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Zombie Companies: Is Your Business Under Threat from the Corporate Walking Dead?

How to protect your business from the “living dead”

Just when we thought we were slowly re-emerging from the COVID-19 lockdown, there seems to be another pandemic lurking in the shadows: zombie companies.

To help, the credit and insolvency experts at Insolve, The Solvers and CreditorWatch have created a survival guide for Australian businesses. Learn how to spot a zombie company from afar and protect your business from their horror.

What is a zombie company?

According to InvestorDaily, the phrase zombie companies emerged post GFC to mean “businesses that carried debt beyond their overall value.” And as the nation stumbles out of the coronavirus lockdown and teeters on the brink of a recession, the zombies are again coming out of the woodwork.

These are the businesses propped up by lenient creditors and government relief packages, but in reality, are in too much debt to continue to thrive or grow.

Chris Baskerville, member of the Insolve Panel and Partner of Jirsch Sutherland says:

“In George A Romero’s classic Night of The Living Dead, people are struck down by a mystery illness and become undead zombies that shuffle about and attack the healthy – causing them to also become ‘undead’ and multiply the harm they do”.

“Government stimulus and support has been critical to keep viable businesses going and keep people in jobs. But it is not a miracle cure – the clock is ticking, and business owners need to use this a time to make a plan. Beware the Apocalypse!”

Patrick Coghlan, CEO of CreditorWatch, offers similar advice: “If we don’t support them [distressed companies] further, we’re going to have an even bigger wave of insolvencies around September. There are plenty of businesses currently operating that should instead be initiating a wind up or at least engaging with a restructuring specialist or banker.”

Read Patrick’s comments on zombie companies in this article from The Age in June 2020.

Do you know a business that is dragging its feet and staring into space? They could be a zombie. These are the risky behaviours to be wary of during this uncertain economy.

Protect yourself from zombie companies

Zombie behaviour #1 – they’re often slow

Insolve Panel Member Roland Robson of Robson Cotter Insolvency Group asks ” What do you do if you run a viable business right now? Will the rest of 2020 see you being like Sheriff’s Deputy Rick Grimes in The Walking Dead, trying to lead a small band to safety in a zombie apocalypse?”

“The thing is you already know the sort of client or supplier. They miss payments and they string you along. They were always out there, but now there could be a plague of them. You need to spot them before they affect your bottom line.”

Patrick Coghlan is a firm advocator of prevention rather than a cure in a zombie apocalypse (and in business).

“CreditorWatch gives businesses the ability to spot their slow-paying and non-compliant debtors early on, before they inflict some serious damage.

With CreditorWatch’s Payment Predictor and our innovative ATB-analysis program DebtorLogic, you can assess your slow customers’ payment behaviour and understand if they’re not prioritising you like the rest of the market or they’re heading into insolvency.”

These are the warning signs to watch for. Are your customers:

  • Slow to pay, and either only partially pay bills or late-paying even before the COVID-19 pandemic began?
  • Slow to supply – the sort that over promise and under deliver or give excuses?
  • Slow to change and are content on doing the same old thing, the same old way?

Zombie behaviour #2 – they make no sense

Attacking people and biting them isn’t usual behaviour for healthy people. It’s the same in business. Whether you’re dealing with the slow sort of zombie that shuffles about or the quick ones who furiously cause mayhem, you need to know what to watch out for, like corner cutters and under cutters.

Stuart Craig, Member of 888x and member of thesolvers.com.au says: “They’re a menace and we see more than usual now. They under price contracts because they don’t know their actual input costs, or they set out to cut corners. They just undercut good sustainable businesses”. Stuart says those zombies can only keep going if:

  • The zombie company underpays its staff
  • The owners take huge risks for no reward
  • The owner plans to ‘phoenix’ and not pay their bills
  • The zombie is propped up by short term cash – maybe they are relying on the current government stimulus as quick fix.

Zombie behaviour #3 – they keep going no matter what

Zombies take all sorts of punishment that healthy people could not stand: they fall from heights, get hit by weapons, lose limbs, and yet they keep going like they’re in a mad daze.

Chris Baskerville says “A zombie company keeps on going because of these three things:”

  • The director keeps going into more and more debt
  • The owners always think the next deal will save them
  • The owner is in denial and doesn’t know (or want to know) what they could or should do

Chris and Roland both say they all too often see directors of those businesses too late. They’re guilty of all of the above and destroy their equity and business until it is forced into liquidation.

Now you know what to spot in a zombie company, equip yourself with the right protection and follow these three points.

Sign that reads 'Zombie Shelter'

Zombie protection #1 – write it in stone

Solicitor Bruce Pasetti encourages businesses to update their contracts and terms, and register on PPSR so you have a retained interest in goods that you are supplying to a client. This means that if your customer doesn’t pay, or goes broke, you are in the best position to get your goods, or their value, back.

Patrick Coghlan says: “We’ve seen an influx of new PPSRLogic customers using our portal as well as our existing customers reaching out to our in-house PPSR expert to check that their PPS registrations are accurate. Securing and recording your business’ interests is vital to protect yourself from failing customers.”

Zombie protection #2 – organise yourself

In any good zombie movie, survivors usually have weapons at their disposal to protect themselves, and for business owners, the same is true. One of the key defences is being organised:

  • Keep talking to key clients and suppliers
  • Clean up your database to reduce your commercial credit risk
  • Don’t get caught in a preference trap
  • Renegotiate agreements and leases
  • Organise your debts
  • Get ‘Judgment Ready
  • Get a Turnaround Plan in Safe Harbour

Zombie protection #3 – be honest with yourself

For many business owners, the stark reality of the COVID-19 pandemic means learning the hard way that their business is not viable or sustainable. In other words, you’ve been working hard to keep going, when cutting your losses and walking way is a better decision.

“For some business owners, the smartest thing for them to do is to wind it up now, and walk away with some equity,” said ANZ’s head of retail and business banking, Mark Hand.[1]

What does the post-September economy look like?

In closing Roland Robson says “Like in any B-Grade zombie flick, while the survivors live to fight on another day there is still a few of the undead around to strike at the unwary.”

“Government stimulus looks to have given a lifeline to some companies that possibly should be closed up. The question is do you want to risk a zombie company apocalypse, which ends badly in forced liquidations and bankruptcies?

Business owners need have to make the choice now. If you’re a zombie business owner, wind it up during the temporary protections before it does you and others more harm. If you are a survivor, you’ll need to be smart to outrun and outsmart the undead”.

The best line of defence is to face them head on rather than escape to your bunker. CreditorWatch’s suite of credit management tools are designed to identify the risks in your ledger early and provide businesses of all sizes with the tools to prevent debt.

You can monitor businesses for any adverse changes as and when they happen and conduct a Financial Risk Analysis to get a better understanding of a company’s financial health.

Are you a director struggling with debt or need help chasing non-compliant debtors? Reach out to the Insolve Panel for independent expert advice on how to protect yourself and your business during troubling times.

Learn more about CreditorWatch

[1] Financial Review 1 June 2020 https://www.afr.com/companies/financial-services/anz-to-stricken-smes-wind-it-up-and-walk-away-20200529-p54xtk