A great many insolvencies are caused by – well insolvency. By that I mean that the business simply did not have sufficient money to pay debts and the lack of money was caused by continued trading losses, large bad debts, loss of legal actions etc.
Occasionally an insolvency is not caused directly by one of these reasons but by something more subtle – a lack of strategic foresight that slowly leads the business to a position where winding it up or selling it as a shadow of its former self was the only thing that could occur.
Over the years we have seen this happen many times and noted that these strategic failures have normally occurred in only a few areas. This series is about these factors, or common threads – and like our “Four Lessons” series starting in June 2009 – we have based all of these descriptions only on cases that we have worked on.
This month we look at:
No new blood
Picture a very successful company set up by a young man in the transport industry. That man lead a good life, made good profits and raised his family on the back of that successful business. Go forward almost 40 years and the man, now in his late sixties, wants to retire.
The company and the business is still there trading, though not so profitably as the man’s energy levels has been reducing over the years and he has lost touch with the business environment. He is no longer the young man that he was. The hired managers do a competent job, but cannot run the business. The man’s sons have no interest in taking over the business, and no one wants to buy it for anything like what he thinks it is worth.
The major issue is that the company has many finance contracts on vehicles. He has guaranteed these contracts, but some of these vehicles are not being utilized to their full (or anywhere near their full) capacity. The payouts on these finance agreements run into the millions of dollars and the company does not have the money to pay them out. As is normal, the value of the vehicles is less than the payout figures so they cannot be sold profitably, if they can be sold at all.
What were his options?
Close the business and walk away? The shortfalls on the finance agreements would be called under the guarantees.
Sell the business? No one wants to buy it and take over the commitments.
Keep trading the business and see what happens? That is what happened because there was nothing else that he could do..
Go forward a few more years and the business is now unprofitable (partly thanks to the GFC, partly because the man’s energy levels have dropped even further (he has lost a of interest in the business and is stuck in his old ways) and partly because the managers – who are now effectively running the business – are good managers, but not good businessmen and cannot innovate the business to compete effectively.
Ultimately we get appointed because a Director Penalty Notice from the ATO cannot be met.
The major problem encountered by this man is that he had no plan to exit the business. He had not groomed a replacement, prepared the business for sale, nor wound down the business over the years in an orderly manner. He simply decided that he wanted out, but had no planned way out.
As his energy levels dropped, his management of the business also dropped. His reactions to changes in the market and business environment slowed. His development of the business slowed. Essentially, he slowed down as he got older and no New Blood picked up where he left off.
The result was a man who had to sell personal properties that he had acquired over 40 years of hard work to pay guaranteed debts because he had no plans over the last few years to exit his business.
So what could he have done?
Instead of hiring managers to just manager he could have been grooming these managers as future business owners together with himself. Get them to buy into the business, to take a financial and personal interest in the well being of the business. As we all know, it is one thing to work for a business, another to have a financial interest. Bring them on to gradually acquire your interest in the business over time ensuring you maximise the value of your hard years of investment in the business.
If all goes according to plan not only have you maximised your exist from the business, but the business lives on, which can be just as satisfying as getting your money out to retire on.
Continued next month ..