How a £500m company fell apart in a matter of weeks

A recent article written by Oliver Shah that we read in the Sunday Times emphasises the need for good quality bookkeeping, regular advice and critique over the numbers.  Interesting title too:

“Revealed: how not to run a p***-up at an off-licence . . .”

The orginal article was quite long, so we’ve reduced it here, but you can read the full article at the end.

At the start of March, a chain of off-licences was feeling the stress when a member of the finance team made a shocking discovery. The company had been using a manually updated spreadsheet to keep track of its incomings and outgoings — a system they admit was “a bit cobbled together.”  Someone had forgotten to enter almost £30m of alcohol duty and VAT payments which were shortly due to HMRC!  This discovery obviously impacted heavily on the firm’s short-term cashflow.

The chief executive was aware that there had been other recent mistakes, so she advised the company chairman, who in turn rang its broker. Those calls set in motion a chain of events that rapidly tipped the business into administration, wiping out investors and putting 4,000 jobs at risk.

Many people are still struggling to understand how the business, recently valued at more than £500m, disintegrated in weeks.

Following its investigation, The Sunday Times said, “It is a stark reminder of the dangers involved when inexperienced executives pursue a strategy of aggressive acquisitions. It is also an example of how stock market rules designed to protect investors can perversely speed up a company’s decline when it enters a downward spiral.”

History

The business began in one store in Cheshire, in 1981, changing hands several times as it grew. By 2013 when it was floated on AIM – London’s junior market, it had 611 franchise stores.

The enthusiastic chief executive enjoyed an annual pay packet of almost £1m, but was described by a shareholder as “lacking a central point of focus.”

Boom…

Between 2013 and 2017, sales increased dramatically from £372m to more than £1.5bn and its share price rose from 150p to more than 400p. Behind the scenes, its various subsidiaries had been poorly integrated, and most were still using manually updated “ledgers” to keep track of their finances. The first warning sign came in January last year, when Conviviality had to restate its half-year results after miscalculating its own earnings per share.

At about the same time, its banking syndicate asked for a review of the company’s financial controls as part of negotiations over an extension to its overdraft. It brought in an independent accountancy firm and, as a result, changes took place, including the appointment of a new finance director. It was claimed that, at that time, suppliers were owed almost £50m. This January, the new FD advised that “a full-year underlying earnings target of £70m was “tight but deliverable.”

…and bust

However, that changed as the Beast from the East swept through Britain in late February, and the prospect of beer gardens buzzing with drinkers at Easter receded. On March 8, the management team was advised of a “stray cell” containing a mysterious £5.2m in the spreadsheet used to calculate the business’s profit forecast. This £5.2m appeared to have been entered by mistake, yet it had been added into the £70m total forecast for the year. “It was pure human error,” said a source. “It was horrendous.”

The firm’s downfall from there was swift.  A statement warning that its full-year profits would be 20% below analysts’ forecasts caused the City to react with horror. The following day, credit insurers began withdrawing cover to some of the firm’s suppliers.  The directors believed they would be able to muddle through, but they were working frantically to reassure suppliers and renegotiate payment plans.

The discovery of the looming £30m tax bill emerged hours after the firm had reassured the market that it was on track to meet its revised earnings target. Very quickly, their remaining credit insurance evaporated and suppliers demanded cash on delivery, putting enormous strain on its working capital. The company had lost control of its short-term liquidity problem.

The chief executive resigned and an attempt to raise £125m through a rescue rights issue fell short of the target. Sadly, the company went into adminisration.

So, what began as a human error led to the downfall of a major player in the off-licence business.  This shows the importance of ensuring a solid bookkeeping system and keeping a firm grip on the financial data. It’s one of the reaons we meet with clients quarterly, guiding them toward higher profits and as far away from this kind of downfall as you could imagine.

Sometimes we celebrate their financial growth with a beer or a bottle of bubbly. (Not bought from the liquidated off-licence chain!!)

If you’d like a review of your figures and the systems you use to keep track of your business finances, call us on 020 8530 0720. Or email Paula.w@nordens.co.uk.

You can read the full Sunday Times article here.