Is your business is in the "Descent" phase?

When a business is in the Descent phase, it is a time of desperation and of doing everything possible to avert disaster but also of not wanting to acknowledge that death and disaster might be knocking at the door.

It is a period characterised by decreasing profitability and increasing debt; slower payments to creditors and suppliers; calls from credit agencies and debt collectors; of severe cost-cutting; increasingly desperate decision making by the owner/directors and the vain search for angel investors and magic wand solutions.

A growing sense of desperation pervades the air as all stops are pulled out to halt the downward slide. Desperate times call for desperate measures, as loyal staff are laid off, directors salaries are cut and assets are liquidated.

Four Possible Pathways:

1. Turnaround - a fortunate few are able to reverse the downward slide and make a hard-fought-for comeback and the wisdom gained from this experience often becomes the foundation for significant business success in the future. One of the most inspiring examples of a ‘turnaround’ can be seen in the book “Aussie John” which chronicles the Herculean efforts of John Symond the founder of Aussie Home Loan and the pioneer of low-cost mortgage lending in Australia.

Another inspirational story is that of Tom O’Toole who in 1984 purchased a struggling bakery in Beechworth and turned it into one of

’s greatest retail success stories. Tom happily shares the secrets of his success through his products and speaking engagements.  http://www.tomotoole.com.au

2. Solvent Exit – many businesses succumb to the gravitational pull of the Descent and exit the business arena, selling up assets and paying up creditors but leaving the owners and investors bitterly disappointed and significantly poorer for the experience.

3. Insolvent Exit – the unhappy route where the sale of assets and securities does not cover liabilities; the company is placed in the hands of an insolvency practitioner or trustee and the few remaining assets are liquidated at a fraction of their market value. The insolvency practitioner, the banks and Tax Office take their share of the remains and the bitter unsecured creditors wait for whatever bones fall from the table. The owner/directors typically lose their homes, their incomes and reputations.

4. Personal Bankruptcy – the final (but not inevitable) demise of the business owner/director who is unable to achieve a satisfactory repayment to creditors. Less than a quarter of insolvent exits end with the directors becoming personally bankrupt. Although bankruptcy imposes significant financial constraints on the individual as well as a black mark on their credit ratings and reputation; it is a system designed to protect the individual from excessive harassment from creditors and debt collectors.

Death of a business

Looking back on the demise of our family business in 2006, I realise now that we had been in the Descent phase for about 3 years before out business was liquidated, but I wasn’t able to recognise it at the time. Oh, the wisdom of hindsight.

Like many others I suffered from an entrepreneurial illness that I call “pathological optimism” and was utterly convinced that we could turn things around. We were all working our tails off to fix what we thought were the problems only to discover that: 

“If the problem is not THE problem, then the answer is not THE answer”

If I knew then, what I know now: What would I do differently?

1. Get out early!

If I had recognised the signs I should have got out at the start of the Descent. Although we were working furiously to fix the business (and it seemed we were succeeding) the problem that ultimately sunk us was an unfixable one – but I wasn’t able to recognise it. It is possible an objective outside advisor may have identified the real problem, and if (and that’s a big IF) I had followed their advice I should have got out early.

So, does knowing what I should have done, change what I would have done?

Probably not!

I had too large an emotional investment in the business to be able to walk away from it after twenty years. Gordon Ramsey once gave this advice to a restaurant owner about the business they had just turned around: “Don’t fall in love with your business”. There are just times when you have to be able to cut your losses and move on.

I had learnt that by my third business failure – it cost me a lot of money to walk away but it probably saved my sanity.

The recent case of failed British millionaire, Christopher Foster, highlights what can potentially be lost when we aren’t able to let go. Hours before the bailiffs were due to arrive and repossess his home, Foster shot his four dogs, his three horses, his wife and his daughter. And after setting his four luxury cars on fire and burning down his seven bedroom country mansion, he turned the gun on himself and committed suicide.

One can only wonder what might have happened if someone had just advised him to “get out early”. Would he and his family still be alive today?

But if that’s not the advice you wanted to hear, then:

2. Get outside objective advice.

The size of your business will determine who you should go to for advice.

If you are a micro-business, like a home-based business, a sole-trader or a contractor you may need to find a mentor with a good ‘business head’ who can look objectively at your business.

If you are a small to medium sized business then you will need to talk to your accountant.

If you are a medium to large business then you may be able to afford a “Turnaround Specialist”. These are a special category of insolvency practitioner who are like the surgeons in the Emergency ward of a hospital – their goal is to save lives but it may mean cutting off a limb or pulling out an organ or two.

But if they realistically think there is no hope for the patient they will pass you on to the hospital mortician – these are the insolvency practitioners who do company administrations, liquidations and receiverships. They may read you your last rights and check your teeth for any gold fillings.

However, if you want to avoid that gruesome outcome, then:

3. Work more closely with your accountant to understand and control the financial side of your business.

If you believe your business is on the downward slide and if you haven’t already do so, now is the time to – TALK TO YOUR ACCOUNTANT!!

We often treat accountants like dentists - we only go when we're in pain or when we have a problem. But, accountants do a lot more than just lodge tax returns and BAS statements. You need to work at building a good relationship with your accountant so that they are as interested in the future of your business as you are.

Large companies and corporations have their own in-house Financial Controllers. SMEs don't often have that luxury, therefore your accountant should be the "defacto" Financial Controller of your business and this will free you to focus on the things that you do best.

But to achieve this kind of relationship you are going to need to invest the time (and money) to make it happen. It's not a case of having a good accountant, but of building a good relationship with your accountant. If you show that your committed to do "whatever it takes" to turn things around, then most accountants will go the extra mile for their client. If they still don't show any interest, then maybe it's time to look for an accountant who is willing to form a strategic partnership with a client. 

My view is that most accountants are "good" accountants. The more common problem is that we are not always "good" clients. SME operators are frequently, self-reliant individuals who think they are the only ones who know what's best for their business and this doesn't make them "good" listeners or "good" learners. I should know - I was one for 28 years!!!

If you’re really serious about turning your business around then you must equip yourself with at least a basic understanding of the financial and accounting aspects of your business. In other words you’ve got to ‘get on the same page’ as your accountant if you are going to be able to take their advice on board and implement recommendations.

Like most SME (Small to Medium size Enterprise) operators I had great technical skills relating to the products and services of my business but I was very weak in understanding the financial or accounting aspects of the business. I always thought such an understanding was beyond me until I did a one day seminar called “Accounting Comes Alive” and I walked away and was able to understand all the business financial statements.

This is a “must-do” training for anybody that is serious about turning things around.

Go to their website at this link: http://www.accountingcomesalive.com

then click on the Register for workshop to find one near you. It was the best one day business training I’ve done in 28 years of business, I just wished I’d done it 28 years ago.

The key to transform any business is to transform yourself.

The next page on this site covers the topics of "Insolvency & Bankruptcy"

Life After Liquidation

ReBound

from business collapse

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