Recession’s Impact on Price Negotiations
Has the recession caused an increase in haggling over price? John Harlow, director at John Harlow Insolvency, thinks the answer has to be a resounding “yes”.
For the last four or five years businesses have been forced to take a careful look at their own finances in order to survive. Not only have they had to reduce their own overheads as much as possible, they have had to ensure that any products or services which they require are bought in at the lowest cost in order to maintain margins.
The Rise of Zombie Companies
This “drawing in of the horns” is undoubtedly part of what has created the phenomenon of the so called “zombie companies”, that is businesses which are under severe financial pressure, but which due to low interest rates and leniency on the part of creditors are managing to survive. I believe that it is the proliferation of these zombies which has been instrumental in restricting growth and delaying the recovery.
Insolvency Industry Faces New Challenges
As insolvency practitioners we are not immune to this. During the recession, perversely, insolvency work has actually declined, with the exception of a few notable high street failures. In the SME market however, business failures have been at an all time low and those businesses which have required the assistance of an insolvency practitioner have been able to shop around. Practitioners have found themselves taking on work for much lower fees and recovery rates than previously.
John Harlow
Trends in Solvent Wind-Ups and Cost Awareness
Solvent winding-up in particular has seen a greater level of cost awareness amongst directors. This is where business owners decide to close down a company which is not insolvent, through a Member’s Voluntary Liquidation (MVL). An MVL is a vehicle under the aegis of the Insolvency Act which enables the company’s assets to be liquidated, creditors paid in full and a distribution made to shareholders in a tax efficient way, as dividends above £25,000 are treated as capital distributions rather than income.
MVL’s have become more popular as a result of changes in legislation in March 2012 and it has now become normal for practitioners to be placed on a “beauty parade” with other firms before receiving instructions to act as liquidator. This has inevitably led to a plethora of adverts from insolvency practices offering MVLs at sometimes ludicrously low prices, which bring to mind the price wars over conveyancing costs waged by law firms in the past.
Fixed Fees and Declining Recovery Rates
As practitioners, most of us record our time even when acting under a fixed fee agreement. It is clear that if the job is done properly, the recovery rate for this type of work can be very poor, so why do we do it? Well, nearly all of an insolvency practitioner’s work is obtained through referral, so no one wants to turn work away from a valued provider, who may place their allegiance elsewhere as a result. Also, whilst work is scarce, any fee is better than none, after all what we sell is essentially time and time is best utilised through at least some productivity.
So from personal experience, haggling over price has undoubtedly increased during the recession and is something which has affected all areas of industry, including professional services like solicitors, accountants and insolvency practitioners.
