Three facts about the rising number of UK business exits

Jelle
Barkema,
Maren
Froemel
and
Sophie
Piton

Record-high
firm
exits
make
headlines,
but
who
are
the
firms
going
out
of
business?
This
post
documents
three
facts
about
the
rising
number
of
corporations
dissolving
using
granular
data
from
Companies
House
and
the
Insolvency
Service.
We
show
that
the
increase
in
dissolutions
that
have
already
materialised
reflected
a
catch-up
following
Covid
and
was
concentrated
among
firms
started
during
Covid.
While
these
firms
were
small
and
had
a
limited
macroeconomic
impact,
firms
currently
in
the
process
of
dissolving
are
larger.
Their
exit
might
therefore
be
more
material
from
a
macroeconomic
perspective.
We
also
discuss
how
the
recent
economic
environment
could
contribute
to
further
rises
in
dissolutions
and
particularly
insolvencies
in
the
future
that
could
have
more
material
macroeconomic
impact.

Fact
#1:
A
rising
number
of
firms
removed
from
Companies
House
register
since
end-2021

Chart
1
draws
the
latest
trends
in
firm
registrations
and
dissolutions
on
Companies
House
register.
It
shows
cumulative
corporation
births
and
deaths
relative
to
a
continuation
of
the
2019
trend.
All
analysis
in
this
blog
is
up
to
2023
Q3.

There
has
been
a
surprising
surge
in
business
creation
since
the
Covid-19
pandemic
and,
as
the
chart
shows,
the
number
of
new
firm
registrations
with
Companies
House
(purple
line)
is
still
rising
above
its
2019
trend
(the
first
year
when
the
ONS
started
recording
data
from
companies
house).
The
recent
rise
is
driven
by
the
retail,
information
and
communications
sectors.
The
persistent
strength
in
firm
entry
has
also
been
documented
and
discussed
for
the
US,
and
could
be
related
to
structural
changes
in
the
online
retail
sector
accelerated
by
the
pandemic
or,
more
recently,
advances
in
AI
technology
(see

Decker
and
Haltiwanger
(2023)).

Chart
1:
Companies
house:
cumulative
count
of
weekly
registrations
and
dissolutions
for
old/young
firms
relative
to
a
continuation
of
2019
average
rate

Sources:
Authors’
calculations
using

ONS
and
Companies
House,
and
Bureau
van
Dijk
FAME.

The
chart
also
shows
the
trend
in
firm
dissolutions
(orange
line)
that
has
also
been
rising
continuously
from
end-2021,
after
a
slow-down
related
to
the
main
‘easement
period’
where
Companies
House
stopped
registering
most
firm
dissolutions.
As
a
result,
dissolutions
were
below
their
2019
trends
and
the
increase
initially
reflected
a
‘catching-up’
to
their
2019
trend.
However,
the
rise
continued
through
2023
such
that
we
are
now
seeing
‘excess’
exit
–
dissolutions
above
their
2019
trend.

We
also
investigate
a
specific
subset
of
dissolutions:
insolvencies.
Despite
their
small
share
in
the
total
number
of
dissolutions
(less
than
5%),
insolvencies
are
of
particular
interest
as
they
usually
concern
larger
and
indebted
firms.
The
insolvency
process
includes
selling
off
the
company’s
assets
to
help
repay
their
creditors,
frequently
resulting
in
those
creditors
taking
a
loss.
If
insolvencies
occur
in
large
numbers
or
for
heavily
indebted
firms,
these
losses
could
impact
financial
stability. 

As
laid
out
in
a
previous
post
(Barkema
(2023)),
UK
business
insolvencies
since
the
pandemic
have
reached
record
highs
and
remain
elevated.
Similar
to
dissolutions,
this
is
partially
catching
up:
there
was
a
moratorium
on
insolvencies
between
2020
and
2022.
However,
insolvencies
have
now
eclipsed
their
pre-pandemic
trend
and
monthly
totals
are
approaching
levels
last
seen
during
the
global
financial
crisis.

Fact
#2:
Firms
removed
so
far
are
mostly
small
Covid-born
firms
with
limited
macroeconomic
impact

We
look
at
the
age
of
firms
exiting
and
find
that
the
rise
in
firm
exit
is
driven
by
Covid-born
firms
(gold
line
on
Chart
1)
and
not
by
firms
born
before
Covid
(grey
line
on
Chart 1),
whose
cumulative
exits
remain
below
pre-Covid
trends.

Bahaj,
Piton
and
Savagar
(2023)
have
showed
that
the
rise
in
firm
entry
during
the
pandemic
was
driven
by
individual
entrepreneurs
creating
their
first
company,
particularly
in
online
retail,
and
that
these
were
more
likely
to
exit
and
less
likely
to
post
jobs
in
their
first
two
years
than
firms
born
pre-Covid.
Overall,
this
implied
that,
despite
surging
firm
creation
during
the
pandemic,
the
overall
employment
effect
was
limited.

We
look
at
trends
in
firm
entry
and
exit
in
the
ONS
business
census
to
confirm
this
intuition.
The
ONS
data
set
only
includes
firms
with
employees
(PAYE)
or
with
a
large
enough
turnover
(VAT).
It
is
one
of
the
main
data
sources
for
the
National
Accounts.
Chart
2
shows
that
there
was
no
rise
in
entry
or
exit
over
the
corresponding
period.
This
suggests
that
most
Covid-born
firms
were
too
small
to
show
up
in
the
ONS
census
and,
in
line
with
previous
research,
they
indeed
have
only
had
a
marginal
impact
on
aggregate
employment
and
productivity.
In
contrast
to
Companies
House
data,
entry
in
the
ONS
Census
has
also
been
declining
in
the
recent
period,
while
exit
increased
slightly,
resulting
in
a
negative
net
entry
rate
since
end-2022.

Chart
2:
Employment-weighted
firm
birth/death
rate
in
ONS
Business
Census

Source:
Authors’
calculations
using
ONS

business
demography,
quarterly
experimental
statistics.

Of
course,
other
factors
could
also
be
at
play
to
explain
the
recent
rise
in
exits
that
should
be
investigated
in
future
work.
For
example,
we
find
that
dissolutions
in
sectors
with
a
higher
share
of
energy
costs
have
increased
relatively
more
in
the
recent
period,
consistent
with Ari
and
Mulas-Granados
(2023)
who
find
higher
energy
prices
are
correlated
with
more
firm
exits.

Fact
#3:
Rising
number
of
firms
at
risk
of
being
removed
this
year,
with
more
uncertain
macroeconomic
impact

Companies
House
also
includes
information
on
firms

in
the
process
of
dissolving.
This
has
been
rising
above
2019
levels
even
more
sharply
–
suggesting
there
are
more
excess
exits
likely
to
be
realised
soon.
Chart
3
shows
these
dissolution
notices
to
Companies
House
(pink
line)
that
the
ONS
tracks.

Companies
House
suggests
there
is
a
larger
number
of
firms
in
the
process
of
dissolving
than
usual
and
that
remain
in
that
status
for
longer
than
usual,
and
that
this
is
related
to
outstanding
Bounce
Back
Loans
(BBL)
that
need
to
be
repaid
before
a
business
can
fully
dissolve.

We
investigate
the
characteristics
of
the
firms
in
the
process
of
dissolving
in
Chart
4.
There
are
12%
of
firms
on
register
in
December
2023
that
have
already
started
a
dissolution
procedure
(~600k
firms),
a
further
4%
(~170k
firms)
are

at
risk
of
being
dissolved.
These
firms
have
stopped
trading
and
our
evidence
suggests
that
the
majority
of
these
are
not
Covid
firms
anymore
(older
than
three
years
old).
As
firms
had
to
be
established
before
1
March
2020
to
be
eligible,
this
is
also
consistent
with
outstanding
BBLs
as
a
factor
for
the
delay
in
the
dissolution.
While
these
firms
remain
small,
their
size
is
increasing
–
they
are
now
larger
than
Covid-born
firms.
This
suggests
the
risk
from
dissolutions
to
come
is
more
material
than
dissolutions
seen
so
far.
Note
that
these
firms
are
mostly
low-productive
(with
a
lower
turnover
per
employee
than
the
average
active
firm.

Chart
3:
Companies
House:
cumulative
count
of
weekly
registrations,

dissolutions
and
dissolution
notices
(firms
that
have
started
a
dissolution
process)
relative
to
a
continuation
of
2019
average
rate

Sources:
Authors’
calculations
using

ONS
and
Companies
House,
Bureau
van
Dijk
FAME.

Chart
4:
Companies
House:
number
of
firms
in
the
process
of
dissolving

by
firm
characteristics,
as
of
December
2023

Sources:
Authors’
calculations
using
Companies
House
and
Bureau
van
Dijk
FAME.

The
vast
majority
of
insolvencies
result
in
dissolutions
down
the
line,
so
insolvencies
could
be
viewed
as
a
leading
indicator
of
what
is
to
come
(recall
though
that
insolvencies
are
only
a
small
fraction
of
total
exits).
While
insolvencies
were
mostly
concentrated
in
small
companies
directly
after
Covid,
they
have
spread
to
larger
firms
over
the
course
of
2023.
Even
individual
insolvencies
can
have
a
significant
impact
in
debt
and
employment
space
when
concerning
large
companies,
exacerbating
any
resulting
macroeconomic
impacts.
So
far,
Chart
5
shows
that
the
share
of
total
employment
and
debt
at
risk
because
associated
with
firms
going
insolvent,
for
a
sample
of
UK
medium/large
firms
we
have
data
for,
has
evolved
within
recent
historical
bounds.

In
addition,
around
half
of
medium/large
firm
insolvencies
in
2023
comprised
administrations
–
a
special
type
of
insolvency
designed
to
stave
off
liquidation.
Analysis
on
2016–19
data
shows
that
around
70%
of
administrations
managed
to
avoid
liquidation
altogether.
Though
some
employment
losses
are
realised
throughout
the
administration
process,
this
does
so
far
suggest
the
total
impact
of
insolvencies
could
be
limited

Chart
5:
Debt
and
employment
associated
with
large
and
medium
corporate
insolvencies,
a
share
of
total
debt

Sources:
Gazette
and
Bureau
van
Dijk
FAME.

Note:
Analysis
is
done
on
a
sample
of
medium
and
large
UK
firms
and
includes
administrations.
Note
that
the
charts
depict
debt
and
employment
associated
with
each
company
when
it
was
trading,
not
to
debt
and
employment
lost
following
an
insolvency.

Firm
exit
has
been
rising
following
the
Covid-19
pandemic.
We
uncover
dissolving
firms’
characteristics
to
understand
recent
trends.
The
data
suggest
that
much
of
the
rise
in
dissolutions,
including
that
in
insolvencies
reflected
a
catch-up
to
pre-Covid
trends
and
exits
so
far
are
concentrated
in
small
firms
with
a
limited
macroeconomic
impact.
But
this
picture
could
change
as
the
cumulative
effects
of
Covid
and
higher
input
prices
weigh
on
corporate
balance
sheets
(as
discussed
in
the

February
2024
MPR).
In
addition,
historical
analysis
suggests
that
an
increase
in
interest
rates
can
lead
to
a
rising
number
of
firm
failures
as
overall
economic
activity
slows
(see

Hamano
and
Zanetti
(2022),
on
US
data).
More
work
is
needed
to
understand
the
implications
of
these
factors
for
firm
exits
in
this
unprecedented
episode 
for
UK
corporates
and
what
their
macroeconomic
consequences
will
be.

---

Jelle
Barkema
works
in
the
Bank’s
Financial
Stability
Strategy
and
Risk
Division,
Maren
Froemel
and

Sophie
Piton
work
in
the
Bank’s
Monetary
Analysis
Division.

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