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.