What Does It Mean To Fold A Company?
To ‘fold a business’ refers to the winding down and permanent closure of a company. This is typically the result of insolvency, a decline in profits, or the directors and shareholders deciding to cease operations due to their own personal decisions.
What Happens To A Company When It Folds?
When a business folds while still owing money to its creditors, it will then enter into the liquidation process. The type of liquidation it enters varies depending on the company’s circumstances, and it can either be voluntary liquidation(CVL or MVL), decided by the directors or shareholders, or compulsory liquidation, initiated by a petition to the courts due to insolvency.
In either scenario, a licensed insolvency practitioner will be appointed to manage the liquidation process and sell the company assets including property, land, equipment, and stock to repay the creditors in a set priority order. Directors must also settle any outstanding wages, holiday pay, and other entitlements to employees who are made redundant in the folding process.
When folding a business, if the company is insolvent it will also have to cease trading immediately to avoid any wrongful trading. Failure to do so can result in the directors facing personal liability and legal consequences, especially in an insolvent liquidation. Once the liquidation is complete, the business will be dissolved and struck off the Companies House Register, ceasing to exist.
What Causes a Business to Fold?
The closing of a business may occur for several reasons, but typically financial struggles are one of the biggest contributing factors to a company folding. Whether it’s declining sales, unmanageable debt, poor financial management, or high operating costs, directors may feel that they need to go into voluntary liquidation, or may be pushed into compulsory liquidation by shareholders to repay debts.
How Can Directors Prevent Their Company From Folding
Monitor Cash Flow and Costs: Directors should keep track of income and expenses regularly, maintaining a cash reserve, and cutting back on unnecessary costs to keep expenses low.
Increase Profit and Manage Debt: Regularly adjusting pricing, optimising inventory, and carefully managing debt allows directors to increase their profit margins and avoid excessive borrowing.
Adapt and Retain Customers: Directors should stay informed about industry trends and continually innovate to meet customer needs. Doing this alongside providing excellent customer service will build customer loyalty and encourage repeat business.
Financial Planning: Directors should create a financial business plan and continue to update it to keep it relevant and ensure it supports the company’s long-term success.
Prepare for Crises: Having a contingency plan in place for several scenarios with actions to follow, allows directors to stay compliant with regulations and avoid any legal issues.
Plan for the Long-Term: Directors should develop a long-term strategy with the help of a financial advisor’s expert guidance. Creating a plan that aligns with business goals and financial objectives, identifies areas for growth and mitigates risks.
