Companies do not equal value. My nine year old daughter, Emma, comes home and tells me “Mike’s dad owns two companies, how many companies do you own?” Mike has clearly impressed her. Yet, particularly in the current climate, those of us who can tie our own shoes should be a little more circumspect.
The price of limited liability includes the requirement to disclose accounts. Yet how many of us do our homework before we get into trouble? And review credit profiles regularly? Credit scores are much more widely available and cheap compared with what they used to be.
I recently acted for a US law firm who wanted our input on a well advanced US/UK joint venture. It came as news to them that their client’s counterpart was trading subject to a Company Voluntary Arrangement (an insolvency practitioner supervised debt moratorium). It takes moments to check when you know where to look. It’s an extreme case, but makes the point. At least that company was professionally addressing its problems.
Perhaps even more concerning is where we discover a company’s accounts have not been filed on time. This can (theoretically) be because the business is so busy it has fallen behind on its paperwork; but it may also be that the auditors haven’t been paid or are struggling to sign off on a “going concern” statement. i.e. finding evidence of financial support to sustain continued trading over the following twelve months.
Despite a company’s familiar sounding name, your prospective customer, supplier or in-laws’ company may also be only days old. A company (or two) can be formed very quickly at nominal cost. Companies are just shells until you put something in them. The balance between assets and liabilities in the shell is crucial.
The word “Group”, “International” or “Energy” may also seem to lend unearned credibility. Don’t get me wrong, start ups are great but their suppliers and customers should still understand the business proposition. Business is about risk, and you can’t win them all. But you can do business with your eyes open.
As for Emma, I could see that my exposition of the benefits of limited liability partnership was not going to impress anyone in the playground. If only I had just told her I work with seals.
Peter Murray is a partner at Scottish law firm Ledingham Chalmers where he specialises in UK corporate law and international projects.
Peter Murray is a partner at Scottish law firm Ledingham Chalmers where he specialises in UK corporate law and international projects.
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