Troubled VARs urged to sell up

Business intelligence firm Plimsoll has urged struggling VARs to consider selling up to help stem the swelling tide of channel insolvencies.

Projections have suggested that UK business failures could rise by 50 per cent or more this year. Research from Plimsoll finds that 167 resellers in this country are rated as being in danger, a slight drop from the 168 facing peril in the firm's January figures.

David Pattison, senior business analyst at Plimsoll, identified five stages VARs go through on the rocky road to going under. Firstly, under pressure to increase sales, companies resort to selling at a loss. This leads to firms taking on short-term debt to finance the sales push.

This unsecured financing is then swapped to a more long-term model at the request of nervous financiers. Backed by this extra cash, businesses plough on with a floundering strategy and heavy interest payments eat into their profits.

Finally, with debt mounting to an uncontrollable level, jittery banks ask for full repayment and, with the company unable to do this, administrators are called in.

Pattison cautioned firms to monitor their progress and watch out for signs of decline.

"Administration should be viewed as a clear last resort," he said. "The damage done to the long-term health of the company in terms of the brand and negative publicity are all too difficult to recover from."

Pattison advised firms of three key strategies to help haul themselves out of trouble. Firstly, trimming down and cutting costs is essential. "Internally this will not be well received as job losses will generally be part of the plan," he said.

The second way to avoid catastrophe is to sell the company or look for investment. Plimsoll estimates that 479 firms in the channel have ready access to cash and can afford to look around for acquisition targets. Pattison claims that struggling businesses are prone to be courted aggressively by cash-rich rivals.

"My view is there could be a great benefit in selling up," he said. "A new owner would give the company time and resource to turn their performance around. "

The final way for companies to circumnavigate peril is simply to trade their way out. But Pattison warns that only a few of the 167 firms in danger have this as a feasible option.

"In the current economic climate this is the least likely strategy as most of those companies have fairly long-term problems," he said. "It is clear that their current business is not competitive in the market and simply doing the same will not change anything. Combine this with the inability to raise extra finance and time is not on the side of this approach."