Why UK boards must embrace insolvencies and restructuring amid economic shifts

With the ongoing economic uncertainty, the long tail of Brexit, and the increasing cost of doing business, a significant number of UK businesses will be looking to restructure in the coming months to consolidate their position and plan for future growth. 

Restructuring is important not only as a strategic measure to manage debt, but also to adapt to new market conditions and harness technologies to keep businesses agile in an evolving economic climate. In doing so, businesses may benefit from or attract forward-looking investment, re-evaluate business models in response to changing consumer behaviours, discontinue underperforming business units or product lines that no longer meet the demands of a changing customer and potentially avert insolvency. 

But what does a restructuring process look like and why don’t more SMEs seek early help in stabilising and then turning their businesses around?  

The reasons behind a restructuring process 

Business restructuring is often driven by several key factors. Financial distress is a primary reason, as companies facing significant debt or cashflow issues may need to refinance to avoid business closure.  

In Q2 2024, 6,578 businesses entered into a formal process of insolvency, a 14% increase on Q1 statistics and a number just shy of the Q4 2023 figures, which heralded a record 6,788 company insolvencies and the highest quarterly number of Creditors’ Voluntary Liquidations (CVLs) since records began. The data shows that company insolvencies are, in fact on an increasingly steep trajectory. 

Mergers and acquisitions may also necessitate restructuring to integrate operations and minimise redundancies. Market changes, such as new competitors or shifting consumer preferences, can prompt businesses to adapt their strategies and structures or else throw in the towel. The retail, hospitality, business services and construction sectors have accounted for more than two thirds (69%) of all insolvencies in this year to date, a result of external pressures including mounting energy and raw material costs and a declining industry workforce.  

Companies may also restructure not because they are in trouble, but rather to improve operational efficiency, reduce costs and enhance productivity. Regulatory compliance is another common cause for change, as amendments to policies and laws can require a business to adjust its operations. The need to strategically refocus, where companies concentrate on core competencies or divest non-core assets, and crisis management, in response to economic downturns or other emergencies, can also drive restructuring efforts. Changes in leadership can similarly lead to organisational realignment as a business adapts to new strategic visions.  

Analysis of data and themes 

In 2024, small businesses remained the most vulnerable, with 98% of insolvency appointments occurring within businesses with annual revenues below £1 million. But the likelihood of insolvency can impact any business of any size (think Bodyshop).  

So, what themes have contributed to businesses in the UK facing insolvency in 2024?  

The ongoing cost of living crisis has significantly reduced consumer spending power, with inflation rates still impacting household budgets despite a recent decline to 2.2% in August 2024, according to the Office for National Statistics. This has led to decreased sales for many businesses. Additionally, the UK experienced a short recession in late 2023, with two consecutive quarters of negative GDP growth. Although the economy showed signs of recovery in early 2024, and continues to inch forward, the lingering effects of the recession have left many businesses struggling to regain stability.  

The new Labour government has introduced and deliberated several policy changes including increased taxes on certain sectors and new regulations aimed at achieving net-zero emissions. For instance, the government has implemented a windfall tax on large energy companies, expected to raise around £5 billion annually. Additionally, the non-dom tax regime is expected to be reformed, which could lead to a significant shift in investment patterns. 

These measures are part of a broader strategy to fund green investments, such as the £3.5 billion allocated for upgrading homes and investing in hydrogen technology. While these policies aim to create long-term benefits, they have also increased operational costs for businesses in the short term, as the steel giant Tata is finding. The increased taxes and compliance costs associated with new environmental regulations have added financial strain, contributing to insolvency risks for many companies. This situation underscores the delicate balance between achieving environmental goals and maintaining economic stability. 

Forecasting the future 

Forecasting the future for insolvencies and restructuring in 2025 is not easy in the context of a complex landscape.   

Global business insolvencies are expected to continue at high levels, and the significant increases of insolvencies throughout 2023 and 2024 will continue to influence the market. In the UK, businesses will likely face ongoing challenges due to lingering economic uncertainties and the impact of new regulatory measures. The focus will shift towards proactive financial management and restructuring strategies to preserve value for stakeholders. Companies may increasingly seek alternative solutions, such as voluntary arrangements or restructuring plans, to avoid insolvency and maintain operational viability. This trend underscores the importance of adaptability and strategic planning in navigating the evolving economic environment.  

In 2025, several industries are expected to be particularly vulnerable to insolvency. The hospitality sector remains at high risk due to ongoing economic pressures and reduced consumer spending. Transportation and wholesale/retail sectors are also facing significant challenges, with profitability being squeezed by high operational costs and fluctuating demand. Additionally, sectors like real estate, durable goods and utilities are under pressure due to higher interest rates and structural changes in supply chains. Businesses within these industries will need to navigate these challenges carefully to survive. 

To ensure success in the coming year, businesses must be proactive and seek help early. This involves customised audit, tax, and advisory services designed to assist companies in overcoming obstacles, adhering to regulations, and enhancing financial strategies. Additionally, personalised guidance and practical solutions that improve cashflow, mitigate risks, and foster sustainable growth will be crucial for businesses to flourish in 2025.