Navigating Australia’s economic downturn: Business strategies | talkBIG podcast

What can business owners do to manage rising costs?

In this episode of talkBIG, host Andrew Sykes speaks to experts Jonathon Colbran, and Gavin Stacey to unpack the critical challenges facing Australian businesses—from taxation pressures to insolvency risks—and provide actionable strategies for navigating financial distress. 

Whether you’re battling rising debt or exploring ways to turn your business around, this episode offers practical advice and a roadmap to making informed decisions. 

Thanks for listening! Visit the RSM Australia website to ask the hosts a question.

Chapters

• 0:00 Intro
• 1:15 The impact of economic distress on businesses
• 3:28 Is Australia in a recession?
• 4:18 Navigating taxation challenges, and the ATO as creditor
• 9:34 Acting early: Strategies for business survival
• 13:08 The philosophy of companies: Limited liability and personal risk
• 15:48 Exploring options when business becomes unprofitable
• 18:01 Dealing with insolvency: Emotional and practical steps
• 20:24 Communicating with banks: It's all about numbers
• 25:34 Superannuation: A critical liability for business owners
• 30:16 Formal insolvency appointments: What to expect
• 30:38 Understanding insolvency: Australia vs. America
• 32:05 Navigating Small Business Restructures
• 38:05 Voluntary Administration: A deeper dive
• 43:44 When to wind up a business
• 47:27 Remember you have options
• 50:30 The importance of acting early in business decisions

Transcript

0:00

Welcome to the RSM talkBIG podcast. Does it feel like we're in a recession? I think we might be and technically we may be. Economists can't quite agree on what the definition of a recession is. But if we look at the economic figures, the Australian economy grew by just 0.2 % in the June quarter. If we look at it on a per capita basis, so that's when we divide it by the number of people in the country, we've actually been in a recession for the last six quarters. This is the longest per capita recession we've had since the early 90s in fact. I've been a business advisor since then and we've had our ups and downs and we've had recessions before. Recessions can be good things for business, they can hurt a lot of people though. Welcome to the RSM talkBIG podcast. My name's Andrew Sykes and I'm a partner in the Business Advisory Division of RSM. I'm joined today by Jonathan Colbran, he's a partner in the Restructuring and Recovery Division. G'day John. G'day Andrew, how are you? Good mate, good. And Gavin Stacey, who's in our Business Advisory Division as well. How are you Gavin? Yeah, good thanks Andrew. Good mate, good. So we're going to have a bit of a chat today about what recessions look like, what they mean for business and how we can come up with some strategies to help you cope. As I said before, for many business owners, I think it does feel like a recession. Back in May, RSM undertook a survey of business owners and business owners said ahead of the federal budget that 82% of them were struggling to pay their costs. I see today we've had some figures out from finder.com saying that almost 50% % of Australians are struggling to meet their mortgage payments. Certainly feels like a recession and What a cost there is to the federal government or the Reserve Bank meeting the 2 to 3 % inflation ban. So a six consecutive quarter fall in per capita GDP. John, how do you think that's impacting on businesses that you deal with? I think there's certainly been an increase in distress, whether it's interest rates, whether it's external pressures, whether it's just a reset post-COVID. What we've certainly seen is not a tsunami, but a trending increase in personal insolvency and business distress. I think it will continue for the foreseeable future. So this is really being driven by, do you see more impact of interest rates or cost of production, just general cost? So I'm seeing a few different levers and a few different pressures. And I think there's not necessarily any one driver, but what I'm certainly seeing is cost of production is high. Wages are high. Productivity is a challenge. So typically I'm seeing businesses needing to recruit less experienced staff that just can't produce the same outputs that staff in the past may have been able to produce. I'm seeing interest rate pressures, particularly on finance goods, so equipment. And now I've also seen the Australian Taxation Office wanting its money back. And that's probably the big one. So they're pushing a hell of a lot harder. They are so certainly during COVID, if we go back to 2019, 2020, the ATO clearly had a policy mandate to support every small business. They simply didn't collect debt. And whilst I certainly respect the narrative, what they've done is they also prolonged the life of businesses that just weren't able and fundamentally had issues back in 2020. And we refer to them as zombie companies or zombie businesses. And one of the challenges the economy has now is it has these zombies taking taking inputs, so taking labour and taking resources out of the economy and they're using them inefficiently and incurring losses. So the ATO is driving a bit of a catch-up going and starting to collect debt and that's causing or driving a lot of the increasing insolvencies. Yeah, that's one of those really interesting problems, isn't it? Where we had public policy which supported businesses and then overnight their public policy changes. Gav, are you seeing a lot of that come through in your client base? Absolutely. I think, yeah, the public versus private policy is an interesting point, Andrew, because it seemed to flip pretty quickly. I think historically clients had always used the ATO, rightly or wrongly, as a source of funding, which has always been an indication of kind of financial distress. But I guess the implications of it have never been so high. The negative implications, sorry. So gone are the days where you could get interest free loans and tap on the ATO and get all your interests remitted and get very lenient payment terms. That's become a real, real struggle across the board. And we've had to train clients accordingly because they, especially mature businesses that might've gone in and out of going through some cycles, gone in and out of cashflow problems now don't have that release valve that they've had. Yeah, and that poses another interesting question. I'd be interested in getting both your thoughts on this. Historically, if we went back sort of 20 years ago, the ATO was a priority creditor in an insolvency matter. Now they have the same ranking as any other unsecured creditor, but they don't act like it, do they? They can certainly put a lot more pressure on a business than any other creditor can. They're certainly typically a major creditor. And if I look at, say for example, the spike in what we're seeing at the moment, which is small business restructures, the vast majority of the small business restructuring appointments that I'm seeing, the ATO is by far and away the major creditor in almost every instance, if not the only major outstanding creditor. And the way the voting works is the proposal is accepted to compromise the debts, whatever the proposal may be, based on the value of the debts in favour. So you could have 30 creditors in the room voting, for example, if those 29 of those creditors vote against, but they add up to say, for example, $300,000 and then one creditor is the ATO and they add up to let's call it $500,000, then the one ATO vote captures everybody. So in that context, they are a very, very major player in the market. So that really puts them in control of a lot of restructuring situations as the largest creditor. A lot of them, yes. And the only reason they'd be they've become popular practically in the last 10 to 12 months has really been the policy shift where now I'm receiving advice from accountants and from taxpayers who are rearing the ATO to seek to negotiate their tax debt. The ATO are actually suggesting that they explore a small business restructure and there's clearly a policy shift to support that type of an arrangement to compromise tax debts. so you're suggesting the ATO and no longer does, they won't compromise unless it's a formal appointment. That's what I'm saying. I'm certainly seeing repayment arrangements being put in place, but they're far more challenging, particularly if there's historical compliance challenges. I have in the past, about 10 years ago, actually successfully entered into an informal compromise. They have a process. It's available on their website to compromise the tax debt. But I'm really clear that that's not a common process and that they don't typically compromise on its repayment arrangements and or their affordable process like a small business restructure that allows you to access better terms or a compromise or payments over time. Gavin, when you approach the tax office to get a payment arrangement, what kind of response do you get generally? Well, they are a little... a lot more thorough in the last 12 to 18 months. Payment arrangements used to be quite a flippant process on their end, I would suggest, as long as we we're within 12 or 24 months. They weren't really too fussed on the amount of upfront payments and the financial information provided. Now, pretty much across the board, they want to see financial viability. They're asking for, they're really... almost stress testing their ability for taxpayers to meet these payment arrangements and just not accepting of arrangements that aren't going to pay this debt down in a reasonable time. Combine that with the fact that their interest rates are increasing, they're credit card interest rates essentially, and their policy shifts to only remitting interest as an exception. Whereas historically we would have interest remissions across the board once we get compliance measures up to date. So those combining factors means these debts are growing and unless they can get under control in a reasonable basis, the ATO will act accordingly. Yeah, and look, I don't think we would suggest for a minute that it's not the best thing to do to pay your tax debts as and when they fall true. I mean, common sense says that that as a small business person. When you make a sale, you should set aside your GST. You should pay your pay as you go regularly and of course meet your super requirements, which... Which according to the tax office, over 90 % of, I think it's 94 % of Australian businesses are able to do that. So only talking a small group that can't, but I think that group may be getting larger. Gavin, someone comes into your office and presents and says, hey, I can't pay my tax. How can you help me? What kind of conversation are you having with them? And not just tax, let's talk. in terms of all other creditors. So I've turned up, I'm struggling, I can't pay all my debts. As a business accountant, what's your advice to me? Well, essentially, acting early is key. What we would find is often behavioral issues with people maybe putting their head in the sand and not lodging activity statements to not crystallize debts and these kind of things and just continuing to use other creditors' pushing out creditor days and really making a problem infinitely worse by continuing to trade. And I'm sure Jonathan can talk about that. The issues that trading while insolvent can put out there. But essentially the key is to act early. Options just continue to fall off the table as the longer this drags out. Act early. We can, Jonathan mentioned the restructures that we can look at. I've got a number of clients where We're not necessarily insolvent per se, but there's definitely immediate cash flow issues. So then we can look at a formal appointment, whether it be a member's voluntary liquidation or something like this, where we can actually work with insolvency specialists and the like to limit personal exposure. We set up companies to, as it's a separate legal entity, we really don't want to let that personal exposure leak out just by behavioural issues and whatnot. Yeah, and that's a really good point. We'll dig through a little bit of that more technical insolvency a bit later on. But from what I'm hearing from you, Gavin, it really aligns with what I think. When business gets tough, start working on your business a bit more. Get your accounts up to date. You can get an MYOB, which is what I use for my business subscription for about $30 a month, or you can get a zero subscription. Not really many excuses these days for not having your accounts up to date, is there? Do you see that a lot? That the better businesses keep their business, their accounts up to date? 100%. And they don't just use it for a record keeping tool. I think businesses that find themselves in trouble look at their management accounts, their accounting data file as an obligation. I've got to do that to get my tax return sorted. I think once you start shifting your mindset and looking at it as an option. to look at your business, look at real time data. I think real time data is fundamental to business success at the moment. If you're still looking at tax returns or financial statements from 11 months ago as your reference point, a lot can change in 11 months. So really using your financial data to your advantage to find out, well, hey, if you do have critical issues in your business, you can find them. straight away you can stop, can act and you can restructure or can limit the bleeding a little bit. Yeah, I agree with that because modern business is often about managing things quickly and getting into some of the details. Really easy to blow $30 a day in business and $30 a day is $10,000 a year. Yeah, you blow $100 a day and And yeah, there's $40,000 out the door, which could be critical to your business survival. You mentioned companies and I think that's one of my talking points generally is that we seem to have forgotten that companies were designed to fail. So why did we, why were companies established? It was to allow a group of people to get together and pull some capital and undertake a risky endeavor. And then if the company failed, they didn't lose everything. John, how does that philosophy stand the test of time? There seems to be increasing moves to push personal liability. Yeah, very much so. But it's funny when I start a conversation with someone, arguably I tell them that they're encountered almost foresaw this potential day and because I set them up in the structure they're in, whether it's a company or a corporate trust or a trust, typically for two main reasons. One is tax minimization, obviously completely legally. The other one is the separate legal entity principle. In the first instance, company directors and shareholders are personally liable for business debts if the business is conducted through a company with the exception of a few exclusions. And that's what you're touching on there with them. And to an extent now the Commonwealth government have recognized that there is a barrier. So the market has responded with some steps to make directors personally liable. Yeah, and that's a, I certainly know when I talk to my clients and I've had experiences as well when I've had companies that owe me money go broke. I don't think if a company goes, if you're dealing company to company, you're in business yourself and you're dealing with another company and that company becomes insolvent, you shouldn't be surprised when you don't get paid. So if I'm sitting there, I've got my well-run company, my accounts are up to date and I need to do business with another company. John, how would you recommend I protect myself as the good business? think what you first and foremost consider doing is explore your letter of engagement or your terms and conditions and adopt the market standard, which is a personal guarantee. So if you provide, even as chartered accountants, I have this conversation with other accountants pretty regularly, I road fees by clients that fail. The first thing I say is do you have a personal guarantee? for the work that you've done for the company in your engagement letter. Then the second thing I say, which is also not uncommon, is do you have a charging clause? Because it's very common for businesses and professional advisors now to actually insert not just a personal guarantee, but a charging clause that gives them then a charge against a real property interest held by the individual that might be the director of business. Yeah. So get some security that's outside of the operating environment, even if it's a personal guarantee. Yep. 100%. Okay. So just say that things are getting a little bit tough. So I've been to see Gavin and Gavin's told me things are a bit tough. And I will say Gavin, one thing that you said that resonated with me is sometimes you should just stand back and say, well, I should either sell or close this business down if it's no longer profitable. John, what are my options if I've reached that point? It's a really really good question and we actually use the terminology options, but I think Gavin made two really good points. The first thing is act early. I would agree with that 100%. Act as early as possible because this conversation when Gavin invariably or someone like Gavin as a trusted advisor introduces us to their client is completely confidential. The world doesn't know that we're there. The world has no idea that we're exploring the current position. And for us, it's all about, what are your plan B options? So we talk about Plan A, Andrew and Gavin, we talk about Plan B. And invariably when somebody's going through a challenging period as a business owner, they have a Plan A. Plan A can be refined and it can be improved. Plan A is what they're currently doing to try and improve their business circumstances and turnaround. And Gavin also made the point, as you did as well, Andrew, the starting point is often, let's get the books and records up to date. Let's make sure that we're making informed decisions. mean, Andrew, there's a client that you and I are consulting too. They operate childcare centers in New South Wales and they've burned through cash reserve. And the primary reason why they've burned through the cash reserve is the forecasting and the numbers weren't accurate enough. And what they've done is increased wages and not increased fees. So as a consequence, their cost base increased and those had the numbers and the forecasting and the budgeting tools being more accurate. I don't think they'd be talking. to us, but coming back to it for us, it's all about what are your Plan B options? And Plan B starts with, okay, the best case scenario of saving the business, navigating through this, perhaps it looks like informal arrangements with your creditors, all the way through to the last option, which we never start with, which is perhaps selling the business or it. Yeah. Because we have seen and John, you and I have worked on a number of engagements and unfortunately we have had a tough time in the construction sector over the last couple of years and there's been some really good family businesses that have had exposure to larger construction companies and through no fault of their own, they wind up in a pressure situation. So that may be a bill that goes, it becomes insolvent and then all of a sudden this business is not being paid. I would say that that business puts themselves in a better plan A position to be able to go and talk to their bank and their creditors if their books and records are up to date and they've got all of their bazzes lodged and all of their supers paid and it does give them options. If that's happened to my business, what's my next step? All of a sudden, yeah, I'm a small business, a builder's gone broke and I've lost say half a million dollars, I don't have the cash. How are the two of you dealing with that situation? Well, first off, I would bring them in. Obviously it's a We're not just dealing with business, we're dealing with people. It's often a pretty emotional time if something catastrophic like that happens to the business, but really bring them in. And I think being a full service firm at RSM, I've got the benefit of walking down the corridor and talking to Jonathan's colleagues in restructuring recovery and bringing them in on a confidential basis. As Jonathan said, trying to pull that stigma down of talking to an insolvency practitioner, essentially. And talk about options. So we can have, I've had a few instances this year where we just, get in early, we talk about our options. right. You've maybe, you've not only worn your own financial risk in this environment, but someone else, another business has fallen over. Well, do we have any recourse there? Do we have an ability to recover on that side? But you also need to work on the basis that if you don't, We can't make this worse. You can't continue to incur debts if it is clear at a point in time that you can't pay your debts as and when they fall due. Anything beyond that, you're creating further personal exposure for yourself. So it's really about doing an immediate assessment at the time. Well, are you insolvent by definition and leaning on Jonathan and his team to help with that and then going, well, what's up? What do we do from there? So that's a couple of really good points there, Gavin. So John, we've gone through and Gavin's done his assessment. He's had a look and say, okay, well, let's go and have a talk to John and his team. You know, as a business person, I turn up and say, well, can you go and talk to my bank? What happens when you open that conversation with the bank and what does the bank ask? If I'm going to ask for support from them, how does that work? All right. Invariably, they need the numbers. So the numbers need to be up to date. And it's funny how important the numbers already always are. So I think if God gave me a call or you gave me a buzz, the first thing I'm trying to do is understand the current position. And I invariably, we work as a team. Sometimes we also look into solicitor if there are legal issues. But if an RSM client was subject to a major insolvency event, the first thing I would do would be get as much information as possible around the insolvency event. So that I understand what's happening on that side of the fence. I know what to look for it. I know where to find it. and to try and get a sense of, there any money coming back? Then I'd be working with the client to see how we best protect ourselves and lodge our claims. Often RSM clients and business advisory clients have debtor insurance. So I'd see if there was a prospect for us to go to the insolvency practitioner, get an immediate adjudication on the proof of debt to get the insurance policy or the insurance claim pushed through. And then I'd help the RSM client launch the formal proof of debt. So at least they've done the things they need to do in the first instance. If we were providing services and depending on the client, we might also have other legal rights. We might hold retentions that we could perhaps claim against. We might hold bank guarantees as security for our incomplete works. So what I do is try and understand contractually all the different levers the RSM client could call to try and best protect themselves and get some money back. And then I'll be very focused on the future. Okay, this is going to create hole in your cash flow forecasts and your current operating position, you may get some money back, invariably you won't get all your money back. So what does that look like and how does that impact both your cash flows and your P &L and then start mapping out options so they can navigate through things. And we always start with the informal side. You need to build upon a goal and get some working capital in the door. So to be talking about going to the bank, that's one conversation, but they're going to want those forecasts and the numbers. So that is one option. The bank of mom and dad and all the directors bank is often a very popular one. You might have drawdowns, but if an RSM client is going to put money in and there's not already a bank there, we talk to the RSM client about taking security, preparing loan documents and actually lending the money in the best possible way to protect the RSM client. And then we look at how do we deploy the capital? Do we enter into repayment arrangements with creditors? We try and assist to negotiate deferral of payments, abatements. Get on the phone with the bank and see if existing loans can go interest only for a period of time if they're currently P &I. Get on the phone with the OTO, try and negotiate a repayment arrangement. They're just some of the things that we would do as a team with your team or with Gav's team or maybe with a lawyer for any RSM client that went through that type of a system. Yeah, because if we went back, say 20 years ago or even a decade ago, John, the banks were a little more aggressive in this area, weren't they? They were more happy to appoint an insolvency practitioner. Now, my understanding of what I see across businesses, banks are actually really reluctant to call in loans. They'd rather work with the business, is that right? They are. So the phrase a banker will use is lead solution. So the preference for any major lender in Australia, and even really the big six, is they would all prefer a client lead solution. So first and foremost, it's about clear communication. So we open the line of communication with the bank, we explain the current position, and then it's about where to from here. So we map out a strategy to either make sure we can continue to comply with the loans or, worst case, exit the I've worked with RSM clients where the exit typically looks like a sale. to exit the bank and pay them out in full and or refinance. And certainly since probably the GFC, there's been a proliferation of new banks. And if we look at the position of say the big six or the big seven, if you include maybe Judo Bank in that as well now, the last three weren't as prolific as they are now with Macquarie, Bennegan Adelaide Bank and Judo Bank. And they have different risk profiles, all the banks. So outside of the non-bank lenders, Obviously there's a proliferation of those now as well, the bullers, the prospers, the biz caps, which can be solutions in different scenarios. Yeah, and if you understand what your business looks like and what your cash flow is like, paying a slightly higher interest rate to a second or third tier bank isn't going to kill you, but yeah, not acting and not understanding potentially well. So interesting you mentioned forecast because I don't think enough businesses keep accurate and up-to-date forecasts. And once again, with modern accounting software, really easy, really cheap to do that kind of thing. I will say one thing that seems to be a really big issue in any sort of insolvency or debt situation is superannuation. Gavin, do you see many of your clients, like sometimes they won't pay the tax or they won't pay certain creditors, do you see them not paying superannuation as well? Essentially new clients that come on board. Hopefully a lot of my mature clients know better. We talk about that the limited liability environment of a company, superannuation is just one thing that breaks that down. So if a company doesn't pay its super on time, the directors can be personally liable. And it's really important. The ATO looks after the little man. They look after the employee. So super is right at the top of their list. And then you've got other PAYG withholding. requirements and these kind of things. Often it can fall away when times are tough, but that's the worst possible time. You really just need to stay on top of those as a priority because there's also additional factors. The ATO is recognizing this in legislation as well by denying tax deductions for super that's paid late. And horrendous penalties. The penalties are tough, aren't they? Well, yeah. So if we pay late, technically we need to look at superannuation guaranteed charge statements. which essentially you can have someone paying superannuation two days late, five years ago, be subject to an ATO audit and calculating interest up to this point in time. And then 200 % penalties if we don't engage with the ATO on a voluntary basis. So we've got a global employment services team that I'm working with a lot of recent times and they specialize in engaging with employers around their wage compliance and dealing with the ATO if we do find any compliance issues and putting our hand up and saying, yeah, we've found this issue historically. We want to make it right because really we want to be out. Yeah, we want to limit the directors exposure there. Yeah. And I will say that when I work with businesses that are experiencing cashflow shortfalls, say to them, just make sure you pay your super because it's the worst thing you can do is not pay your super. It's a strict liability with large penalties. If you pay it a day late, you've got that liability and there's no way that the Commissioner, legislatively, the Commissioner can't actually remit those penalties. you're on the hooks. But I think even worse so is that nobody will touch you if you haven't paid your Is that a fair statement, Like the difficulty in refinancing if you have unpaid super increases exponentially. Yeah, generally taxed it. I followed, particularly for the majors. probably the big six at least, they'll expect when you provide them with your financial accounts, they'll ask for all the relevant documentation and confirm that you can. So there's no denying the fact that unpaid superannuation raises your risk profile. And so I know the ATO's view of superannuation, although it's obviously if it's outstanding, it converts to superannuation guarantee charge and is collected by the ATO. They take the view it's not their money. And it's not their money. In reality, it's employees' money. and they 100 % prioritize the collection of superannuation. So in terms of risk profiling as a client, we find that if you have a tax debt over$100,000, if you have outstanding superannuation guarantee charge and you don't have an active repayment arrangement, you are absolutely in the high risk category and more than likely you will receive legal notices that will continue to escalate. So you'll receive direct dispelling notices, you will receive garching notices, and eventually you'll receive a winding up at the cash. Yeah. And Gavin did touch on the point that it doesn't matter if you paid your superannuation late five years ago or 10 years ago, that liability never goes away. It also doesn't matter if you make it through. The other point is it doesn't matter if it's your super. So we find that pretty commonly. The directors invariably challenge businesses will pay themselves lunch. They also don't pay their super. The problem is, that again, and the ATO sees it as SGC debt and it raises your profile. for risk, even though you're trying to help. just to clarify there, John, so if I'm running my own business, my own company, just myself and a family member of the only employees, we don't pay our super, we're going to end up with penalties. Yes, yeah, that's a common one that we see, John. Common misconception is it's my money. I'll do the right thing. I'll fall on my sword by not paying my super. But again, they're making the problem come infinitely worse. So John, go back to you on some of these insolvency appointments. We've been to see Gavin once again and we recognise that we need to do something formal. What are my listeners say? We've tried doing something informal. We need to seek a formal appointment. What does that actually mean and what's involved? What is a formal insolvency? It's a really good question. So in Australia, we use language which is not consistent with the language you probably hear in America. because their legislation is slightly different. For example. language. That's the only word that everybody associates, I guess, insolvency with, I think, is bankruptcy. When I hear the word bankruptcy, I know that that's strictly in Australia dealing with personal insolvency. whilst it can be a sole trader, it's not dealing with anything to do with a company insolvency. So if you're the owner of a company and we want to try and save the business, then our two major options are a voluntary administration. or a small business restructure. And that's always our immediate focus. Okay, let's see if we can save the business. It needs to be viable. We need to be able to obviously improve cash flows and improve profitability. But if we can turn the business around, for argument's sake, there could have been a catastrophic event, could have been COVID, could have been the death of a patriarch or a matriarch that then triggered challenges in the business. Those sorts of things do happen regularly. Directors disputes in fundamentally great businesses happen very often. but then triggers in silency when the directors freeze bank accounts. There are ways to navigate through it. And the two primary levers, like I said, are the SBR, that's the acronym or VA. And the SBR is the preferred approach in the first instance, but there are criteria. The VA is then the more expensive, more robust process that allows somebody independent to come in in the event that the SBR criteria can't be met. So we've come to see you. and we're saying that we want to do something informal, or sorry, something formal because we've had one of these catastrophic events. So if we go back to the example, your business had one of my builders, for example, has gone broken and now I don't have enough cash, but I have a fundamentally good business. What's the criteria for a small business reconstruction? It's a really good question. So the first thing is that the company has debts of less than a million dollars. Its lodgements are up to date, so tax lodgements. You don't have to have paid all your tax debt, but your tax lodgements need to be up to date and your employment entitlements need to also be up to date. So it's funny, critically, to enter into this process, again, the starting point is it's all about the balance. So it's very common that when an RSM client comes to us or a client referred by another business advisor, that all those boxes aren't ticked. But fundamentally the key one, and we can work on the numbers and we can work on the entitlements being to date and current before we commence, is that the debts need to be less than a million dollars. So what we would do is if the debts were less than a million and the accounts were outstanding and the entitlements just needed to be paid up, we'd work with the director on a solution to make sure those criteria could be met. Typically we'd work with say, Gavin and his team. They bring the accounts up to date, make sure that they're all up to date and the lodgements are done. And if they're outstanding entitlements, we need a solution to pay those to meet the criteria. And there are two common solutions, there's three. One is the business can pay the entitlements and these are not entitlements that are accrued. These are entitlements that are accrued and due. So for example, outstanding wages that are unpaid or outstanding super that is unpaid. You don't have to pay, for example, annual leave or long service leave if it's not currently due, it's just accrued. So the first option. to tick the box is pay the debt through the company. The second option is a third party pays it, so the directors pilot it. The third option is, and I haven't utilized this service, but I'm aware of it, is there are lenders. There are lenders that will lend the money to the business and or to a director, and then the director can on-lend the money to the company to ensure the company meets the criteria. going back to that conversation we had around super, that once again, if you haven't paid your superannuation, that cuts on option. off for you and then you're going to be out there struggling with higher risk finance. So say I owe my creditors, I'm an RSM client and I've been dealing with Gavin for years. So of course all my bazzes are lodged and my books are up to date. Thanks for your help Gavin, you kept me on track. No worries. But all of a sudden I find I have 00,000, I owe some creditors 100,000 and I owe the tax office 200,000 for GST and PAYG. What does that look like for me? So I'm coming to some sitting in front of you, John, and what are you going to tell me? How much is it going to cost me? And what are you going to tell me I need to do? Yep. So I'm going to tell you that the small business restructure based on those numbers and based on GAB's excellent work and business improvement work with the business advisory team is the best option because what we need to do is deburden or upburden the company from the problems of the past and essentially clean up the balance sheet. So what I would recommend is that we put forward a proposal that would be ideally a lump sum compromise from a third party. So a director, for example, or a relative or a lender lend the money as a lump sum and offer a compromise to your creditors, ideally within three months. Alternatively, I'd recommend that we offer either a hybrid with a lump sum contribution or surplus from profits over time. or just contributions over time to the creditors. Typically, the cents on the dollar that we're seeing accepted fairly regularly is in the 25 cent to 40 cent of the dollar. After costs, certainly the higher the offer, the higher the propensity it will be accepted and the quicker the creditors receive their return, the higher the propensity it will be accepted. But if the offer is within those parameters and although you can offer a proposal over three years, we're seeing proposals of to 12 months be accepted, we're not saying proposals longer than 12 months be accepted, then I would recommend we put that proposal to the creditors, they would vote on it, and the cost to you of putting that proposal would be about $15,000 plus interest. Okay, so I'd need to make costs of about $15,000 and I'd have to come up with probably somewhere between $100,000 to $150,000 to contribute into the company. And then that would be dispersed to the creditors and they would write their debt down and I would continue on with my business. That seems like a reasonably fair outcome. know everyone loses, but everyone gets something back. It seems reasonably fair, particularly when it's no fault of the business. It's a compromise. And whenever there's a compromise, mediation or otherwise, no one should win. Everyone should give a little and take a little. So it is very much the definition of a compromise. The only challenge with it, which is why fundamentally we always talk about three phases with any of our assignments. The first is planning. The second is implementation. And the third is post implementation, is you always have additional things pop out because we come all the way back to the conversation we were having in the beginning about personal liability and the separate legal entity principle. If there are personal guarantees or if there are direct dispelling notices in the third phase, needs to be a strategy for how you will deal with those as well. And we talked to you about. Okay. So it reminds me that old maximum about a successful mediation or compromise is success is everybody feels like they've won or everybody feels like they've lost. So. is a compromise. Now, if I'm a slightly bigger business, I'm one of I'm Gavin, the number one client. I've got a hundred employees and I might have say five million dollars in debts that I can't meet. Once again, successful business. I've got my projections. I think I'm looking good for the long term. What are my options then? Yeah, look the best option then and really the only practical option outside of the Plan A, which is always informal resolution, is the Voluntary Administration. The key distinctions with the Voluntary Administration as opposed to a small business restructure is that the small business restructure is kind of the DIY insolvency restructure. You have an insolvency practitioner who is a registered liquidator that is in the background, but it's a debtor in possession model. And what that means is the director remains in control of the business while they undertake the small business restructure. And the creditors don't get the benefit of either one, an independent party taking control, like an administrator in an administration. That comes with personal liability and guarantees from the administrator that they'll get paid. It also doesn't come with the detailed meetings of creditors or reports. So you don't get a detailed investigation. The Violentry Administration gives you all those things. And for something that is more complex and bigger, where for example you might be ordering hundreds of thousands of dollars of goods or you might have two or three hundred staff as you mentioned, in my experience everybody wants guarantee they're going to get paid and they get that guarantee from the RSF balance sheet as an example. So the voluntary administration is still a highly effective tool. It's just bigger and typically for more complex situations. Probably one of the best voluntary administrations, which is on public record that our team successfully implemented was the voluntary administration of Star Aviation. So Star Aviation continues to operate today. It's a market leader. providing above wing and below wing services to major domestic and international airlines in Australia or ports all across the country. It's grown exponentially since its voluntary administration and was a classic quintessential example of a great business that had been started up that just was carrying some problems of the past. It had some investors, it had an excellent management team, good key stakeholders, new accounting firm providing advice. They just needed to restructure their debt and restructure their business. We were able to come to the table work as part of a team to affect that. And that was about six years ago now. And they're still trying to successfully go. So that's those good people that clean the planes when they land. Yeah, do baggage handling to that. So the above wing is the cabin cleaning and the below wing is the baggage handling bits and pieces. That's the lingo. I will say and gave you'd have to agree, mate, isn't it? You learn so much when you're an accountant, don't you? About different businesses. I've never heard those terms before. Absolutely, I'm learning so much from this call, Good to know the lingo going forward. But yeah, you learn as much as you get involved with businesses. At the end of the day, the greater understanding you have of their business, the greater understanding you have of the challenges and whatnot, provides you positions you to advise bespokely to them. and Gavin, like myself, you probably don't. Yeah, it's not the best thing having to deal with businesses in distress. What are the kind of signs you look for to advise a client to say, hey, you should seek help or we can work through this? What are the key financial indicators you're looking at there? Well, often I suppose we can look at the financial data. You can look at growing predator days if we're taking longer to pay our creditors. Obviously, ATO debt is massive. It's just a really big beacon that there's some issues there. But also the behavioural stuff and it's a common thing people don't often don't want to face up to the problems. So and I call it the old putting their head in the sand, not lodging, just continuing to work in the business and the old Aussie attitude, she'll be right. And mentality which doesn't allow us to actually stop and track our accredited days and work out. Hang on, there's something not right here. We're not collecting. We're not paying as quickly as we should or we're not collecting. And we're not only wearing our financial risk, we're wearing the financial risk of our customers as well. So really that I would say it's more so the more extreme examples are where people just aren't responsive to, to, tax lodgements and they keep pushing those to the side because you can't actually answer the question whether will everything be all right? Well, we can't tell you. We can't get in and have look at the numbers. No, and despite what people think, yeah, a lot of accountants say, I don't think it's exciting doing a business activity statement and doing taxes. Some of the outcomes are interesting and the actual grind of doing it every month can be just that. So I would say to a lot of businesses out there, if you don't like doing it, go and get a bookkeeper to do it for you. It costs you every month, but it can be cheap in the end. Absolutely. it's investing in that finance function so the business owners can utilize their skill set. Yeah and quite often as you said business owners you know 20 % of what they do is going to make them 80 % of their profits so if you don't want to spend your Sunday mornings doing bookkeeping get someone to do it but the thing you can do is ignore it. Absolutely. And to a certain extent I also think Yeah, if we paraphrase that great Australian movie, The Castle, yeah, it's the vibe of the thing. If you're sitting there and talking, so we're talking to this business operator and they just, this might have been their second time that they've started and I've got a matter I'm dealing with at the moment where it's the second time this person has started a business. The first one went insolvent through non-lodgement and accumulation of tax debt. In the same position again, So you're just thinking, well, maybe you're not suited to run the business. So then I send this person over to you, John, and we're really not looking good for the future. What does that now look like? So this is our third case scenario where this business is not good and needs to be wound up. Well, there will be a conversation. Whenever somebody comes to see me, always first and foremost, try to understand the current state. And then I'll always say to the business owner, what would you like to achieve? And usually in that moment, the business owner will give me what they're really after. And more often than not, it's just a way out or to better understand their options to navigate through things. But typically the business owner, if they're talking to me, probably deep down knows if their business is viable before I even talk. And it's really, really common to that point around them winding down a business that if I ask a business owner off the back of that question if they're paying themselves, They'll invariably say no, although invariably say not much. And I'll say, how much are you paying yourself? And typically they'll tell me maybe 500 to a thousand dollars a week. And I'll say, you're working about 80 to a hundred hours a week in the business. And they'll say, and then I'll say, why are you still doing this? And they'll say, cause I just don't know what my other options are. If you weren't doing this, what would you do? And then invariably they've actually already thought through that. And they'd say, you know what, I could. get away from the business, I would go and do this, make me happier, focus on my health and or go and earn an income and earn $150,000 a year. At which point we say, well, you've got two options. One is you could personally contribute funds and pay out all the debts if you don't have a personal guarantee or coming all the way back to the structure that your account put you in because they were prudent, you can step back from the business, invoke the separate legal entity principle. You're not personally liable for the company's debts and the law says you should be proactive and appointed. Now, unfortunately in Australia, there's not a government solution to that. There's no free service. So really, unfortunately you'd need to fund that, but we'd be looking for a contribution from the director if there are insufficient assets to then wind up the company. Now, in that case, the director can only be liable in one of three ways. One is, or personally liable, one is if they've signed a personal guarantee. but invariably they won't have signed personal guarantees with every creditor. Two is if they've received a direct dis-penalty notice, that is always a risk, but the best possible way to minimize that risk is to be proactive. And the third way is if they've done the wrong thing. So for argument's sake, I'll just use the Louis Vuitton handbag example. If you've used the company's bank account to go and purchase Louis Vuitton handbags, that's a really good example of deliberately doing the wrong thing. But if you've tried and failed and tried to do the best you can, maybe you've made some mistakes on the way, you've still got directors duties, but all you can do now is try and be proactive, take control of situation and continue to minimise that risk to you by pointing a liquidator. And in that scenario, typically a liquidator would be appointed. Yeah, generally I think a more modern example of that, one we see a lot of is all of a sudden, you know, A young trades person decides to go into business and within six months is the big flash American Ute that you suspect may have been paid for out of the GST account, often a warning sign. Can I give you an example of somebody that I've spoken to in exactly this situation? So somebody that I've worked with professionally had been funding the business with personal assets for about two or three years. unfortunately they ran out of money. They couldn't continue to sell personal assets to put into a business that wasn't making any money. And this person professionally knew what I did. So they knew that I was an insolvency practitioner and they had seen some of our marketing collateral and they were aware of our options campaign. But still this person didn't reach out to me and their strategy, their plan A was to go and borrow further money from family and friends, about $150,000 and personally pay the company's debts. And this person rang me. I was in the back of a car. on my way to the Melbourne office rang me to tell me they were closing down the business and they were going to pay out all the debts. And I said, hang on, you have to explore all your options. And in that moment, they said, no, I was scared. And I said, really? This is what we do. You know, this is what we do. And it's completely confidential. So I talked to this person for half an hour. And at the end of the conversation, they sent me this text message. I'm so glad I called you. I've asked my accountant to give you access to Xero. She'll do that today. Tomorrow she'll send you a short summary email of where we're up to to give you a head start. Thank you for being their job. Every word of the options campaign that I've seen before is ringing in my ears and I know I need your help. Enjoy your day, I'll be in touch. Now I assisted that director to appoint a liquidator. They invoked the separate legal entity principle and they didn't contribute $150,000 because they didn't have the money. and they didn't have to borrow the $150,000 from family and friends. And if they do borrow money now, it'll go for the benefit of starting afresh. Yeah, and you raise a really good point there because not only if you don't act in a timely manner, it can lead to personal insolvency. And you are, I mean, it's a tough conversation telling mum and dad that you can't pay them back that $150,000 because you're personally insolvent. Have you seen that kind of scenario where that's where you try and stop, isn't it? More often than not, what I actually see is they'll go to essentially a payday lender. They can't grip 150 anywhere, but what they can do is there are lenders that are essentially cashflow lenders. can rely on, you don't need to have a viable business or collateral assets. You put some information into an online platform. They'll immediately approve your or approve a loan in a very short turnaround. You can commonly get between a hundred and a hundred and fifty thousand dollars. The issue is the interest and the charges and the penalties more often than not in that type of a scenario where this person was going to be unemployed. That's when you lose the family home and that's when you worst case go bankrupt. Yeah, which is a very tough scenario to go through. You talk about that and a lot of businesses on a very practical. So the business is not sustainable. I will say and you know, my experience has shown the sooner you act the better. If your business is looking bad, don't spend the two or three years. Try and sell the business. Try and sell it while you still have an asset to sell. Because we have seen that there's this situation John where all the assets of the business are a fit out. What's the difference in value between a solvent and an insolvent basis on the fit out of say our retail store? It's monumental. So invariably, one of the suggestions we always make to somebody wanting to exit Plan A and they can sell their business is that they go and get a valuation from someone like a Pickles Options. The advantage of the valuation is it's itemized, so it gives you something tangible to give to a buyer. It's invariably you'll say, I think my fit out's worth X dollars, and invariably the response will be, well, I want prices. So you get the itemized valuation. I'll give you a valuation in two scenarios if you want to start. One is liquidation and one is market value. The market value assumes that the fit out is a going concern. In other words, someone wants to use that fit out to continue to operate the same business or a similar business. Liquidation is what can you take out and sell away from the premises? And invariably, it's five to 10 cents of the dollar in liquidation. as compared to the market valuation, because you simply can't sell all the assets. So classic example, you can't take the light fittings out, no, buy them. You're really only looking to take out assets that are movable. So tables and chairs, which aren't worth very much, perhaps some equipment, it be a cool room. There's very little to sell typically. So if I've spent half a million dollars on my fit out or a million, you know, half a million dollars spent on my fit out, I then become insolvent. It's worth 20 for 50, if I'm lucky. So that goes, yeah. I think we're coming up with a bit of a golden rule there, which is, which is act early, sell while there's still some value. Gavin, have you taken many businesses to market in that situation or do you have many of those discussions with clients? Sometimes we've had the opportunity. Yes. It's, think something resonated from John previously is what are you trying to achieve? Some recent example has been there is a succession plan. strategy that hadn't been documented and executed properly. But we had a client and one of John's colleagues, Jerome, over here in Perth, with meeting with the client and outlining the plan. Really, was some short-term cashflow issues, but his whole plan was to transition the business to his son. And there was this golden succession plan intent that hadn't been mapped out correctly. And really we looked at options through this process to sell that business. to Hisan in a very documented and formal way where we took it out of an environment where there was the cash flow issues. was almost there. It was a plan A restructure, if you like, John, where we could sell that business to a third party at complete market value to achieve the succession plant story along the way. And that was something that it was, it wasn't a formal SBIR approach, but it was that plan A strategy of what was the most important thing they were trying to achieve. Other instances where we've gone to market, think the hospitality food and beverage industry has done a tough in the last kind of few years. That fit out example resonates pretty strongly. with a client around investing a lot of funds to fit out a venue, the precincts didn't quite get off the ground, but we've got enough time, we've got enough, we've got real data to look at this and go, hang on, if we're not hitting these key metrics, we're in trouble in six months time. That six months gives you time to get to market it, to go to market, get a business broker involved and get someone that might have the fresh idea, but can come in on a going concern basis and take that figure out. And yeah, when you spent 250 grand on fitting out a cafe, the five cents on the dollar doesn't really stack up. But this strategy was all about leases, right? Leases have personal guarantees a lot of the time. So our clients were not not trying to generate value and generational wealth from stepping away from this. It was more trying to limit that personal exposure by not being on the hook for another three and a half years of personal liability in line with the lease. So it was a really just win-win benefit where someone came in, paid a reasonable value, but not a lot of goodwill to get an established business, established fit out and be up and running in weeks and our client can step away from that personal liability. Yeah, because you raise a... Sorry Gavin, you raise an excellent point there is that the crystallization of those personal guarantees, particularly most businesses rent their business premises. That's a tough one when you have to meet those personal guarantees, isn't it? Absolutely. And you see it so often. It's a starting... position. Everyone's trying to look after their interests. Landlords are trying to, they want security of tenancy. Personal guarantees are a way to kind of secure that cash flow. Sean, I'm sure you'd suggest limit your personal guarantees at all costs, but sometimes there's a commercial reality there that is somewhat boxed in and you're going into business thinking you're going to succeed, right? No one's going into business thinking that they won't be able to pay rent in 18 months time. But yeah, it's putting little steps in place to try and protect yourself is important. Yeah, terrific. Well, John and Gavin, thank you very much for your time today. I learned a few good things from that. I will say in particular, what really resonated from what you both said was make sure you bring your records up to date, make sure you've got good information and start to act early. Unlike red wine, debts don't get better with age, do they? If we open ourselves up to data driven strategies where we can come up with a good outcome, we can often achieve a better outcome and we can also hopefully help businesses remain successful. I'd like to John Gavin, thank you for your time today. you. Very informative. My name's Andrew Sykes. I've been your host for our talkBIG podcast. encourage you to subscribe wherever you get your podcasts from and we'll talk to you next time on talkBIG. Thank you. RSM talkBIG podcast, helping you invest well, understand money and achieve your best tax outcomes.