Phoenix by jurvetson

Since the recession began, I’ve seen an increase in the number of business phoenixes. A phoenix happens when a business closes down one day, and then opens the next day as a completely new company, but with the same staff, directors and customers. You can usually tell this has happened by a slight change of name, a different bank account, and the directors looking exhausted but relieved.

Businesses usually phoenix (if we can use it as a verb) because they are in trouble and have big debts around their shoulders. Ethically, the difference seems to be that some businesses phoenix because they would not survive otherwise with their huge debts to the banks and some businesses phoenix in order to avoid paying their suppliers. You can tell the difference because the second category (the unethical ones) phoenix again and again. They’re the ones where the directors have taken all the money out of the business before closing it down – you can recognise them when the director is driving a Lexus but telling you that they can’t afford to pay your invoice.

In essence, creating a phoenix company is fairly simple. You put one company into liquidation and open a new company at the same time. The new company now does whatever the old one used to do for the same customers, with the same staff, and a very similar name and brand. Quite often you don’t notice the difference – you could be sitting next to a phoenix right now.

Pros and cons

If you’re thinking that this might be a great way to ditch some of the hassles of business life, such as that troublesome loan which the bank seems to think you will pay back, or that useless member of staff, then do think carefully.

A phoenix strategy has some things going for it, but there are also some serious disadvantages.

• A phoenix has to be done properly and legally otherwise you’ll end up still owing the money but you won’t be able to pay it back because you’ll be in prison for fraud. Get the right advice, from an accountant who has done this before (many accountants haven’t) or preferably an insolvency specialist.
• A phoenix has major long term consequences. You could have that bird around your neck for the rest of your life. If you put a company into liquidation, you are unlikely to ever get a loan again and you’ll have difficulty getting personal credit, even for small items. Some people who have been through this have had difficulty opening bank accounts or setting up online payments, even years after the event.

When you might have to

I’ve worked with three businesses in the last year who have phoenixed. They all tried everything they could to keep the original business going but, when the banks withdrew credit, the directors had no choice. The only alternative was to close down the business for good, and make everyone redundant with no severance pay and walk away. The phoenix was the lesser of two evils.

When it’s bad

A bad phoenix, like most bad actions, has a malicious motivation. When a business owner does this because they have been reckless or greedy, paying themselves big wages when the company isn’t paying suppliers, spending money on lazy, crazy marketing activities such as PR to promote the owners’ egos rather than the products or buying expensive things like cars, or in one case I saw, a giant fish tank for the office when staff hadn’t been paid that month. The company’s assets get sold to the owner’s mum for a fiver at liquidation, and you see Mr Dodgy driving his (sorry, his mum’s) sleazemobile a week later.

How you can make it better

If you’re in a bad situation, and are thinking about phoenixing, or you’ve done it and are feeling morally icky about it, there are some things you can do to make it better.

Firstly, protect the little guys. If you owe your suppliers, and can’t pay them, unless you talk to them they will hate you. Make sure you know that the small companies you owe money to know that they’ll get their money later. A client once paid me the last part of the fees she owed me a whole 5 years after I’d done the work, and I respect her for taking the trouble to do this.

Secondly, ensure that your staff know what’s going on. Staff always have a good idea of what’s going on, and if you tell the truth it will usually be better than the worst case scenario they’ve been imagining. If you’re intending to take staff with you to the new company, this is especially important as you don’t want them to jump ship.

The current campaign to keep Radio 6 reminds me of the campaign a few years ago to keep Heinz salad cream. Heinz threatened to stop making salad cream, because it had fallen in popularity, and this made headlines for a few days. People who had not bought salad cream for years suddenly became all nostalgic about the taste of their childhoods, and a campaign was launched to save salad cream. Of course, when we look behind the scenes here, we can see that this must have been a great big PR stunt – companies stop making products all the time if they stop producing enough profit for them, and it doesn’t make headline news. In the normal course of events, salad cream would have just disappeared from the shelves, and the 5 people who were still buying it would have just not been able to find it anymore, and they too would have switched to eating mayonnaise.

In order to make headline news, someone had to have engineered the PR. Someone had to write a press release about Heinz stopping making salad cream, and get journalists interested in the story. And of course, this had to happen before the end of production, so that people could then rush to the shops and buy the noxious yellow stuff.

With all the fuss about Radio 6, we see a number of the same elements. We have a product which has disappointing levels of sales, or in this case listeners. I regularly listen to Radio 6, and had been very surprised to find out a few weeks before that the listener figures were so low. The brilliant Adam and Joe show on Saturday mornings was the most popular show, but only had 160,000 listeners, and some of the other shows only had around 5000. So, the BBC has a problem child, their little radio station is a bit of a runt. And they’re doing a strategic review and have to think about whether this is the best use of their money.

I’m not sure whether the campaign was started as part of an official marketing strategy by the BBC, it seems more likely that as rumoured, it was started by a BBC employee – I’m guessing someone who works at Radio 6. Radio 6 has been promoted to millions of people who have probably never heard of it or thought of listening before. And I bet that their listener numbers have jumped this week just as dramatically as the sales figures for salad cream did when Heinz threatened to stop making it. In marketing terms, there are few techniques as effective as making people feel that they might have something taken away from them.

So I can admire this as a marketing technique, and you can argue that the ends justify the means, if Radio 6 is saved and lots of new people get to listen to a wider mix of music. But I’m not convinced that this is an ethical way to do things, so I won’t be wearing any Radio 6 ribbons just yet.