Tweet

How to ensure your business becomes an asset not a liability

Written by: Michael Smyth

Article Overview: 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.

How to ensure your business becomes an asset not 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.

Related Articles
  Good Debt, Bad Debt: Know the difference
  How do Business Owners account for Capital Lease Transactions?
  QuickBooks - How To Record Certain Transactions
  Car Insurance - A Guide To Liability Car Insurance Coverage
  Debits and Credits in Accounting

Article Tags: asset, business sale, liability, retirement



Related Forum Posts
Cash-flow helps in getting financed - Also, if you are trying to obtain a loan, the first thing that a creditor will take a look at is your quick assets, which includes cash. But of course, the asset to liability ratio will also be evaluated.
The Double Close/Escrow - Hello, I was in business for many years and have decided to buy another. Retirement isn't what it was cracked up to be. BITD if I needed a piece of equipment or bought another business I just put up 20 percent and the bank did the rest. I have been reading about another way however and hope some of you can fill in some blanks for me. What I am reading about is the double closing which uses a swing loan and an asset lender to purchase the assets of a business to use as the down payment. As below: 1.You arrange a swing loan for the down payment amount from the bank and give this to the seller. Supposedly after the paperwork this transfers title of the business and its assets to you. 2. In another room you have a second closing set up with a asset lender who loans you the amount of the swing loan which you use to pay off the swing loan. Now the asset based lender owns the assets as collateral for his loan and the seller is owner -financing the remaining balance. Now , I get a double escrow close in real estate circles but there are a couple of things about this business purchase situation that I don't understand. If the seller of the business is owner financing it and has the first lien what is his motivation to allow his assets to be used for collateral to the asset lender? Does the asset lender take a second lien on the asset loan he has just made( the down payment)? Or does it truly mean that during the first closing where the seller received the down payment that the right to do whatever I wanted with the assets was truly transferred to me and I can now give the asset lender a first lien position? This seems very strange to me but I continue to read about it in numerous places and the methodology never varies. Again, its been awhile since I did all this and we were much simpler back then. However, even then it took an act of God and Congress for any first lien holder to give up that position. Even for a very large down payment. Any help you guys and gals could give me would be greatly appreciated. All the Best!
Re: Invest in Real Estate or Stocks? - I agree with both David and Aneshia that your home is not an investment. Robert Kiyosaki defines and investment or asset as anything that brings money to you. Your home does not do this, it is an ongoing expense even if it is mortgage free, there are other expenses connected to it that are on an ongoing basis. A property that earns you an income is an asset. MichelleJ
The most important points to start your own business - It is important to have a business opportunity that has a pedigree from start and a product that will open doors to further opportunities. You have to know what the start up costs are and need to have a business plan. You have to think about your personal liability issues (e.g. financial credit) and to have a business name. Furthermore it is important to decide between a public or private company and to think about a partner. It is also important to have experience (e.g. to work in the same business first)
Insurance for Home Based Business? - Apparently homeowners insurance and liability insurance may not be enough to cover your at home based business. Especially if you are running the business out of a detached garage or other dwelling on your property. Does anyone have another type of business insurance for their home based business or know anything about this?


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Tweet

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

The Importance of Master Data Management (MDM)

How do you keep it together on a daily basis?

The Neglected Art of Receiving

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.