Business advisory firm BDO identifies ‘zombie’ companies

The term ‘zombie’ refers to businesses that generate just enough cash to continue operating and service their debt but not to invest in growth.

According to research by the firm BDO, in the last year, 17.6 per cent of mid-sized businesses in the North East have been identified as at risk of becoming ‘zombie’ companies.Mark Thornton of BDO LLP (Image: BDO)

This is an increase of 6.2 percentage points compared to the previous year’s figures.

The North East has the second highest concentration of ‘at risk’ businesses and has experienced the largest increase of all UK regions.

Nationally, 15.9 per cent of mid-sized businesses are classed as ‘at risk’, a year-on-year increase of 3.5 percentage points.

The BDO tracker, which analysed more than 20,000 businesses with a turnover between £10m and £500m, found that very few sectors have been able to buck the trend, with all but two showing a notable increase in the number of ‘at risk’ businesses.

Mark Thornton, partner at BDO LLP in the North East, said: “In light of the challenging economic conditions over the past 18 months, it’s no surprise that the number of mid-market businesses at risk of becoming zombie companies is on the rise in the North East.

“Although many have managed to navigate a difficult post-Covid environment, increased borrowing costs and inflationary pressures have significantly impacted their financial stability.

“Some of these companies cannot afford to wait for market conditions to improve, particularly in light of upcoming increases to employers’ national insurance contributions, the national minimum wage and the national living wage, all of which will have a direct impact on profitability.

“Proactive actions will be critical to maintain stability and protect shareholder value.”

UK-wide, real estate has the highest number of ‘at risk’ companies this year, with a quarter of the sector (25.1 per cent) exhibiting signs of a zombie business.

This is an increase of 10.1 percentage points versus the prior year, highlighting the ongoing impact that relatively high interest rates, economic uncertainty and supply chain disruptions are having on the sector.

Leisure and hospitality has dropped one place to second, with 23.4 per cent of businesses ‘at risk’.

While mining and quarrying is the biggest riser in third, with the percentage of ‘at risk’ businesses in the sector increasing by 11.9 percentage points to 20.7 per cent due to rising energy and input costs and weakening global demand for raw materials.

Geographically, of the 12 UK regions, 10 have between 13 per cent and 18 per cent of ‘at risk’ businesses.

Greater London has the highest concentration (17.8 per cent and up from 13.3 per cent in 2024).

Ben Peterson, partner at BDO and author of the report, added: “In general, mid-sized businesses have been hugely resilient in the face of geopolitical tensions, Covid-19 and Brexit.

“Over the last decade, these businesses have significantly contributed to UK GDP and overall employment numbers.

“However, while resilient they are not invincible.

“There is now a proportion of businesses in the North East that will require more transformational action to ensure they can prime themselves to survive the coming economic turbulence.”