10 ways to lose your business in a downturn
Tuesday, 1 April 2008
Last Updated: Tuesday, 1 April 2008
James Thomson
As the economy slows, more and more entrepreneurs are finding themselves in trouble. There have been some spectacular high profile falls. Some have lost their shareholdings and others have been forced to shut the doors completely. Watch out for these 10 ways you could lose your business – avoid these and survive the downturn.
1. Margin Loans
Let’s start with the main reason for some of the more high-profiled collapses in recent months, such as Allco Finance Group, MFS and ABC Learning (all of which are still alive, but in a much diminished state). A big part of the reason these companies have been sold off so sharply is that their chief executives – David Coe, Michael King and Eddy Groves – had big margin loans over their personal shareholdings.
It’s great to own a big stake in a publicly listed company that is performing well. But the problem is you can’t realise any of your wealth without selling some shares – and that is generally frowned upon by investors, who see it as a sign that the chief executive lacks confidence in their company. So some chief executives took out margin loans over their shares and used the cash to buy more shares (in their own or other companies) and lifestyle assets (Michael King, for example, had an extravagant polo complex in Queensland).
When your shareholding is worth $200 million and you take out a margin loan of $20 million, it’s not such a problem. But if the share price tanks and your shares are suddenly worth $50 million, a $20 million loan is a big burden. And if you are forced to pay if off your margin loan by selling shares, then you are going to lose a lot of money – and in Coe and King’s case , your job as chief executive – very quickly.
2. Timing
The other big problem that has struck chief executives of troubled companies in recent months is the way the credit conditions changed so quickly. One minute financing was cheap and easy to obtain. The next minute – mainly because some US banks had lent money to people who should never have been given loans – the credit markets are shut and financing and re-financing became impossible to get. For many of the businesses that have run into trouble, refinancing just a few weeks earlier could have made the difference.
3. Debt
Of course, if businesses such as Allco and MFS hadn’t taken on so much debt, then they wouldn’t have been in so much trouble with re-financing.
Debt isn’t just claiming high flyers. Mark Alexander-Erber, owner of the Pubboy hotel chain, is being forced to sell up by the banks and other creditors who are owed about $20 million. It appears that Pubboy took on too much debt to expand and when interest rates rose sharply he was caught out by higher repayments.
Nick Combis, an accountant with Brisbane-based insolvency experts Vincents Charted Accountants, says business owners are struggling to adapt in the credit squeeze. “They’ve still got these large amounts of borrowings but now they are at much higher rates.”
4. Bad management
David Hambleton, partner at insolvency specialist RE Murphy & Co. says the problem that hits most companies is simple – poor management and particularly poor record keeping. “In the majority of cases you’ve got a mum and dad team who are very good at what they do but who aren’t great book keepers.” When a business starts getting into trouble, many business owners have little idea why and little idea of how to turn things around. “They just don’t know where the company is sitting from a financial point of view.” Combis agrees. “I constantly see management taking their eye of the ball.” He says it’s the little things that matter, like keeping good records and keeping up with tax office requirements.