Over the past few years I have had a bit of an ‘on-again, off-again’ type of relationship with a particular Client (that’s at least the term we’ll use for now) who had once been able to build up quite a reasonable business. Regrettably the business was ultimately severely dented by the GFC. Certainly the GFC itself did some damage but with better preparation that could have been better handled. However, a potentially greater factor was some earlier investment decisions that were made for the business but with complete disregard to business fundamentals.
Ultimately the business was sold off for a fraction of its once top potential value and the investments retained. Sometime later the issue of maintaining the investments began to arise and the Client began a process of engaging with professionals in order to seek advice and guidance on how this could best be achieved. So why was all the ‘shopping-around’ pursued? Well, as I was to find out much later, there were a number of very significant fundamentals that could not be varied; any solution HAD to be built around these rules.
Picture being asked to build a dam across a creek; and then being told that it had to be made out of ‘papier-mache’, simply, in the long term an impracticality. I don’t truly know how many earlier advisers there were, but I’m sure there were many.
Wind the clock forward and the Client finally arrives on my door step and we discuss options; none of which in any way related to insolvency. By this time the fundamental question was in fact how much of the base capital could be preserved and how best to achieve that. As the meetings progressed we would reach the formalities of proper engagement and costs, we would part with an agreement to give the issue proper consideration. We revisited this circumstance on more than one occasion, all ending at precisely the same point. I am confident that this was meant to be a process that was intended to drive me to a point of saying that I’d do it for free.
Then came the very long pause, the Client was not to be seen for some time. Ultimately the Client returned with the only difference being that there was now an additional $500,000 in borrowings. To my stunned amazement these borrowings had been done to fund an adviser they had been dealing with. I was puzzled, what was the genius idea that this adviser had had over so many others that he had been paid. Right or wrong understanding this became my focus.
Whilst it took some time the answer finally became obvious; the new Advisor had promised the sale of one asset for a number that was potentially between 2 and possibly 4 times its real value. What such a sale meant though was future financial freedom, the removal of all secured creditors and above all 3 or 4 times as much as was required to start the business up again, also without borrowing: simply a dream come true. My disbelief came however with the fact that the whole of the additional borrowings were the fee, and more stunningly it had been paid in CASH with no receipts. Given all my previous experiences I was flabbergasted!
By the time of their return to see me the secured creditors were circling and the asset was now the subject of an urgent sale. Again circumstances were placed upon us that could not be controlled; the time for proper action had once again been stolen by the Client. In the end we made some basic attempts but to no avail. The asset was sold in conjunction with one of the secured creditors for a figure thirty to fifty percent less than our property advisers were predicting, and there would still remain a liability over other assets retained.
Had they been more willing to listen, more willing to pay, more willing to understand that there were others smarter than they, and genuinely, rather than egotistically, been interested in their future then this story could well have had a much better ending.
Marketing has for so long taken significant steps to convince us to buy what we “want”, not what we really need. When we are dealing with personal discretionary spending that’s great; maybe?; but for business there is no room for wants. Spending must focus on the needs, coupled with the search for the best quality and value. The hype is irrelevant.
The rules of business are fundamental; and remember, they are brutal to those who ignore them.