guidance, and staying attuned to market trends. Successful investors in this field leverage financial expertise, operational experience, and industry insight to maximise their chances of success.

The best place to start is to identify businesses exhibiting warning signs. Then, rely on expert advice to conduct a rigorous due diligence, analyse the business’s overall financial health and underlying causes of distress. This is also where effective leadership plays a big role, for in its absence, it is almost impossible to stabilise operations and rebuild the confidence of internal teams and customers alike. 

If you are looking for such opportunities, the Administration list platform is a goldmine for you. We not only track distressed businesses and failing enterprises all across the UK, but also offer timely insights that can help you crack lucrative deals. Find out more on our website, and become a part of our growing community to get your competitive advantage in dealmaking!