by Real Business - Thursday, 30th August 2007

For Ivan Massow, calling in the receivers nearly meant calling in the undertakers. “I got two deep vein thromboses from sitting at my desk for so long. I would get in at seven in the morning and stay until ten or eleven at night trying to sort out the mess.” For Stuart Bruce, it meant “crippling lethargy”. Ed Mills reckons he survived the ordeal in good health, “but I used to cry in the car on the way back from work.” This is the reality of business failure. It’s not just dashed dreams and the misery of years of hard work going down the gutter. It’s a catastrophe of life and By Charles Orton-Jones death dimensions, akin to bereavement. This year over 5,000 firms will go bust, and it’s rare that Real Business runs a profile of an entrepreneur without covering the years of failure (remember double glazing mogul Gary Dutton’s two failures, Lush founder Mark Constantine’s disaster in 1994 or Blueback cab founder Scott Pielsticker’s revelation that he was now on his sixth firm?). But what is it really like going bust? And what lessons can be gleaned? To find out we spoke to four entrepreneurs who’ve experienced disaster firsthand. Mistake after mistake:

THE INSOLVENCY PRACTITIONER’S VIEW The most commonly used phrases I hear in my job are: “I wish I’d called you earlier,” and, “I wish I’d talked to my bank more.” Sometimes I deal with chief executives who don’t know how much money their firm owes. They have no idea of the scale of the problem before them. The 2002 Enterprise Act has lessened the stigma of going bust. It was designed to make the UK more like the US where they don’t consider you competent unless you’ve gone under at least once. I think it’s been pretty effective, though there is some way to go yet before we are like the US. Entrepreneurs usually are afraid that their suppliers are irate, but it is rarely the case. Suppliers work closely with lots of small firms, and usually appreciate the efforts these firms make to find the money to pay them. The most difficult lot are the banks. But even they are so ravenous for business that they don’t do anything that might lose them business. Most entrepreneurs bounce back very fast. Almost always they’ll pick the same industry. They’ll say, “I know this sector, and if I learn from what I did wrong the first time around I’ll be fine.” And they are usually right. Nick Hood, senior London partner at Begbies Traynor

How Stuart Bruce’s risky sideline in conferences ruined his PR firm. My wife and I started a PR consultancy called Networx. We knew the industry inside out and had a great business. We had run the occasional conference, and decided that was a good sector to expand into. We saw a tremendous market for a conference business targeted at the public sector, putting on conferences in the north of England. So in 2004 we launched it as a part of our existing company. First mistake! We went from being a fee-based business with low risk, to a high-risk model with advance booking fees for conference facilities, hotels, printers’ costs and lots of other expenses. Crucially we should have set up the new venture as a separate limited company. Because when the conference business failed, it brought the successful PR business down with it. The conference business suffered because we were under-capitalised. We were making a profit but we had cash flow crises. The initial idea was not as great as we had thought it was. Public sector conferences require government ministers to be present, but with a general election looming we knew it would be hard to get them to commit. But we found that they wouldn’t commit to anything after the election either. We had assumed that it was the office that committed, rather than the individual minister. That wasn’t the case. The cash-flow crisis kicked in. We tried to trade our way out of our difficulties – our second mistake. If we had founded the firm as an independent unit we could have just shut it down. We also had the problem that both of us were tied in with the business. If we’d been working separately there would have been another source of income and a different perspective to bring. Our biggest fear was trading insolvent. It is really hard to get good advice on when that might happen. I didn’t want to turn to Business Link as I saw them as a branch of the state. Instead I relied on our accountant for advice. We had creditors screaming down the phones and we were worried that if we put any more of our own money in we’d have nothing with which to start again. In the end we shut the firm. My accountant recommended O’Hara & Co, an insolvency practitioner he was familiar with. As far as I could tell there’s not a lot to choose between them. At our first meeting they were extremely reassuring. They told me they did this sort of thing all the time, there was no shame in it, and encouraged me to go back into business afterwards. They took all the firm’s books away and a few days later called me up to inform me of how they were going to deal with our creditors. Their initial quote for their services was £5,000. We haggled them down to £3,500 by saying we would do the invoice chasing, which, strictly speaking, is their duty. I had to give personal guarantees to pay the bill – after all they don’t want to be out of pocket at the end of the day! After two weeks we had our creditors’ meeting. All the shareholders and people who are owed money are allowed to come to the meeting to ask you questions. No one turned up, which was a relief, but I hear that this is par for the course. The whole winding-up process took four weeks from start to finish. Rehabilitation didn’t take long. We closed Networx with £10,000 owed to printers and hotels. One of the hardest things to take is the hit to your morale. I was crippled by lethargy, and had to force myself to pick up the phone again. But I’m older and wiser now. I’ll never make the same mistake of starting a new venture as part of my successful firm. And with my new firm I’ve got the chance to start afresh, armed with everything I’ve learnt. Stuart Bruce is now chief executive of PR firm Stuart Bruce Associates. “It was like wartime”
Ivan Massow merged his IFA with a rival, and then disappeared to the Balearics to party. When he returned his firm was in turmoil. In 1999 I merged my financial services firm with another IFA, Rainbow Finance. I was the chairman of the new company, but it was clear they didn’t need me. My PC got moved into the basement and my pictures got taken off the walls. I thought OK, and celebrated by going to Ibiza and partying for four months. I’d left the firm with £300,000 in cash and a £250,000 overdraft facility. I knew things had gone wrong was when I got a call from the management asking me for money to pay the wages. I flew straight back to England. The first thing I learnt was that in a crisis you don’t have to wait to be given authority. You just take it. The MD had disappeared, leaving me in charge. We had huge problems. There were too many managers in what was a small firm. Invoices were unpaid. We were at the end of our overdraft facility. When the board met, they voted en masse to go into receivership. I refused! They told the staff to go home and to put out-of-office messages on their email telling customers we’d gone bust. I was flabbergasted. Everyone cleared off and I was left rushing round trying to turn off the email messages. I sat in reception for a week manning the phones, keeping the fires alight. For the sake of the staff I did not want to let the firm go under. In the end we entered receivership because of the law. We wouldn’t have survived another three weeks. The legal threat from the DTI terrified me so much so that today I refuse to have my name down on anything. The DTI could call me a shadow director of firms I am involved in but I don’t care. I just don’t want my name down on paper. The receivers looked through the books and gave me a clear picture of our financial position. They found unpaid invoices and bills that I didn’t even know existed. They charged me £5,000 for five days, but at least they meant I knew where the firm stood. They reported we needed £430,000 to salvage the company, and I discovered another £150,000 of debt. I tried to get the existing shareholders to put more money into the firm, but every time we tried to raise cash we had to have an EGM which required 21 days’ notice, or needed them to sign some sort of waiver. Some shareholders were in Canada! I worked fourteen hours a day, every day. That’s when I got the thromboses. I just sat at my desk all the time trying to find a solution. It was stressful, but I’ve never felt so alive! It’s like wartime. The air was alive with activity. There were jobs to save, damage to minimise, and a company to rescue. It was as exciting and empowering as the biggest business wins I’ve ever had! In the end I bought back the firm. I paid over the odds as I had made the classic mistake of keeping the firm going whilst we were looking for a buyer. I renamed the firm Ivan Massow and wrote to all the customers explaining what had happened. I used my own name to show I was investing my personal reputation in the business. A year later the clients had forgotten all about the trouble. Today no one even mentions it. I eventually sold the firm to a management buy-in. Ironically I saved the firm for the sake of the staff, but after the MBI most of them found the new CEO quite difficult and left anyway. So what was the point!? I lost ?1m and two years of my life. Looking back I wish I’d just walked away. Ivan Massow went on to chair (and spectacularly resign from) the Institute of Contemporary Art, to found the world’s largest online social network, JakeTM.org, and to cofound cosmetics firm Halos n Horns. The perfect time to buy:

LEARNING THE HARD WAY Call in insolvency practitioners as early as possible. Don’t incur more costs when you are in trouble. If you trade whilst insolvent you will be personally liable. Quadruple the time investors say they’ll take to consider investing. Enrol in the Enterprise Initiative Scheme and your investors could recover over half of their investment. Don’t be afraid to walk away. Start risky sidelines as separate legal entities to your main business. If you are planning on buying out other shareholders, don’t inflate the price by rescuing the firm before you bid. Take an axe to the workforce. Half measures won’t work. If you can’t sleep at night, do something useful: make action lists. Insolvency practitioners may reduce their fee if you agree to chase invoices for them.

Stephen Morris on how pick up a bargain amidst the rubble of a ruined business. I sold my marketing firm in 1987 to a firm called FKB. They were clued-up guys, and I carried on working there. Three years later FKB went spectacularly bust. They’d overinvested in the US, a market they didn’t understand, paid far too much for acquisitions and took lots of bad advice. The staff were scared stiff. The clients were nervous too. I wanted to buy my firm back, but I didn’t want to pay over the odds. So, I told the clients the truth about what was going on, and persuaded them to send in faxes threatening to take their business elsewhere due to the uncertainty. The receivers sold me back my business for a knockdown price. I renamed it Haygarth. I raised the money for the purchase by remortgaging my house. We had the relaunch party in my back garden, with my wife and mother doing the catering. It took several years, during which I didn’t take a salary or pension payments. In 2001 I sold the firm to a French group for £35m. Here’s what I learnt from the debacle. Number one: never trust banks. They are liars, thieves and cheats. They will call in your loan at a moment’s notice if they want to. If you can’t pay, you go under. Number two: always keep plenty of cash in the till. We never pay a dividend unless we’ve got three months’ overhead in cash. And number three: a bankruptcy can throw up some great bargains! Stephen Morris remains chief executive of Haygarth. Inside a dotbomb:
Ed Mills founded Britain’s first online wine shop. But unreliable investors left him putting everything he had into the venture, before he finally ran out of cash. My wife and I love wine. We visit vineyards in our holidays, and we’ve always wanted jobs that are more fun that being in financial services. In the late nineties the internet was taking off, and we saw a gap in the market. Although we knew nothing about retail we spent £30,000 on setting up ItsWine.com, Britain’s first wine shop on the web. At first everything went brilliantly. We did our normal jobs during the day, and then rushed home to run the wine business. We’d look at the orders, pack the wine in our garage, and couriers would arrive to deliver the cases to customers the next morning. We had a just-in-time process so there was little excess stock hanging around. By 2000 it was clear this could be a great business. But we were undercapitalised. Our initial money had gone, so we approached friends and contacts for investors. We raised £1.2m just around the time of the Lastminute.com flotation. The business just kept accelerating. I coldcalled the founder of Majestic wine, Esme Johnstone, and persuaded him to be our chairman. We even had our own master of wine, yet the business was still being run from our home at night. In late 2000 we hit our first cash crisis. We had had two offers of funding, one for £2.5m from a media company, and £0.5m from a VC. When the media company withdrew their offer, the VC company reacted by pulling their offer too. By January 2001 we ran out of money. From then on in it was hard. We had 14 employees. I had to fire nine. Five went in one go, the other four went a few months apart. No matter how bad things got with the business, firing people was the hardest part. I just felt like such a git, smiling at people when I knew I’d be letting them go the next day. My tummy would ache. I had sleepless nights. We kept afloat by paying the bills ourselves. We’d re-mortgaged in 1999 and used the money to write wage cheques. The biggest reason we got into such trouble was that we kept being led up the garden path by possible investors. In January 2004 I had lunch with the CEO of a listed plc who asked if his company could invest. I was over the moon. This would solve all our problems. In February I hadn’t heard anything, so I rang his office. I was told in an off-hand way, “We are still interested, but these things take time.” I knew that with large corporates you have to quadruple the amount of time they say it takes to do things, so I decided enough was enough. We couldn’t wait. We’d lost £400,000 of our own money and the only way to carry on was to sell the house. I wasn’t prepared to ruin our lives, so I called in the receivers. The insolvency process was very smooth. You can actually liquidate without calling in a liquidator, but I wanted everything to be done by the book. My investors had lost substantial amounts of money, and I wanted to reassure them I had done everything above board. All my accounts were done on Sage, which is unusual for such a small firm, so it was an easy job for the receiver. The first call to an insolvency practitioner is to establish whether you are going to be insolvent. If you already are, you are too late! You’ve been trading insolvent. We knew from that meeting that we were going to call it a day. I called the other two directors and we agreed we would not buy any more stock. Incurring more cost while knowing you are in an insolvency situation is a serious offence. We just sold what we had. We laid off all the staff as we knew we wouldn’t be able to pay their wages in the future. A month after I’d made the first call to the insolvency practitioner we had the creditors’ meeting. I was dreading it. I felt ill beforehand. It is the very worst thing about going bust. Fortunately, of our 75 shareholders, only one turned up, and he came to give us moral support. Our creditors sent representatives – rottweilers who can look after their interests. One of them asked me straightaway, “Shouldn’t you have given this up three years ago?” I said if I’d known how it would go then I’d have never got started. The trick to getting through the insolvency process is to be honest. If you are caught doing something dodgy you will be crucified by your investors, and you could become personally liable. The insolvency guys will size you up very early on as to whether anything funny has taken place. They have to write a confidential report to the DTI on your character, recommending whether or not you should be struck off. Because I’d been careful and followed all the rules, I was fine, and though I wouldn’t say the practitioners were friendly, they were businesslike, and showed a lot of empathy. In January this year I got my final letter from the practitioners, saying the company was being wound up. That was the end of the process and the last I heard of them. The final bill came to around £5,000, which we paid using assets from the business. I’ve learnt a lot of lessons. Such as how to deal with investors, when things aren’t going so well. You’ve just got to be honest. Lots of our friends lost money – one lost ?20,000 – though none blamed us personally because we’d been clear about the risks involved. I learnt not to be so enthusiastic about opportunities. I am more cautious now. My optimism meant we kept ItsWine.com going much longer than we should have. I kept believing an investor would rescue us, and hung onto that possibility for far too long. In the last eight weeks of trading we lost £12,000 through personal guarantees. I am also relieved we qualified the firm for Enterprise Investment Scheme tax relief. It meant that our investors lost only 48 per cent of the money they put in, which is far better than if they put their money into a non-taxfree tech fund in 2000! I console myself with the knowledge that although we failed, so did our rival, Wine.com, and they had $180m. We were too soon for our time. It didn’t take me long to get started again – around a month. My new business is doing well. I’ve learnt a lot from my experiences, and though I don’t think I’ll ever say I’m glad I went through an insolvency, there’s definitely a positive side. My only worry now is what the extreme stress has done to my long-term health. They say you store these things up. In ten years’ time I might start to see what I’ve done to myself by going through all this. Ed Mills now runs Reliant Financial Services, an IFA, and consults through the IBD network of practitioners.

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