Can we save more businesses that fail?

New is shiny, old is not. Innovation is the rage, conservation an afterthought. In business, a lot of dissipated energy goes into the frenetic chase to do something new, where a loving touch to something already out there could deliver so much more.

This gives us, for example, an obsession in policy on the start-up of new enterprises, rather than a concern for reducing the closure of existing firms. It is as if we have swallowed the distant myths of Joseph Schumpeter, that destruction, particularly if it hurts, must be good for the creative process.

In the UK, around 17,000 businesses fail each year. Within this number there are many companies that on economic grounds could be saved. A large number, forty four percent, are wound up because of poor management prior to insolvency. There is a pool therefore of up to 7,500 viable enterprises that are failing.

One way to do this is to look to the staff. Workers taking over an insolvent company to preserve their jobs and entitlements has emerged as a trend in a number of other countries. Appropriate enabling legislation exists in Spain, Sociadades Laborales (SAL), and Italy, the Marcora Law.

A new report, Saving Business, written for us by Anthony Jensen, based out of the University of Sydney, tells the story.

In a period of economic crisis in the 1980s, both countries enacted legislation in 1985 to support workers take over thousands of failing enterprises. Both countries based the legislation on encouraging workers to become entrepreneurs in saving their jobs by taking their entitlements, and three years projected social security payments, in a lump sum payment, and investing these in the new company. This was supported by government loans and advice.

The Marcora Law set up the Campagnia Finanzaria Industriale (CFI), a financial institution to support workers establish a workers cooperative, to take over the failed company. CFI also provided advice, finance and has the right of a seat on the board of the co-operative.

Both these programmes were suspended by the European Union (EU) in the 1990s. The reason given was they contravened European competition law. However after a redesign, they have both restarted. Professor Alberto Zevi in Italy reports that the Marcora Law is working well, with eleven buyouts assisted in recent months.

In France, over 700 businesses on the verge of closing down have been transformed into cooperatives between 1989 and 2010 (over 30 every year), thereby saving thousands of jobs.

Now, I am sure that there is a view that says ‘don’t go there. Let them fail. It is too difficult. Or we don’t want to be associated with their failures.’ I understand the view, but the UK has now to be more entrepreneurial.

Worker cooperative buyouts of insolvent businesses have been successfully carried out in many countries as measured by their longevity, job saving and job creation and performance impact. There are successful case studies in the UK: UBH International, Tower Colliery and a number of smaller buyouts in Wales. There have also been failures when best practice has been ignored namely a viable market, strong leadership, a homogeneous culture and ongoing advice.

Not every business can be saved. But success overseas points to the potential to save some.

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2 thoughts on “Can we save more businesses that fail?

  1. All good stuff Ed. The other big opportunity to my mind has always been business succession. I recall that some good work was done in this area some years back, but with many thousands of viable small businesses winding up or being sold and asset stripped each year simply because the owner wants to retire, selling that business to the employees has to be a real winner. And it avoids the perceived risk of dealing with ‘failed’ businesses.

  2. Ed, where does that 17,000 firms come from.?

    My work on The Beta Model suggests that its about 350,000 in the total economy in 10/11 (latest data). Even the IDBR on its limited VAT data based Business Demography stats set suggests it was 297,000 in 09/10 (latest data).

    While the vast majority of these firms are very micro, a general heuristic for 10+ employees is about 10% of all firms. Surely these would be contender for mutualisation? If so the closure rate would be closer to 30,000.

    However, my personal opinion is that that many firms with as low as 4 employees could be converted to co-ops. This could be in the region 60,000 firms.

    I do agree this is a good idea, whatever the background stats. I know Gareth Nash was looking at this about 10 at CODA. I don’t know if he has any useful learning to share from then. We looked at it for a firm that I was working for at the time, although we trying to stave off insolvency of the firm and the timing was all wrong.

    I suspect that timing is a bigger a barrier to saving firms through mutualisation than philosophy, although I suspect the some of the innovations in practice from the ‘Turnaround’ industry could aid this.

    You might also be interested in a related blog I wrote last year about a mutual aid network for micro firms that could facilitate this practice http://www.garrilla.com/?p=296

    Finally, some of my other research which suggests some ‘destruction’ is uncreative. see (with James Derbyshire) Derbyhttp://www.liv.ac.uk/managementschool/research/working%20papers/wp200739.pdf and http://www.scribd.com/doc/60421640/New-Labour-the-Enterprise-Gap-and-the-Red-Queen-James-Derbyshire-Garry-Haywood & (with NEF) http://www.neweconomics.org/publications/filling-the-jobs-gap

    Best wishes,

    Garry

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