Do you investigate everything you really need to when a prospective customer approaches you?

This is an unusual question for anyone to ask, after all we are all grateful when a potential new customer approaches us.  So why am I asking this question now?

Many businesses are going through a period of massive change… old style business models are being replaced by what appear to be leaner, faster moving, sometimes digitised models that involve using the services of people and companies you’ve not used before.  Companies are outsourcing more, they are sending goods and services out for external processing by specialists, before sometimes getting them back for further processing – in the past companies often tried to do everything in-house, now it is generally recognised that doing so is a massive mistake, no company whatever its size can hope to have all the skills and resources to keep all aspects of their operations at the cutting edge in an increasingly complex and fast moving world.  We are all being asked to do more work by companies we have never heard of before.  So what’s the problem?

The problem there is no past history of working with that company, and increasingly I’m seeing companies – particularly engineering companies – who are outsourcing to specialists, closing down some or all of their own departments.  And that brings massive risk to the company that accept such work… especially as I have seen several times in recent weeks those companies looking to outsource appear to be very close to insolvency and are merely supplier hopping, leaving a trail of unpaid debts behind them which, if you accept such work, would put the very existence of your business at risk.

So here are a few questions for you to ask / things for you to do before you take on a new customer / client:

  1. Why is the customer looking to use your services / outsource? Really dig down deep on this…is it for valid reasons that should stand the test of time or is it merely an effort to stave off cash flow problems, to get you to do work for which you will struggle to get paid?
  2. Why you?  Why not someone else?  What’s so special about you?  Is it merely because they see you as a easy touch because you need more work?  Or is it because you and you alone have the skills they really need?
  3. Why have they closed down their own department who used to do the work you are being asked to do?  Was it because they lost or made redundant the staff in that department (if so, why?), was it because they couldn’t properly manage the department or manage or control the work flowing through it? (in small industries or in a small area like the Black Country it may be possible to ask former staff for the real reasons, don’t be afraid to seek them out, either using your contacts or even social media).  Same for any previous supplier of such services, do you know who they are, can you speak to them?
  4. What do you know about the prospective new customer’s contract with its customer?  Does it enable such outsourcing?  (I’m seeing instances where work is being passed out where the contract specifically prohibits doing so – this is a very real warning not to get involved because the ultimate customer as and when they find out will not pay, and that means you will probably not be paid either, they will argue that the reason they are not getting paid is your fault).
  5. What do you know about the customer’s history and its finances and its directors’ / senior management’s history?  Do in-depth searches on them.  Not just cursory credit searches.  Do they habitually leave a trail of subcontractor destruction, liquidations or administrations behind them?  Are their finances strong, or not?  – And actually look behind the figures, don’t take them on face value – I’m seeing groups who have recently liquidated subsidiary or associated companies in order to jettison large levels of external debts (this could be you next time they do this!), where their failures will have a massive knock on effect on the remaining group companies which are not reflected in the  accounts or credit ratings – they have delayed filing their current accounts  to hide their true financial position.  Who are the customer’s external accountants / auditors – are they reputable or could they be working closely with their client to orchestrate the eventual failure and rebirth of the business (after writing your debt off)? – again, I’m seeing evidence of this…
  6. What’s the rumour mill saying about them?  Are there any murmurs of under-pricing, suppliers not being paid on time, fabrication of reasons not to pay, non-deliveries, resignations, sudden changes in staff/suppliers, etc?
  7. Who can you talk to whom you can trust, if anyone, to satisfy yourself as to the customer’s motives and reliability?  If they have been involved in any recent failures, pull down the statement of affairs, talk to the suppliers you know who have been left behind.  Think about others – customers, employees, advisers.  If there is no one you can talk to, then you might think about not accepting the work.
  8. Think about what’s the worst that can happen?  Then budget for it because there is a good chance it will happen… would it take down your business or be something that you can simply put down to experience?  What ‘hold’ if any do you have over the customer os its directors once you have started to do your work?  Should you be asking for a personal guarantee from the customer’s directors?

Right now I am seeing good businesses being put at massive risk by unscrupulous companies – yes, as much as it hurts me to say it, by Black Country businesses – who appear to be following the Carillion example of massive subcontractor abuse.  Make sure it’s not you who suffers as a result… and if you are an accountant or lawyer whose client has been asked to take on a big contract which might hurt them if they’re not paid, why not ask me for my thoughts? – it might just be the difference between you losing a client or your client going under themselves, or not.

Beware the precise wording of insolvency practitioners’ letters of engagement!

Beware the precise wording of insolvency practitioners’ letters of engagement!

When you as a director approach an insolvency practitioner for advice and support in connection with your insolvent company, the IP has to provide you with a letter of engagement.  The purpose of that letter is to set out:

  • Your legal responsibilities as a director
  • The legal processes that need to be followed to put your company in to CVL / Creditors Voluntary Liquidation (or similar), and in the period immediately after then (including the creditor decision procedure)
  • What the IP’s duties are and what you will do to help them fulfil those duties
  • How the IP gets paid
  • A good number of other things the IP must point out either because his governing body or law require him to do so.

The prime purpose of such letters is to ensure you and the IP both know exactly where each stand.

But do you really know where you stand?

I’ve been approached several times recently by directors looking for a second opinion, a different set of eyes, after they’ve taken advice from bigger firms of IPs.

And they brought with them the IPs’ letter of engagement… which in my view was impossible for the directors to fully understand because the letters were incredibly long, detailed and complicated.  But it goes further than that… a few words amongst the ten pages – which were explained erroneously by the work getter in the IPs’ firm – would have had a major impact on the directors.

Let’s explore this…

The basis of the IPs’ fees were explained in the letter – they would be paid an agreed sum for the work they did up to the date the creditors decide whether or not to allow them to carry out the liquidation, and then once their appointment was confirmed their fees would be agreed by the creditors, or in another way which the directors / shareholders had no input into.  Quoting one such case, £5k plus VAT, ie £6k up to the creditor decision date, but no figure estimated for their post decision fees.

The letter in that case said that ‘in the event that the assets of the company are insufficient to discharge our fees, any shortfall will be paid by the directors of the company personally.  The signature of the enclosed copy of the letter of engagement letter by the directors shall be evidence and confirmation of your joint and several guarantee of all monies owed to us’.

Tell me… how much have you guaranteed?

Nothing, because you hope the IP realises at least £6k.  £5k, the figure before vat (can the IP claim back the vat?)? £6k?  £10k?  £20k? More?

The point is you don’t know, you have no idea?  Did you notice the word ‘all’ in the last few words of the quotation?

Because of this you are guaranteeing the IPs’ entire fees, including that post the creditors’ position.

And you have no control over the his fees or the extent of his work post creditor decision – here his fees will probably be calculated as follows:

    1.  At his rate per hour per staff grade – you have no control over
      -what grade of staff they get to do what;
      – whether he asks the creditors to enhance his rates (he can do so under Insolvency Law if he thinks his work or the circumstances of the case make it appropriate he’s paid more) – and it’s the creditors who get to decide, not you; or
      – by how much he increases his charge out rates each year – you only know his current charge out rates – and as you will see, they are hefty)multiplied by
    2. The number of hours spent – post creditor decision, you have no control over:
      – what work they choose to do;
      – What complexities are caused by others, such as creditors, employees, HMRC etc
      – how many hours they spend;
      – how long the liquidation takes (the longer it takes generally the more time is spent).

All you know is it’s a minimum of £6k plus the reasonable fees of the IP post creditor decision date – work on at least double the £6k figure as a bare minimum.  In reality by signing the letter of engagement you’re signing a blank cheque in favour of the IP.

So was that explained to you?

No it never is – it’s always explained that you’re guaranteeing the IPs’ fees only up to the decision date, his costs after that are conveniently ignored, never raised with you.

And that is why it’s often a good idea to get a second opinion, even if you’ve been introduced to the IP by someone you trust such as our accountant – because the person who introduced you will simply not know about these issues, you’re putting blind trust in your adviser’s recommendation, blind trust that could cost you dearly.

If you would like to arrange a meeting for a second opinion, call me on 01902 672323.