We all know
that positive press coverage is good for business. But just how damaging is
negative publicity?
Nobody is
immune to negative press. Elon Musk – arguably one of the most powerful and
innovative men in business saw $1 billion wiped off the value of Tesla after he
was caught on camera smoking a joint, and he lost another $20m when the
Securities and Exchange Commission (SEC) fined him for breaching the rules by
announcing his intention to take Tesla private on Twitter.
He is not
alone in paying the price of bad press. Fellow billionaire Mark Zuckerberg had
to cough up a record $5 billion for Facebook’s dodgy dealings with Cambridge
Analytica.
And to bring
my point up to date, it has recently been announced that the owner of fitness
training company CrossFit has sold his business following outcry over his
remarks about George Floyd. After his comments (which I won’t repeat here),
gyms across the world dropped the CrossFit branding and there was a rapid
ending to his partnership with Reebok.
But it’s not
just the high-profile businesses that fall foul of bad PR.
I found out the hard way a few years back when I, Neil Debenham, purchased the fitness training company Fitlearn. Not on the scale of CrossFit, but nevertheless in the same field.
This
business reflected all that an acquirer would want to see. It had a great
balance sheet, excellent financial track record and a well-run, professional
company and a good pipeline of potential new students. But what I had failed to
do- and I kick myself for this – carry out a reputation audit.
Two
employees of the business were under investigation for fraud at a previous
company they’d run. With the media reporting the activities of the previous
employees, bad publicity that followed linked Fitlearn to the previous
activities of the employees and ultimately drove a sword into the heart of the
business.
The misleading,
negative PR had a direct impact on the company resulting in existing customers
demanding their money back and with the new customers seeking alternative
routes to study, the company very quickly became insolvent.
As a
director of a company, it remains your fiduciary duty to not allow a company to
trade in an insolvent manner – Insolvency means that the company revenue or
assets do not meet the demands of the company’s liabilities. In this instance,
Fitlearn relied on new students joining the study programme to meet its
overheads and with the press leading the general public to believe that
Fitlearn was somehow involved in the ex-employees previous venture creating
nervousness for potential new students, I was left with no option but to enter
the company into voluntary liquidation.
As with any
business, you must remain focussed on making the correct decisions however;
knowing that students may not complete their studies made the decision ever
more difficult.
Working with
The Office of Qualifications and Examinations Regulation (Ofqual) awarding body
and the insolvency practitioners to find a solution for the existing students
and to fulfil existing contacts, many attempts were made to create an ongoing
study path for students but no-one wanted to pick up what they saw as a poison
chalice.
The downfall of what was once a great business was simply an effect of negative and misleading press coverage and had this not been the case, I’m confident that FitLearn would continue to strive today and Neil Debenham would be renowned as a great business leader..
Putting a
business into administration or liquidation is not an experience I can
recommend. It is an extremely difficult decision to make, knowing you will have
a direct impact on the creditors.
One of the
main lessons to learn from this is to look beyond financials and operate a 360
view of all that the business entails.
Make sure
that a reputation audit features high on the due diligence list. This includes
a thorough Google search and trawl for comments on social media. Also, take a
look a Trust Pilot to see how the business is rated. Assess the public view on
the business and if there are concerns, investigate.
Talk to
staff and customers – they will all have a view.
Don’t just
carry out your due diligence on the business but also the individuals owning
running or working within the business. They are the representation of the
brand. If it is, has or could be mis-represented in any way, could this be
contained and what steps would need to be put in place?
The other
lesson is to find out whether the business is actually solvent at the time of
purchase. Of course, you can buy an insolvent business at a knock-down price,
but you need to know what you are letting yourself in for. A specialist will
buy an insolvent business and implement strategies, processes and finance to
trade out of insolvency, If you are considering doing this, match your
skillsets carefully against what may be needed. Some businesses will
technically drift in and out of insolvency, but it can indicate a serious underlying
problem.
There are
three simple tests to establish whether a business is insolvent:
- Do the company’s liabilities exceed
its assets? In other words, is the cash in the bank and value of property and
equipment enough to pay off all debts? If not, you could be insolvent. - Can the company pay its debts when
they fall due? This includes TAX and NI payments to HMRC - Does the company have any legal
actions against it for debts over £750?
If your
business- or the one you are looking to purchase- fails these tests, then you
need to get help. It’s not a viable business and you could well be trading
illegally.
If you have any questions on the issue of reputation or insolvency, I would be happy to advise. Drop me, Neil Debenham, an email neil@neildebenham.com and follow me on Instagram and Twitter.
