My Say: Managing through the tough times
OVER the past 12 months we have seen a number of smaller and larger local businesses folding for various reasons.
Almost always the failures hurt not only the owners but also staff, contractors and suppliers. It's a serious negative effect for our economy and the stability of our region.
Recently reported examples of businesses in difficulty report substantial sums owing to staff and the ATO.
In one case, at least some of these liabilities seems to precede the current ownership. In another, attempts to protect parts of the overall corporate group failed.
Let's take a look at the liability issue.
When you buy a business you normally have the option to buy the whole business including the corporate structure it resides in (a company for example), or just the assets of the business. This difference is extremely important because if you buy the whole company (usually by purchasing all of the shares in the company), you get everything housed in the company - the good and the bad.
You get the client base (goodwill), and the hard assets, but you also get the debts and any existing or potential legal issues. If you buy the assets then you just get the assets you nominate - the right to service a client base, tables, chairs, for example, and nothing else.
While it is possible to have the vendor of a whole company to provide indemnities in the event that something goes wrong, these things can be difficult to enforce, and anyway, the vendor may have long since gotten rid of any of their assets via which you could exercise your rights. This isn't to say that there may not be issues regarding the purchase of business assets alone (particularly if they are tied to leasing arrangements), but generally speaking the due diligence (background research, DD) is simpler and the risks more easily avoided.
Very often a solicitor will advise a client to purchase business assets rather than the whole company, and if that's not acceptable, they will be very direct in their advice regarding the DD needed to be undertaken before a purchase is settled.
But it's not uncommon for people not to seek legal advice, which is hard to understand given how fraught business negotiations can be - we recently worked with a business where the new owners entered into a lease that transferred a whole range of additional expenses to them, which in turn crucified their ability to grow, and forced them to sell.
Another issue concerns running up debts to staff (through not paying superannuation) and to the ATO.
Our business, over almost 20 years, has had plenty of experience in working with small business owners facing tough times. We've also managed through some tough times of our own.
It is very common for owners and managers of struggling businesses treat payment of tax and staff superannuation as a discretionary cost rather than as a fundamental responsibility of running a business.
It's illegal not to pay staff super and tax (you may become directly liable), and it's a sure-fire sign that the business is not being run properly.
Almost always, it goes hand in hand with no understanding of cash flow, no budgeting and no respect (until it's too late of course) of the financial side of running a business.
Basically, business is a challenging endeavour for which along with the opportunities there are rules, and disciplines.
Putting processes in place so that these obligations are met will greatly assist in the understanding of your business, not only in terms of the rules, but in terms of how profitable your business really is.
And if it's not profitable (or at least cash flow positive), then you need to look at sales, pricing and costs.
If you are paying your BAS and super as required, then most likely you're doing OK.
If you are not, respect that for the warning that it is. And finally, for any significant commercial transaction, you simply have to get legal and financial advice.
- David French, The Investment Collective