British businesses battle back from the brink of bankruptcy

An extensive study analysing approximately 44,000 businesses across the UK that were on the brink of bankruptcy in 2006 reveals that almost two-thirds (63%) survived one of the most turbulent periods in economic history. The analysis, published today by Experian, the global information services company looks at how these businesses fared between 2006 and 2011, and reveals that half (50%) of the businesses that survived, managed to turn their business fortunes around and  significantly improve their overall financial health.

Financial health is measured by a score that combines numerous financial measures such as revenue, profitability, liquidity, gearing, cash flow and trends over time.

Approximately 44,000 businesses were identified as having a significant risk of bankruptcy within 12 months as of January 2006; Experian’s analysis highlights the characteristics of those businesses that survived.

Despite the volatile economy, approximately one in eight (13%) businesses increased their employee base as well as significantly improving their overall financial health while just over a third (37%) improved the financial performance of their business whilst either maintaining or reducing the number of employees. Overall, 36% of businesses that were close to bankruptcy in 2006 went on to increase their number of employees over the next six years.

How did the businesses fare over the six year period?:

Size matters
The analysis emphasises how a business’ survival rate from the brink of bankruptcy is very much aligned to its size. Overall survival rates increase the bigger a business gets. A business with one employee has the survival rate of just 58% compared to 80% for businesses with more than a 100 employees.  This is likely to be down to smaller companies finding it easier to wind themselves down, whilst larger businesses, with bigger overheads have the greater flexibility to reduce costs by laying off staff.

However, if a micro business does survive, it is more likely than any other business size to transform itself from the brink of bankruptcy to excellent financial health. The following table gives a breakdown of how businesses struggling in 2006, turned their business around by 2012 split by the number of employees. Overall, Experian’s analysis clearly shows that while a larger business is more likely to survive tough times, it is also more likely to be continuing to struggle six years later than a smaller company.

Craig Boundy, Managing Director, Experian UK & Ireland, said: “Our study highlights the resilience of British companies and business leaders who were able to come off the ropes despite being on the brink of bankruptcy in the midst of a flat-lining economy.

“Micro businesses with five or less employees have shown particular adaptability through a period of unprecedented challenges to the economy.  Almost one in five businesses with one employee managed to completely turn their organisation around.  This is surprising when you consider that a micro business has little flexibility; there are no other employees and overheads are usually low anyway.  Demonstrating sharp business acumen, it is the directors of these micro businesses that have the greatest potential to continue to create jobs and growth in our economy moving forward.”

Sector breakdown
The survival rates of companies that were facing bankruptcy in 2006 also differ substantially depending on which sector they operate in. While the manufacturing industry was undoubtedly hit hard by the economic downturn, manufacturers at ‘rock bottom’ in 2006 demonstrated the ability to turn their business around better than businesses in other sectors.

Over two thirds (67%) of the struggling manufacturers survived the double dip recession whilst companies in services, construction and distribution fared less well with survival rates of 63%, 61% and 58% respectively.

Manufacturers may have showed a greater resilience than other sectors due to the incentive of ‘ploughing on’, deriving from costs largely associated with physical equipment and number of employees.

Across the UK
Businesses in Wales and Scotland experienced the highest survival rates across the UK.  Out of the businesses facing bankruptcy in 2006, both Wales and Scotland saw 64% of businesses survive compared to 62% of businesses surviving in England.  London only saw 62% of its struggling businesses come back from the brink. With the exception of the North East, which had a low survival rate of 56%, Experian’s analysis showed only a very marginal North/South divide.

Three is better than two is better than one
The study also found that businesses had a significantly greater chance of survival when their board contained three or more directors consisting of both men and women.  Seven out of ten of the struggling companies in 2006 that had boards with three or more directors, both male and female, survived.  This compares to just 54% of businesses with just a single director (either male or female), surviving.