Clive Palmer’s recent activities have put the spotlight on companies in administration. There is an increasing number of companies going into administration. While a company in administration is a difficult time for the owners and employees, it can provide opportunities. Opportunities for another business to make a strategic purchase at a good price. Such purchases provide continued employment for many of the existing staff, a better outcome for customers that have paid deposits and for the existing owners. However for such a purchase to work a number of things need to be in place.
One of the reasons administrations are increasing is the pressure the ATO is exerting on those companies with large tax debts, generally over $200,000. The ATO is acting quickly to issue director penalty notices. When these are issued a company can either pay the debt or put the company into voluntary administration within 21 days of the date of the notice. Failure to do this will make the directors personally liable for the tax debt.
Businesses offered for sale in or just prior to administration will be able to be purchased cheaply and largely on the purchaser’s terms, as a quick sale is needed. This provides a great buying opportunity, provided it ticks a number of boxes.
The most important question is: Would this acquisition be a good strategic fit with your existing business and your current strategic plan? It may offer the opportunity to increase your geographic reach, enable you to gain greater control over your suppliers or distribution network. It may increase your capacity and in the process enable you to get volume discounts. If the acquisition does not provide a strong strategic fit, it is likely you will lose money.
Why did the business fail? The primary reason businesses fail is not economic, but personal. The personal reasons may be serious health problems, marriage breakup, or excessive drawings from the business for personal use, as in Clive’s case. These personal factors seriously weaken the business and then when tough times come, the business has nothing in reserve and fails.
The failure may also be due to financial management as well. For example, high staffing levels, high prices for the cost of sales etc.
Identifying the causes of the failure enables you to determine the extent you can quickly turn the business around and know where you need to focus.
It is helpful to commit these turnaround ideas and the synergies with your existing business to writing. Writing enables the plan to face a realism test, especially if you have it debated with your leadership team.
Taking on a business in a distressed state requires an injection of management to bring the necessary changes. Do you have management capacity that can step in and implement the changes?
There are an increasing number of distressed business opportunities. Maintaining a strong balance sheet in your business enables you to act quickly to make the right acquisition.
Some questions to ask yourself:
Does your business have a strong balance sheet? If not do you know what to do to make it strong?
Does your business have a strategic plan so that you can quickly identify if a distressed business sale will be a good fit?
Peter Ambrosiussen is a partner of Ambrosiussen Accountants & Advisors www.ambrosiussen.com.au