Business owners can often feel trapped in their businesses. They owe so much that the money from the sale of the business would not cover it. They may feel that they have no choice other than to trade on. In this month’s case study we look at how we helped a client get out of their business and on with the rest of their lives.
BACKGROUND
Our client owned a café, but the business was struggling to meet its commitments. Prior to engaging with de Jonge Read the client spoke to a business broker. They told the broker, “We need $300,000 for the business”. This was based on the total debt position of the company that ran the café, with no consideration given to what the business was worth.
The broker advised the client, that in his opinion, the business would sell for between $140,000 and $180,000. This was based on the physical assets of the café, and the profit that it was generating at that time. The owners, husband and wife, were taking excessive drawings from the business which impacted on the bottom line.
As a result, the business stayed on the market for over 12 months. Despite the broker’s best efforts to get the client to list for a realistic price, the client continued to insist on $300,000. Creditor pressure continue to mount, with no way out in sight. Ultimately, the client’s accountant referred them to de Jonge Read for advice.
STRATEGY
The first thing we need to do is fully understand our client’s position and their goals. In this case our client did not want to trade the business anymore. They were under pressure and stressed, and just wanted to get out.
At the time of our engagement the situation was as follows:
Assets
Going concern business - $140,000 to $180,000
Liabilities
ATO – GST $150,000
ATO – PAYG & Superannuation $ 40,000
Trade creditors – personally guaranteed $ 40,000
Trade creditors – not guaranteed $ 50,000
Unpaid rent $ 20,000
Sub Total $300,000
Loan owing to director $180,000
Total $480,000
So, excluding the debt owed to the director there was $300,000 worth of liabilities. As part of our comprehensive review of the situation we confirmed that all PAYG was reported within 3 months of the due date, and Superannuation was reported in line with the new regulations and reported by the due date. While the company could not pay the amount owing, they had at least reported their obligations. Not all of the trade creditors held personal guarantees. The directors had personally guaranteed the lease for the café premises.
The clients brought their drawings down to a more commercial level. This helped to repair some of the damage to the bottom line. All amounts owed were reconciled and accounting records brought up to date.
In liquidation the debts of a company stay with that company except in a few specific circumstances. In this case:
The directors would not get a Directors Penalty Notice (DPN) that could not be remitted as reports were lodged within the required time frames.
There were no amounts owing to the company by the directors.
No creditors had received payments in preference to others.
In this case the director’s personal liability would be limited to personal guarantees provided to some trade creditors and the landlord in connection with the lease of the premises.
WHAT HAPPENED?
Once we had reviewed the situation, and provided our report to the client, the business was re-listed for sale at a more realistic price. While the business was totally unsaleable at $300,000 it began to attract interest at $180,000. Within 2 months of the re-listing the business was sold for $180,000.
As the business was sold to a new operator, the landlord entered a new lease with the purchaser. This was on the condition that all rent arrears were paid. This released our clients from the personal guarantee they provided to the landlord.
At that time, the directors distributed the sales proceeds proportionately to all creditors. No creditor was paid in preference to another. All creditors received 37.5 cents in the dollar including the director personally, who received $67,500 for his director’s loan. The director then utilised these funds to assist in managing the shortfall of his personal guaranteed creditors as shown below.
Personally Guaranteed Creditors
Total | 37.5 cent return | Shortfall | |
Trade Creditors | $40,000 | $15,000 | $25,000 |
Unpaid Rent | $20,000 | $7,500 | $12,000 |
Subtotal | $37,000 |
The director settled this shortfall of $37,500 from his distribution which left him with $30,000.
Turns out they did not need $300,000 after all. In fact, with a sale at $180,000 the clients were able to meet all of their personal liabilities with a little money left over to help them transition to the next stage of their business careers.
THE TAKE HOMES
By considering all issues, both business and personal, and navigating the insolvency framework an unsaleable business can be turned into a saleable business.
If you have a client who feels trapped in their business, or has been talking of selling for ages, they may benefit from a fresh perspective and some specialised advice.
As we all know, a business can only be sold for what it is worth.
Should you have clients or associates that you know are struggling with financial issues, our team of Strategists would be pleased to discuss options that are available on how to best design and implement insolvency strategies.
Call us now on: 1300 765 080.