When you go into business you should have a firm idea about how and when you will exit your business.
You should seek advice on how to exit the business properly because failing to do so can have costly consequences.
Principal Business Coach at Delta Business and Executive Coaching Paul Roach sums up the reason for going into business in the first place.
“I think you go into business so you can get the hell out, so when’s your exit date?” asks Roach.
“Having this approach does a few things: first, it puts some urgency around meeting that date…‘I’m building this business to be this big, make this much money and I’m going to do it by this time, so I can sell it, get my multiples of earnings and cruise the world or whatever’.”
He says when more than one party is involved in owning the business and they disagree on when to get out, finding a solution is much harder.
He advises business owners to assume the “wheels will fall off the relationship” before they do — and plan for it.
Trading while insolvent will cost you big time
While the ideal exit might be to sell the business and move one, failure to properly wind up a Proprietary Limited can be costly, warns CCI’s Workplace Relations Manager Ryan Martin, who recommends taking regular advice from an accountant.
“You need to make sure you commence the winding up process while you are still solvent,” he warns.
“If you wait until you are insolvent then you risk penalties from ASIC for trading whilst insolvent, so you need to make sure you start that process or appoint an appropriate restructuring professional to go over your affairs to make sure you are not trading while insolvent,” he says.
“That may be obvious to you beforehand because you’ll know that your business is struggling and that you are getting pretty close to trading in the red, but a lot of small businesses don’t realise that if you are doing that you can actually be breaking the law.
“If a business cannot pay their debts, when they are becoming due and they are incurring further debts that is really the definition of trading insolvent.”
According to the Australian Securities and Investment Commission, the consequences of trading while insolvent can see the directors face penalties of up to $200,000 and up to $220,000 and/or five years imprisonment if a director faces criminal charges.
But these financial penalties don’t include a potential insolvent trading claim by a future liquidator, which essentially is a claim against a director to repay any outstanding debt the company may have incurred since the company became insolvent.
“So even if the business is out of money, if the directors have personal belongings including their own home, they could be putting those things in jeopardy. And if they have done it dishonestly they are more likely to get those fines — it could also involve imprisonment for criminal charges,” Martin says.
“Winding up while solvent and appointing a liquidator to wrap up the affairs is a better way to go and would still take a number of months by the time a special resolution is passed, notices published and a liquidator appointed.”
Martin says how long a business can be in trouble before acting will depend on how much risk the directors are prepared to take.
“And a lot of small businesses will give it every last bit they have got and then they will realise nope, we’re completely out of money, we can’t pay our debts and often by that time it is too late.”
He says advice from an accountant and a lawyer are good first steps if you run into financial difficulty.
While he doesn’t believe an exit date should be set in stone, many businesses overlook succession planning.
“It is something where if you begin with the end in mind, again regardless of whether you are purchasing a business with the intention to build it up and sell it for a profit or to hand it down to your children, for either decision one should have some sort of succession plan in mind.”
Exit strategy depends on size of business
Bruce Sinclair, a KPMG Enterprise partner (a division of KPMG that operates almost exclusively in the SME space) agrees, saying an exit strategy can be helpful, while the extent of planning depends on the variables.
“These factors include the size of the business, the level of financial expertise in the business and the reasons for exiting the business in the first place,” he says.
“For example, if the business has been forced into an exit strategy (i.e. due to financial stress), this usually tends to have less planning involved and is completed with a great sense of urgency.
“Similarly, smaller businesses tend to have fewer resources available, so the level of planning tends to be less, although this is not always the case.”
Sinclair says there are no hard and fast rules as to how often a business liaises with its accountant.
“For example, a business with a CFO in place may have less of a requirement for basic assistance, but smaller owner-operators may place a greater reliance on external assistance from accountants and business advisors,” he says.
“We would always say to our clients, ‘If in doubt, call prior to entering into any transaction as it may be difficult to unwind after the fact’.”
