I recently took part in a skydive for Peace One Day to raise awareness for Peace Day on 21st September. One minute we were sat in the plane, the next we were falling through the air.
The beautiful clarity made everything fit into place for those free-fall moments.
Then it dawned on me, I had to start to think about the next step, pulling the parachute and then landing!
It gave me an insight – In life it’s easy to get caught up in the flow and forget to check where we are on the overall journey. In our business life this can result in a “bite back” when our economy goes from growth to recession.
It may seem like a good idea to spend profit to avoid a large tax bill but when the economy starts to dip, and business start slows down, if this is your strategy, you will need quick reactions to soften the blow.
Lots of owners use their business to fund their lifestyle. Spending profits on “stuff” to reduce the corporation tax liability. Although I have never taken up this strategy myself , as I have always looked to build value for an exit, I wouldn’t argue with it in the boom years.
When the economy slows, you need to quickly change your personal spending habits – otherwise you will find that the business can’t keep up with your lifestyle. Resulting in, you personally picking up the bill for the companies debts.
It’s hard to get away from personal guarantees these days. It’s a belt and braces approach. A bank will want to secure its borrowing with a fixed and floating charge on the assets of the company – and – ask you to put your head on the block with a PG.
They want you as the business owner to be accountable for any losses that they may suffer in the event of a company closure. A limited company is no longer a limited liability.
With that in mind I would strongly recommend to think of any debt, backed by a personal guarantee, as your own.
If the company fails, the banks will want to recover that money. In the last 12 months they have become very unforgiving on director / shareholders with PG’s.
That is why I would suggest that if you need to purchase something for the business, that will increase your own personal liability, make sure it is entirely necessary and you will get a return from the investment.
This may seem like common sense, but I walk into some businesses that have fancy new office furniture but worn out, old-fashioned, systems and processes. It’s not hard to see where the return on investment will come quicker and easier.
Be thrifty with the cash in the business, that is not to say you should run the business with a cautious approach! On the contrary, be on the front foot looking for the best deal with suppliers, and the best deal with clients. I am always looking for contractual work that will guarantee a long-term success.
Thinking in this way, as a creditor to the business, will bring it all into focus. The first goal – to reduce that overdraft to zero and pay off the loan as soon as you can!
“A banker is a man who lends you an umbrella when the weather is fair, and takes it away from you when it rains” Anon
I recently acquired a company with a significant debt in proportion to its turnover.
The only way to move the business forward into a viable position was to restructure that debt.
The challenge was that every single penny was personally guaranteed by the owner.
We weighed up the options –
- close the doors and walk away, wait for the bank to call in the personal guarantees.
These debts can be negotiated into payment plans and I have a strategy of doing this to significantly reduce the debt. However it will be painful after giving so much energy to the business, perhaps with dreams of selling it for seven-figures.
- restructure the debt in the business through an insolvency procedure.
To liquidate the company it would have cost a minimum of £5000. The overdraft and loan would still need to be paid off and there would be no chance of getting that money back.
- to trade on in attempt to pay off the debt in time – this would have been a mountain to climb and the business model would need dissecting and rebuilding which would take time and money.
There was also a bigger issue – the existing owner had actually lost their passion for the business and felt the risk of incurring further debt was too great.
A forth option was considered; which seemed like a win-win all round.
- seek a synergistic business to merge with the existing one, move forward with a clean slate, then sell both businesses to recoup the cost of settling the PG’s.
Co – creating this deal meant we had aligned our goals and reached the best outcome for all parties. It made a seemingly impossible situation feel like a challenge won.
Of course we took steps to secure our position, should the plan falter. But I have every confidence that the business will move swiftly forward because of the strength that is gained when merging two businesses.
My advice keep your eye on the door at all times, especially if you think it might be a quick exit!