What do you do if your design agency fails? One designer and ex-agency owner's support and advice

8 February 2016

Last month we posted an opinion piece discussing how to set up an agency and “survive the design apocalypse.” But as most of us know, it’s never all plain sailing. So what do you do if your agency fails? Designer Paul Batterham has been through it, and offers some superb and very practical advice on how to deal with the situation.

I read Alex Dempsey’s article How to survive the “design apocalypse” by setting up your own agency with interest. It rang bells for me, as I founded my own design agency back in 2012 (a lengthy tale to be told elsewhere). Alex’s article is full of interesting advice and good survival tips, but when my company became insolvent early last year and my world came to a screeching halt, there was nothing I could find that spoke about what happens when your startup dream fails.

At almost exactly the same time I was winding things up, Forbes ran an article about how 90% of startups fail. RSA insurers released research in 2014 that show that fewer than 50% of new businesses last beyond five years.

For all the startup and entrepreneurial talk of “fail fast,” there is precious little support or information out there for what actually happens when you do fail. We live in a culture of talking about success, everywhere, paying lip service to the notion of failure. No one (that I have found) talks about the actuality of it, the pain of it, the reality of it and what decisions you have to make.

So in the spirit of Alex’s article, I’d like to offer some practical, hard-learnt lessons from what to do when your limited company fails, because it probably will. Sorry.

Stop trading as soon as you recognise you are insolvent

Put simply, insolvency is when your liabilities exceed your known assets and when you are no longer in a position to pay your creditors. If you owe more in terms of rent, rates, tax and salaries than you have booked work, you are insolvent.

One of our first employees was a finance director, who helped us to spot this. Once you know you are insolvent, you are legally obliged to stop trading; it’s out of your hands. Continuing to trade is fraudulent and could make you personally liable for all company debts. Get advice, quickly.

Keep records of everything: not just accounts but meetings where you make any decision too

Again, our FD mandated this. Up to that point, my business partner and I would hold “company meetings” in the pub and make decisions on the fly over a glass of wine. We weren’t acting negligently, but naively. Our FD ensured we began to minute all meetings, especially once we recognised we were in trouble. If you get into legal problems, those minutes will be needed to prove your intent and that you didn’t act fraudulently. So be careful.

Understand your legal responsibilities (and liabilities) as a company director

When we started our company, we lived off a tiny wage (under the income tax threshold), making up the rest through dividends – an approach which is pretty standard for directors of small companies.

We’d never encountered the notion of a director’s loan account, let alone the idea that it could be overdrawn. Overdrawn accounts work as company assets (the money belongs to the company until there is sufficient profit in there to pay dividends) and are fully repayable. They are an asset on your balance sheet and the company can take them back.

We were naive in not understanding this, and used the dividends to live on. But when the company was closed, the accounts had to be paid back to satisfy creditors.

Be charming, speak to all creditors face to face if possible

With two exceptions, every creditor we owed money to when we became insolvent was understanding. In most cases, they had ‘bad debt’ insurance, or could write it off on their balance sheet. It was painful, but we arranged meetings with most creditors to tell them what was happening and explain the situation. People were more supportive than we could have expected and it was a pretty humbling experience. It also saved us money and stress in the long run.

Be prepared to move quickly to save money

You will have to make some extremely tough decisions driven purely by numbers. Having to make my best friends redundant is not an experience I ever want to live through again. Accepting your dreams have all fallen apart pretty much overnight is psychologically very difficult to come to terms with.

But you will need to stem the cash outflow as soon as you can, and try to realise income from whatever assets you have. We sold everything we could – computers on ebay, furniture to other companies – to help pay our debts.

Allow people to support you, let them understand what’s happening

It’s often said it’s lonely at the top, and it’s true. Running a business is a situation few people put themselves in, so the experience can be very lonely. I was lucky I had a business partner to share the rollercoaster with.

Where I failed is to not let anyone else in. My world became so inwardly focused, I thought that no-one else could understand what I was going through, that I kept it all to myself and didn’t allow anyone to support me when I needed it most. Consequently, my mental health suffered, closely followed by my physical health.

Let people in, you never know what they can do for you.

Get professional help; speak to as many people as you can

Similarly, do not be afraid to ask for help with your business. I’m a designer by trade, I had no clue what the difference between members and creditor’s voluntary liquidation was.

We spoke to as many people as we could, and asked for advice everywhere: specialist insolvency practitioners gave us an hour’s advice for free, other business owners put us in touch with people who had been through the process, old college tutors were a real help.

Ultimately, our most practical and unbiased advice came from our accountant, who was also a creditor. He didn’t charge us for it and remains on my Christmas card list.

Try to keep a distance between you and your business

A difficult one to do, given you’ll have spent years giving every day and probably most evenings to build your company; it’s probably as much a part of you as your pet.

But you need to remember that your company is a legal entity that is not you. Unless you do something pretty stupid, or wilfully negligent, your liability is limited by the act of incorporation. It would take HMRC a court order to make you personally liable for tax, for instance. Court orders bought by creditors have to be against the company and are likely to pointless if the company is insolvent.

Keep in mind that everything will resolve, it will just take time

It’s been just over a year since we wound our company down. Psychologically at that point, I was at the bottom of a deep hole, facing a very uncertain future. The stress was unbearable, I wasn’t sleeping and I had developed an unhealthy relationship with alcohol to help me deal with the stress.

It’s been an extremely tough road to walk. But 12 months on, I am now able to talk about my business and what we did, with pride. I am on top of my finances and am looking after myself.

You will get through even the darkest situations. Just be patient.

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Paul Batterham

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