In the latest in our series of articles about selling your business, Martin Barrett shares this cautionary tale of a retiring business owner who decided to wind up his company rather than put in place a succession plan.
Many business owners assume that their business is worth the balance sheet value. In other words, when they wind up the business, collect in all the assets and pay off all the liabilities they will walk away with the net asset value. In reality this is rarely true.
This case study shows what happened when a business owner who manufactured home textiles wound up, rather than sold, his business.
It was a typical small, owner-managed business with turnover of around £1m. The owner employed six, mostly part-time, staff who had been with him for years with some also nearing retirement. The owner had enjoyed a good lifestyle from the business, indeed hadn’t drawn all his income in full over recent years (the business owed him £120k in directors’ loans) but the market was getting tough and he was ready to retire,
This was his Balance Sheet before he started to wind it up:
The owner assumed he would be able to sell his equipment and suppliers would largely take back his large stockholding. The trade debtors monies would gradually come in, which would allow him to repay his creditors. Taking everything into account, the business owner hoped to walk away with around £250,000 to add to his pension pot.
In reality, the fixed assets couldn’t be sold and so were scrapped. His suppliers wouldn’t take back the stock and when his customers found out he wasn’t continuing to trade and they needed to find alternative suppliers, they became awkward about paying their debts. Suddenly he received complaints about poor workmanship, bad service/products and other arguments so that they didn’t have to pay their debts in full.
When a business relationship ends (even if due to retirement) customers often see an opportunity to haggle. The only route to resolve this was taking each of the disputes to the Small Claims Court. As this was a hassle and cost the owner didn’t want, he wrote off 25 per cent of his debtors.
Clearly he received the monies in his business bank account in full – but see the additional costs at the bottom of the Balance Sheet below.
The actual situation, after about 6-7 months was as follows:
The owner had to pay all his suppliers and liabilities to HMRC, but as director, he didn’t receive his loan account balance because there wasn’t enough cash left. The additional costs of redundancies and scrap/removals cost £60,000. He was fortunate that he didn’t have any leases or contracts to extricate himself from, so he didn’t incur any legal costs in this instance.
The net effect? Instead of £250,000, the owner walked away with approximately £30,000.
From a business that earned him over £100k per year, that he had built up over 30 years and had provided years of continuous employment to the local area, he personally left with £30,000 – less taxes.
After he had liquidated the company and asked if, given the opportunity again, he would attempt to sell his business as a going concern he absolutely would. The owner described the winding up process as the most depressing part of his business life, and the most costly.
Don’t assume that your business isn’t saleable. With the right planning and approach to the disposal, there are ways to assist making the business attractive to potential purchasers.
ENDS
Williams Denton will be running a series of free seminars across North Wales to help business owners get to grips with succession planning. To register your interest in reserving a spot at a seminar near you, email llandudno@williamsdenton.co.uk or bangor@williamsdenton.co.uk with your contact details.
Alternatively, if you are keen to get personalised advice on succession planning, book an appointment with Williams Denton’s business sales expert, Martin Barrett, by calling Llandudno 01492 877478.
williamsdenton 