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A lifeline

Updated: Mar 12, 2019

With the number of insolvencies in the foodservice sector increasing, Michael Roome, partner at Midlands-based accountancy and business advisory firm Smith Cooper, helps fish and chip shop owners recognise the warning signs before it’s too late

What is the situation on the high street currently?

In official government figures, 1,306 restaurants and mobile food service operators in England and Wales entered into an insolvency process in 2018, compared to 970 in the previous year. This was the tenth highest number of insolvencies by industry in 2018, showing it as one of the worst affected.

Why are we seeing this increase in businesses going under?

There are a large number of businesses that have been insolvent for some time but have managed to stave off a formal insolvency process and continue trading regardless. However, that strategy cannot continue forever and whilst in that situation business owners maintain the belief that they can trade through it. Ultimately the level of debt the business accrues and becomes burdened by becomes insurmountable and, even if profitability returns, it is not enough to avoid the inevitable insolvency process that has been looming for some time.

The economic and political landscapes continue to provide much uncertainty and have not really settled since the global financial crisis occurred over 10 years ago. With the UK being scheduled to leave the European Union on 29th March you cannot envisage either situation changing any time soon, which in turn impacts jobs, finance and investment in the UK with the tourism and leisure industries always one of the hardest hit as a result.

How at risk are fish and chip shops to these pressures?

Anyone who has traded in the restaurant industry will be familiar with the substantial and onerous overheads that need to be met in order to simply operate and even more so in the current economic climate.

Business costs are on the up, accelerated by rising costs of produce, particularly for imported goods. As the cost of produce continues to rise, ingredients get more expensive to source, having a detrimental impact on margins and therefore placing low profit outlets at risk.

With a fall in disposable household income, increasing rental costs and rising wages also having a negative impact, the consequences continue to reverberate through the industry as a whole. Furthermore, the restaurant industry is a crowded one. There’s stiff competition, and consumers have more choice than ever, meaning brand loyalty is less significant.

What are the early warning signs that shop owners should look out for?

Being aware of the dangers from a very early stage and knowing whether a business is at the “point of no return”, or merely going through a short dip, is key to owners taking the early action that can save their business.

Cash rarely flows in the steady stream business owners would like. The cost of business can rise sharply and unexpectedly, making it difficult to manage liquidity. The difference between businesses that survive and thrive and those that fail is how well they manage difficulties.

Business owners should take a moment to look around at their market. Have competing businesses ceased to trade? Whilst that presents opportunities in an increased market share is it an indicator that the market has changed and demand has reduced.

With an increase in the failure of restaurants and mobile food service operators, ask yourself what makes your business different? And, if it is different is that sufficient to navigate your way through these times of financial uncertainty? Should you be unsure you should always seek the advice of your accountant or an insolvency practitioner. You do not want to continue to trade for the position to only worsen and impact your personal assets and affairs.

What one piece of advice would you give to help a a shop owner avoid a problem?

Whilst it does take time and focus away from the day-to-day running of the business, it is vitally important that you maintain good and accurate books and records.

Chip shops generally tend to operate cash-based businesses and should take heed of the recent case of Keith McGilvray, director of Frogfish fish and chips takeaway in Aberdeen, who, following a report by the Insolvency Service, was subjected to a seven-year disqualification order having found that he had failed to maintain sufficient records to explain where monies had gone and, following insolvency, make sure that such records are delivered up for scrutiny by the relevant bodies.

In times of financial distress it is not uncommon to lose sight of the basics of what a good business should do but, in doing so, owners open themselves up to wider issues and risks, making a bad situation worse.

"The difference between businesses that survive and thrive and those that fail is how well they manage difficulties."

If shops are in financial difficulty what should they do to avoid formal insolvency?

Where a business is experiencing cash flow difficulties, the owner should always be seeking prompt advice from an Insolvency Practitioner. At Smith Cooper we pride ourselves on prioritising whether a business can be saved and avoid an insolvency process, however, the timing is key and the earlier we are engaged to work with a business the options available are enhanced. We help provide candid, proactive commercial advice on your options when you need it most.

And if it is too late?

It is not unknown for a business to be subject to the latter stages of a winding-up or bankruptcy petition and still have viable options available to avoid ceasing to trade. However, the longer a business leaves dealing with debt, the greater its credibility is impacted, particularly when dealing with HM Revenue & Customs in relation to VAT, PAYE or National Insurance.

Ultimately, if you do not take protective steps a creditor may seek to enforce their debt, leading to the business entering liquidation or bankruptcy. These types of insolvency processes result in the business ceasing to trade and the employees being made redundant, with the assets being sold on a break-up basis.

Where the business is a Company, it is possible that the director may be subject to claims arising against them in relation to their conduct, particularly where it is evident that the business ought to have ceased to trade at an earlier juncture. Therefore, it is imperative that professional advice is sought sooner rather than later to avoid compounding the issues that might arise in those scenarios.

On a positive note, what opportunities are there? Fish and chip shops have a wealth of opportunities available to them. For one, they are far more adaptable than large scale national brands. They are less constrained and have the opportunity to capture wide consumer bases.

In recent years, food trends - food markets to pop-ups, to adopting more sustainable and conscious ways of eating - have shaped the industry. By getting on board with trends like these, fish and chip shops really can differentiate themselves amongst a sea of competitors.

In the digital age, convenience is king and online food delivery companies such as Deliveroo now offer consumers the opportunity to have their favourite restaurant or takeaway delivered directly to their door. Taking advantage of a sizeable customer base by expanding operations into cyberspace offers many opportunities.

Despite low levels of eatery loyalty, there is evidence to suggest that people tend to be loyal to their local fish and chip shop, meaning vendors must grasp the opportunity and build awareness for those in the local area.

Diversification, adaptability and the assurance of quality is key.

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