What is Meant by a Zombie Company?

A zombie company is a business that continues to operate normally by trading and running its operations, but it has substantial debts that leave it unable to expand or grow.

These companies are typically unable to pay off their debts, yet continue to operate, effectively ‘zombifying’ themselves.

By only ever paying the interest on its debts rather than any of the capital sum, the situation shows little sign of improving. The company is in a state of stagnation, as it cannot make a profit to start paying off its debts, but it is not in such trouble that it faces closure. It also does not have the money to hire new employees to kick-start growth but cannot afford to make any redundancies.

Radio 4 made a useful program about the subject, which you could listen to here.

What-is-a-Zombie-Company-and-Can-you-Bring-it-Back-to-Life_

Potential Causes of Zombie Companies

Becoming a zombie company is usually a gradual process, resulting from a combination of these and other factors.

One of the leading causes of zombie companies in the past has been high-interest rates. This can make existing debts so expensive that companies can only afford to repay the interest on the debt. The current record low-interest rates make this much less of a factor.

Companies that take on excessive debt, either to fund expansion or to cover operating expenses, may struggle to make repayments if their income declines. High interest payments can drain cash flow, leaving little for investment or growth.

Ineffective leadership, strategic missteps, or a failure to control costs can all contribute to a company’s decline. Poor management may fail to address underlying problems, leading to a gradual erosion of the company’s financial health.

In some cases, banks or other creditors may be reluctant to force a struggling company into bankruptcy. They may extend new loans or restructure existing debt, effectively propping up the company. While this can provide short-term relief, it can also allow the underlying problems to persist.

During recessions or periods of economic stagnation, businesses may face reduced demand for their products or services. This can lead to declining revenues and profitability, making it harder for companies to meet their debt obligations.

How many Zombie Companies are there in the UK?

According to recent analysis by BDO March 2024), 12.4% of the UK’s mid-market companies (with turnover between £10m to £500m) are ‘at risk’ of being or becoming ‘zombie’ companies. This represents a slight increase of 0.4 percentage points since Summer 2023.

Key points from the data:

  • The analysis covered a total population of 15,600 mid-market businesses in the UK.
  • There has been a steady but consistent uptick in the proportion of ‘at risk’ businesses over the last 18 months.
  • Leisure and hospitality remained the most’ at risk’ industry, with 22.3% of businesses, an increase of 1.9 percentage points from the previous tracker.
  • The South East, Greater London and West Midlands regions have the highest proportion of ‘at risk’ businesses.

There are several strategies you can employ to avoid falling into the zombie trap and breathe new life into your business.

What are the Options for a Zombie Business?

If you feel like your company’s liabilities are spiralling out of control, it’s time to take some professional advice. There are several strategies debt experts like ourselves can employ to help your company escape debt

If your company is insolvent and there’s no realistic prospect of recovery, a CVL might be the most appropriate course of action. In this process, the company’s assets are sold, and the proceeds are distributed to creditors. While this means the end of the current company, it allows directors to move on and potentially start afresh with a new venture.

Administration is a formal insolvency procedure that provides larger companies with breathing space from creditor pressure. During this process, an insolvency practitioner takes control of the company with the aim of either rescuing the business as a going concern, achieving a better result for creditors than liquidation, or realising property to make a distribution to secured or preferential creditors. Because it’s an expensive process, it’s not appropriate for smaller businesses.

A CVA is a formal agreement between your company and its creditors to repay debts over an agreed period, typically three to five years. This arrangement allows you to continue trading while gradually settling your debts, providing a path back to financial health. A CVA can be a powerful tool to restructure your company’s liabilities and improve its long-term viability.

If your company owes money to HMRC, you may be able to arrange a Time to Pay (TTP) agreement. This allows you to spread the payment of your outstanding tax liabilities over a period of time, usually up to 12 months. A TTP agreement can provide much-needed breathing space and help alleviate immediate cash flow pressures.