There are around 76 companies in the UK software industry that are ‘Zombie’ businesses. These failing companies—which continue to operate with government support but cannot stand on its own—have seen their performance deteriorate to such as extent that they now exist merely to pay off their debts and survive.

According to David Pattison at Plimsoll: “These companies are in a state, posting growing losses and, despite the obvious freeze in the credit markets, increasing their debts. They are Zombie businesses with debts at an average of 65% of turnover—they exist to service their out of control liabilities. Many are also using their suppliers to finance their growing losses, taking twice as long as to pay their bills as the industry average of 14 days”.

Pattison also explained the other major problems these Zombies Companies are facing: “They are falling behind the rest and their productivity is well below the industry average. It’s hard for them to compete as their cost base is just too high. As a result, investment plans have been mothballed meaning their aging assets are further restricting their ability to remain competitive”.

Pattison is clear that not all Zombie Companies will survive and those that do have a lot of pain ahead: “The first thing they need to do is sort out their immediate finances. They have to convince their banks and suppliers to keep supporting them or not pull the plug. If they can pull that off then the hard work really starts. They urgently need to stem their losses and control costs. The longer it takes them to address these issues, the harder and less likely it is they will ever fix them”.

However, Pattison points to some attractive takeover targets hidden among the Zombies Companies: “Canny investors are seeing an opportunity to pick up a bargain. Some of these companies, stuck in a zombie state because of their balance sheet, have lots of potential for new owners to turn it around.”

And for those unable to attract new buyers Pattison said: “Most have simply had their day and a combination of aging assets, rising losses and increasing debts mean they are unlikely to attract a suitor before the receivers are called. They will be forced back into negotiations with their lenders to buy more time but their future doesn’t look good”.

A Zombie Company has lousy revenues and lousy prospects. For many business owners, it’s hard to admit they are wrong—it’s an ego thing. So most entrepreneurs carry on with losers a lot longer than they should. I’m sure many of you reading this are guilty of this. But first you have to recognise the symptoms.

Are you running a Zombie Company? Here are the signs, courtesy of Dr. Bruce M. Firestone.

  1. Costs are much higher than revenues.
    2. Sales people blame the “Sales Cycle” or have other excuses which seek to delay the inevitable.
    3. Morale is down and dropping.
    4. Staff turnover is increasing.
    5. People are forgetting the obvious (”I forgot the contracts”, the story of Istari Electronics), blaming each other but never themselves (not taking responsibility for their own actions/not having a good ‘heart’) and not learning from their mistakes (repeating the same mistakes over and over again).
    6. Stuff falls through the cracks.
    7. Lack of initiative.
    8. Lack of demand (curve) for the product or service (e.g., CFL football in Ottawa in the 1990s).
    9. People start lying to you. (Note that most people don’t actually lie to you. They lie to themselves first then they tell you what they believe is the truth. If you think you are dealing with a Zombie Company, you need to verify independently all the information flow; you need to triangulate on people by asking the same question of several people to see if you are getting the same answers.)
    10. Current Assets are much less than Current Liabilities.
    11. Media rumours of financial troubles begin to circulate.
    12. Shrinkage increases- employees and others begin taking furniture, computers, money, client and customer lists. Your employees become your competitors.
    13. Sick leave, MHDs, holiday pay, absence-on-the-job increase. People play ‘golf’ and other electronic games on their PCs.
    14. Receivables become hard to collect because people erronoeously believe that if the company goes bankrupt they won’t have to pay (untrue in most cases because the receiver will try to collect).
    15. Staff hide purchases, purchase orders, other costs.
    16. Sales increase at the end of a quarter only to be reversed in the next quarter as inventory is returned.
    17. Fianancial statements cease to reflect accurately the cash position; cash becomes scarce.
    18. Bank lines are fully utilised.
    19. Creditors call at home and at the office. Payables exceed 90 days.
    20. Productivity drops because supplier credit dries up and materials and services needed for production are hard to come by.
    21. Client and customer complaints skyrocket. Repeat customers and clients are way down.
    22. Your credit rating is dropping like a stone.
    23. You can’t get any financing deals done.
    24. Your sales pitches are met with silence. (Silence is never good in deal making. It means that they either haven’t made up their minds yet to give you the order, which is bad, or they have made up their minds and the answer is ‘no’. People don’t like telling you ‘no’. So they will usually say: ‘maybe’. In my experience the best answer is ‘yes’, the second best answer is ‘no’ and the worst answer you can get is ‘maybe’. The latter wastes your time and theirs. So if I hear ‘maybe’ a few times from a client, I tell them that I will take this as a ‘no’. Then either they will say ‘yes’ or I have saved everyone a bit of embarassment from having a negative outcome to something. I never take ‘no’ personally.
    25. You start to worry more about your legal position and less about sales and the biz. (In business generally, you need to be aware of your legal risks but almost no entrepeneurs can afford to be guided solely by legal concerns and not by business issues. There are so many potential legal risks in today’s business world, that practically no one could do anything if they put legal issues first and business issues second.)