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How to ensure your business becomes an asset not a liability

After ten years the plan was to retire: either Trevor could sell his business and generate a retirement fund, or pass the business…

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After ten years the plan was to retire: either Trevor could sell his business and generate a retirement fund, or pass the business onto his children with it paying him a yearly consultancy fee to see him through his twilight years.

But after ten years neither was possible. Nobody would buy his business and his children perceived it to be a liability.

Why Trevor’s business was a liability

Trevor’s business hadn’t run a very smooth course. The balance sheet didn’t show enough profit to attract a buyer and a due diligence process carried out by one prospective buyer had revealed that there were very few systems necessitating Trevor to be still very hands-on.

Whilst Trevor was one of the first to enter his market, competition had steadily risen over the last ten years and to any buyer it was obvious that Trevor was being squeezed out of the market as the competition marched on. His children could see this too. For them it would be hard work from year one and there were other more lucrative possibilities to explore.

Trevor’s problems started in the first year too

Trevor’s problems started in the first year of trading. Anxious to achieve new business, he was slack on chasing debts. He extended credit to clients who he thought would honour their word and then had to write off significant debt when they didn’t pay. He experimented with court action but found that costly and no guarantee that he would recover his money. He soon lost sight of his cash-flow and very early on he had already eaten into his reserves and was forced to borrow more. Unfortunately, his choice of lender was poor, so when Trevor was stung with penalty interest on a late payment, his profits took a further blow.

Lost profits meant his employees became dissatisfied

The cash-flow problems meant that sometimes Trevor was a day or so late with his salary payments. For the most part this wasn’t a problem, since his employees were understanding, except one who took Trevor to the Employment Relations Authority. She had been a good worker initially but her performance and attitude had over time deteriorated and caused enough of an unsettling atmosphere amongst the other staff to see their productivity plummet too.

Her attitude and the accumulating stress of making ends meet in a tough market had caused Trevor to snap one day and fire her without due process. Trevor was advised by his lawyer to fight this claim and although he got away with paying only $2,500 to the employee, he was fined $2,000 for not having an employment agreement and his legal bill was $5,000. At the conclusion of the hearing, he wished that he had ignored the gung-ho attitude of his lawyer and settled at mediation.

The fine wasn’t the only problem

Since Trevor didn’t have an employment agreement his intellectual property was very exposed. Shortly after the case he discovered that his ex-employee was soliciting his clients and his other employees. Dissatisfied with the lack of systems in Trevor’s business, two employees left to the rival organisation, taking Trevor’s know-how with them. To make matters worse this company started trading using a logo very similar to his.

It was a tough road for Trevor from that moment onwards. As he saw his market share gradually being eroded he felt it was time to cut his losses.

That’s why it was time to get out

Trevor had had enough. He had originally gone into business to create financial freedom and security. He came out tired and certainly no further forward than when he started. He had a business lacking in any systems, with only a modicum of goodwill amongst a very fickle client base, and a five year liability to pay rent on his office lease.

Had the promises of financial freedom and more free time been just a lie? Or had Trevor just gone about his business the wrong way?

What Trevor should have done

Building a business is like building a house. If you have no plan and build it with shoddy materials and poor workmanship, eventually someone will come and knock it down. Build it on solid foundations and it will last forever and become an asset.

The foundations of any business rest in the relationships it has with its customers, staff, competition, suppliers, distributors, agents, professional advisers, lenders and investors. Such people can either help you grow your business or they can gobble up your profits like a shark. Deal with too many sharks and your business is sunk.

The trick is telling the sharks apart from the people who are generally there to be fair and help your business. However, even the most astute businessman can be taken in by a skilful shark, which is why it is necessary to have strategies in place to ensure that the shark doesn’t cause damage to your business.

Had Trevor shark-proofed his business, then he may have had an asset rather than a liability, and have been able to enjoy his retirement.