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Archive for the ‘Business rescue’ Category

Why size matters (part 1)

Does your business fit into the definition of “Small Business”? Or for that matter, “Medium” or “Large” business? The definition varies from one industry group to another. And even within “Trade” it varies from one sub-group to another.

This table shows business sizes as grouped by StatsSA for South African industry sectors.

“Turnover” is the number at the head of your income statement. It does not include “other income” like grants, interest, rent, VAT and the like.

It is the sales turnover of your principal business, excluding VAT.

Those turnover groups have been varied from one industry to the next. My “hot air industries” notation is my slightly quirky reference to a whole bunch of consulting type activities.

The graph below will give you a more aerial view of the way in which sizes relate to one another and across different industries. There is no maximum for “large business”.

‘The one thing this country has taught me, Vaughn,’ said Griessel, ‘things never get as bad as you think they will. And things are never as good as you want them to be.’

Benny Griesel. The Last Hunt by Deon Meyer

So why are small businesses punching above their weight?

In the early stages of a business, the entrepreneur faces the envy of his friends who just don’t have the courage to chuck in the corporate environment and “go on their own”. Or they have to explain their risky behaviour to family members who feel insecure about the lack of “stable income”. But above all, they face their own fears, challenges, impostor syndromes, and bank managers.

Unless they make it big; and quickly, they are to be pitied. And that is also how they are treated when they ask for funding. But then along with the pity comes the distrust.

So to make my small business owner friends happy, here are a few metrics calculated directly from data supplied by StatsSA for 2018.

Just note that these numbers and conclusions drawn exclude banks, insurers, state owned enterprises, and the like.

Better negotiators

Small businesses managed to close off an average of 44% gross profit. The average GP% across all industries in 2018 was 41.5%. Not too shabby for my mates, eh? Gross profit is at the sharp end of running businesses, where the negotiating happens.

The small guys hold out for higher selling prices and convince their suppliers to give them better deals.

Look down the list: small businesses top most industries’ GP% where they have any chance. (There is not much space for negotiation in energy & water supply, mining & quarrying, and transport & communication.)

But for the other industries they do alright!

More working capital

NWC = current assets – current liabilities.

You will recognise that as the liquid assets available to first run the business, and second to build for the future. This you know because all business owners run that calculation last thing at night, first thing in the morning, and several times during the day. I’ve been told!

NWC is the single most useful day-to-day report metric for on-the-go management. If it is positive – you’re good. Negative, and it gets worse with the price of tranquilisers.

But when it comes to using it to compare with other companies it is fairly meaningless. Unless… A small tweak makes it extremely meaningful.

Net working capital ratio (NWCR) = current assets divided by current liabilities.

If the answer is above 1, then immediate liabilities are exceeded by what is available to pay them, now or reasonably soon. If the ratio is below 1, there is a problem now, or just around the corner.

Expressing net working capital as a ratio, we can compare the NWCR of a small business to a medium or large business. And within homogenous industries, these comparisons are very apt.

Any guesses?

For all industries combined in South Africa in 2018, NWCR = 1.15. It is positive. So there is that. But of course, I wouldn’t be writing this if the smaller businesses weren’t in the best shape of all the sizes. Here is the breakdown:

  • Small 1.47
  • Medium 1.36
  • Large 1.07

None of these are great numbers. Analysts like to see the ratio between 1.5 and 2. We’re all a bit tight here, as you may have heard.

But we do know that 1.47 is a lot better than 1.07. That’s small business for you – cashflush!

How does your business match up in each of these metrics? Remember the numbers quoted here are for 2018.

Step by step

  1. You know in which industry your business operates
  2. Place yourself in the appropriate size
  3. Gross profit ratio = gross profit / turnover
  4. Net working capital ratio = current assets / current liabilities

You can be quite sure that for 2020, those results will be very different. But we can only work with what we have, and I’m writing this with a view to showing up how unfair the system can be, and how the so-called “small business rescue packages” are actual, real, common or garden variety BS. And not the balance sheet type of BS.

To be continued…

Assets and equities

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A long long time ago and in a different galaxy, there was only one way to sell a small business. We called it the “asset deal”.

In essence, the company stayed intact. The assets required to run “the business” moved to a new company, replaced in the old with cash.

Assets to run the business:

  • Machinery

  • Vehicles

  • Debtors, creditors, cash (or not)

  • Stock

  • Recipes, procedures,

  • Customer and supplier lists

  • Employees

  • Brands, domains, communications, etc

  • Basically everything needed to carry on what the business does.

Of course, some of it becomes the subject of negotiation. Things like buying cash, excess stock, the owner’s car, bad debts, and so on.

In return, the company, not the owner of the company, receives the cash. For the owner to get it, the company must first pay capital gains tax and then deduct dividends tax. That all gets very expensive.

But the deal was safe for the seller if he had personal sureties in place. The new company with the business in place would have to open all its own accounts with suppliers and banks. There was no risk of the account holders ever coming for their securities.

And safety was important to the purchaser too. What if the company had provided security for the shareholder’s daughter to buy her car? It happened.

Anyway… So here we sit with a shutdown doing a bit more than just threatening every business in the country. CIPC promises to be lenient on directors of insolvent companies. Big hairy deal! The company will still be insolvent.

And that brings us back to the whole asset deal thing. You see, the business is part of the company. And in the current state of disaster with Covid19 and the lock-down fall-down, things are going to get messy for the companies.

A lot of companies are going to get themselves liquidated. That means the company has no value. It does not mean the business has no value. As any small business owner knows; things get done to survive.

Your business can survive without the company

Your business can resurrect itself before, during, or after Easter. And as times improve (and they will) your business will be ready to rock and roll. Yeah, your registration number will change. And you’ll have to open new accounts (so be careful here).

And you must not prefer any creditors over others, so be careful here too. Except perhaps your staff. Look after those guys. You’re gonna need them on the other side.

But you know what? My readers, clients, and friends have been on this journey for too damned long to have their valuable assets taken away because of a bug in the system.

You guys are resourceful. That’s how you got this far. Make it work. The country relies on you, as ungrateful as it may seem most days. 

Too soon for business rescue

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Business Rescue is not covered in the practice note issued by CIPC. Here some things of which you should be aware.

The Companies Act, Section 129 (7):

If the board of a company has reasonable grounds to believe that the company is Financially Distressed, but the board has not adopted a resolution placing the company in business rescue, the board must deliver a written notice to each Affected Person, setting out the criteria referred to in section 128 (1) (f) that are applicable to the company, and its reason for not adopting a resolution contemplated in this section.

Section 128 (1) (a) “Affected Person” means

  • A shareholder of the company
  • A creditor of the company
  • Any registered trade union representing employees of the company
  • Any employees not represented by a registered trade union.

Section 128 (1) (f) “Financially Distressed” means

(i) it appears to be reasonably unlikely that the company will be able to pay all its debts as they become due and payable within the immediately ensuing six months; or

(ii) it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.

So what now?

We expect banks to behave in a manner inconsistent with the spirit of the State of Disaster. I have already heard stories, first hand.
Banks and other creditors will use all the leverage they have at the end of this period. And yes, you can always resort to “Covid19 being the reason” for non-payments and so forth.
I am not an attorney. You should give your own friendly legal bloke a call to check on where you stand with force majeure. You may want to talk that through for both debtors and creditors.

And then ask your attorney:

  • Would they use every angle at their disposal to win a case for you?
  • Does that include collecting from your debtors?
  • If the insolvent debtors have not complied with the requirements laid out in the first part of this blog… Will they go after the directors, personally?

Of course, the answers are yes, yes, and yes.

So here we are.

Small businesses all over the world are facing cash flow problems and worse. Goodwill amongst their owners is reasonably healthy right now.
But that isn’t going to last. And if your attorney is going to go after your debtors for you, why won’t your creditors do the same to you? Through their attorneys, of course.
Perhaps while you are on that call with the legal bloke, ask him about completing a CoR123.3.

There are two questions to be answered in the form.

  • The first involves a declaration that the company is reasonably likely to be unable to meet its obligations as they fall due in the next 6 months; and
  • The second involves an explanation which can be loosely summarised as: “The reason is that the world as we know it is busy changing, and the ability to make our usual sales is going down the toilet. But we are confident that once sanity returns we will be able to make profits again.” You may want to rephrase that.

I think your lawyers will tell you that this document will mean that the directors will not be sequestrated on the alter of a company liquidation.
Unless of course, those directors have signed sureties for credit lines. That’s another issue.
But at least the directors will not be declared delinquent through the process.
Just make sure you have it delivered to every single Affected Person as described above. Oh, and make sure you have a meeting of directors and that this decision is properly minuted.
There is also some confusion between the CIPC website which says the document must be filed with it, and the Companies Act and the Companies Regulations which do not say so.

Again, if you’re going to protect yourself properly… Your legal guy… but you know that.

State of business disaster

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On 24 March CIPC issued a “practice note“. It deals with the ramifications of the State of Disaster declared the previous week.
The bits that are important are the following:

  1. In light of the COVID-19 pandemic and the declaration of a national state of disaster [CIPC] will not invoke its powers under section 22 of the Companies Act, in the case of a company which is temporarily insolvent and still carrying on business or trading. This is only applicable where the Commission has reason to believe that the insolvency is due to business conditions, which were caused by the COVID-19 pandemic.
  2. This practice note shall lapse within 60 (sixty) days after the declaration of a national disaster has been lifted.

Section 22 of the Companies Act prohibits a company from trading under insolvent circumstances.

The State of Disaster was declared on 15 March 2020. It is valid for 3 months. The minister can extend it by 1 month at a time. She can also end it at any time.

As of today, 8 April, that means that the “practice note” could be in place until 14 August. That is if there are no extensions to or shortening of the initial state of disaster.
So for the next five months. Or maybe 6 months, or 7…
And then, of course, there will be inevitable delays as things catch up.

Reach your own conclusions. But 6 months seems to be important to me.

Post business rescue financing

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Businesses in trouble wait too long before going into business rescue. This creates more problems than it should.

  • The longer a business waits to avoid the “disgrace”, the less likely it is to rescued
  • A director who avoids the business rescue provisions, and then has his business liquidated, can be held personally liable for the claims of creditors.

Of course as they wait and wait and wait…. for that miracle… time based bills fall due and then over due. And then when it is too late, they do the business rescue thing.

Part of the problem is that banks have been spectacularly reluctant to think like they have moved into the 21st century with the rest of us (apart from providing some “mobile app”) and they steadfastly refuse to get involved in post rescue financing. I even had one bank renege on its agreement to keep existing financing in place because it later discovered that the main shareholder had stood surety in the deep dark past, and if the liquidator acted quickly… You can imagine.

Well now there are forward thinking people who are able to help with risk capital, in conjunction with the business rescue practitioner, particularly if a business is able to be rescued, jobs will be saved, and there is equity available for acquisition.

This is not primarily loan capital. It is particularly for the acquisition of part of the equity, plus some specialist knowledge in a variety of disciplines, plus some lending if necessary.

It is also necessary that the business is not only rescue-able, but is also able and willing to grow, so that the white knight gets a good return on his investment. Let me know if this is something you need to talk about. 011 875 2330.

Single member labour contractor tears

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A successful business may be so because it has many customers or in spite of having only one. Of course the business with only one Customer is probably not a business at all. It is more likely to be some sort of self employment scheme which has gotten lucky.

Some years ago I drove into the Johannesburg CBD, down the Rissik Street off ramp where I was greeted by a group of protesters. It’s quite funny to think of it now. They were all white, mostly middle aged and male. They were protesting outside SARS (or whatever it was called in those days), the change to some tax laws. Their placards called on motorists to hoot if they agreed.

The law change was to do with employers no longer being able to contract single workers through the worker’s close corporation. Up until then the company would treat the CC as a supplier, pay the VAT if applicable and then claim the expense as usual. There was no real benefit to the employer, except that he was able to attract and keep some very good talent as a result, and there was less by way of admin involved.

The first time I came across the idea was when I was working in the small remuneration department of a bank in the mid 80’s. It was a revolutionary idea at the time, and we spent much time wrestling with the concept of cost to company, as the bank tried to negotiate with this specialist who eventually headed up a significant division. He always billed the bank as a close corporation.

Ten years later the practice was widespread. For the sole members of these close corporations things were very peachy. With tighter labour legislation the “employer” felt better. For SARS, not so much.

Travel, telephone and even a portion of the upkeep of the family home suddenly became claimable through the CC. SARS was out of pocket. So SARS made it clear that sole membership close corporations would be treated as being in employment relationships with their sole customer. Therein lay the trick: Make sure that you have more than one customer.

A sole customer company is imminently unsellable, even if it has hundreds of employees. Even companies with only a few customers are generally of little value to anybody who is not the technician within the company. The loss of one customer would mean the immediate loss of all the future profits, and probably a whole lot of capital to boot.

With time the dust settled, and single membership CCs quietly went about their businesses. Then in 2010 business rescue and chapter 6 of the Companies Act 71 of 2008 came into being. The very first business rescue that we were exposed to had an interesting twist:

There were lots of employees, and two “independent contractors” who were contracted through their companies. They also did a bit of work for some other customers in the industry, or so was their right.

Part of the rescue plan involved retrenching a significant portion of the workforce. The retrenchment bill was eventually settled with the proceeds of a sale of assets of the company, and all employees were paid out in full. This is where the independent contractors found themselves out in the cold; they were not employees. Employees are preferent creditors in a liquidation or business rescue. Independent contractors are concurrent creditors, and must settle for the dregs alongside the other suppliers.

At some stage in the not too distant future, a similar disaster is going to arise around “employees” being taken out in a major liquidation or business rescue where the troubled company has used labour brokers to run their workforce. The result will be that where they would have been treated in a preferential manner, they will instead be left claiming their usual salary from the labour broker. If the broker is a small outfit with tight margins and small reserves, the labour broker itself could find itself in business rescue with even more business rescue practitioner expenses diluting the pot.

Such are the twists and turns of changing business rules in a country with a history.


Business rescue – first defence

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This is going to happen to someone reading this blog, in the next few weeks, while everyone is on holiday. It is inevitable.

A major debtor is going to put itself into business rescue (BR), and you are not going to be paid. The bigger the debtor, the longer he has been outstanding, and the easier it is to talk to him at present – the more likely it is for him to go into BR over Christmas.

Right now that debtor is hanging onto life by his finger nails, waiting for the holidays, when he can take care of a lot of statutory time while the wolves are sleeping. That is what planning for BR is all about.

But creditors should also plan. By this I mean that every company should have in place a BR plan, just as you have a fire escape plan, a business continuity plan, a flood plan, a backup plan, and so on. (Of course you have those other things – right?)

What do you do in the event you are sent a fax or email advising you that your largest debtor has been placed in BR? Worse, what do you do over Christmas when a fax lies unattended, or your email is being given a break? Does the security guard know what to do with service by the sheriff?

For many, the plan involves frantic phone calls, out of time, to an over worked BR practitioner (BRP) or to the directors of the company who are not answering their phones in January.

Take a step back. Take a breath. There are provisions in the Companies Act which require the BRP to act within very carefully defined parameters, particularly before the creditors have been asked to vote for the first time. Those voting parameters in the first instance, should be interrogated carefully by all creditors.

In particular, the coming holiday period should be monitored for opportunities where BRPs might take advantage of the general lethargy, to gain an unfair advantage.

Chief amongst early day abuses will be the requirements for all creditors to be notified, and invited to the first meeting. There are only a few days within which this must happen. If the BRP screws up, he is at enormous risk, personally. If you know he has screwed up, you could have a nice advantage. They do screw up, but without creditors noticing.

So what is your BR plan?

  • Nominate someone within your organisation, today, to be “on duty” for the holiday period. He must have access to a recognised official method of acceptance of legal delivery, on all days, including Christmas and New Year.
  • Notify any debtors acting suspiciously that if they are contemplating business rescue proceedings, that the method of delivery is as decided above. Send this by registered mail, or obtain a written confirmation of receipt. Under the proper circumstances, email, and even SMS is legal and binding. If they are being difficult, record a telephone conversation.
  • Send a general circular to all your debtors advising them of your BR official’s details.

Suitegum offers this service, and someone will be on duty 24/7 through the holiday period with a watching brief for our Splinter clients. The fee is small, but well worth the price as cover for potential disaster while you enjoy your holiday.

Let me know on 061 410 2421 or drop me an email if you need more information.

The problem with Business Rescue

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Business Rescue (BR) is an exciting new addition to the tools available to company directors in escaping from their mistakes, keeping their jobs, and perhaps some of their employees’ jobs too.

It’s a wonderful idea.

Except a lot of other small business owners are going to get screwed by people using the provisions in the new Companies Act. It’s that simple. Close on 1,000 businesses will by now have been “placed in BR”. A few dozen have been rescued. The balance have either been liquidated, or are languishing in BR, waiting for someone to complain.

The biggest problem is that too few attorneys and other professionals have been exposed to the provisions to know when they are being had.

There are many restrictions governing exactly how the BR practitioners can behave. I bet few of them accurately understand the provisions properly, and many of them are going to be paying for their lack of knowledge by digging into their own nest eggs.

If a BR practitioner acts outside the provisions of the Act, he may be held personally liable by creditors. Ask me how. I have been involved in a number of these things in the last eighteen months or so.

It is only a matter of time before a BR Practitioner is taken to task by a creditor, for not following the law closely. It is also only a matter of time before a business rescue is declared a nullity, also because the rules were not followed properly.

If you intend to take your own business into BR in the near future, you should plan for it properly.

Mark

Business rescue – 1Time

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After several months of being “in business rescue”, the plug was finally pulled on 1Time Airlines at 3pm, Friday afternoon. It appears that the big white knight got himself some cold feet, and trotted off into the sunset. I guess the real truth will surface in the coming weeks and months.

Of course this has all been very traumatic for those who have recently purchased tickets, particularly those who paid cash, or by way of EFT, and are unable to claim non performance refunds through their credit card companies. “How are we gonna get our money back?” They are all shouting at radio stations right now.

A good question, and one that needs answering, because these customers have, at the decision of the business rescue practitioner, become creditors, and concurrent creditors at that. Effectively they have lent money to the business, after the start of business rescue proceedings (Post BR).

The answer also holds interest for small business people who find themselves inadvertently supplying their customers who have gone into business rescue.

Most business people are acutely aware of the order of payout in the event of a liquidation: Liquidator, secured creditors, preferent creditors (employees, SARS and general notarial bond holders), concurrent creditors (suppliers and unsatisfied customers).

Once a business rescue (BR) process has been entered into, things change around a bit; it’s as if a new estate has been registered, and finance coming into the new estate ranks above the pre BR claims, and in a different order:

  1. BR practitioner expenses
  2. Employees for that portion earned after BR began
  3. Secured lenders after BR began
  4. Unsecured lenders and other creditors for any loan or supply after BR began.
  5. And only then the pre BR creditors in the same order as earlier described.

So new creditors, no matter how insignificant they may feel right now, rank above even the bond holders pre BR.

The point is that ticket holders and suppliers post BR will be ranked in their claims ahead of all the backlog which got 1Time into this mess in the first place. So assuming that the main creditors were fuel suppliers (a reasonable assumption), and I heard on Friday that ACSA was owed more than 100M; they will simply have to wait until the current ticket holders are paid in full, before claiming their first cent.

Now it is also important to note two things:

  1. The business rescue practitioner (BRP) should not have continued with the BR attempt beyond ten days if he did not reasonably believe that the business was rescuable.
  2. The creditors at the time the business was placed into BR had to vote on his initial rescue plan at that ten day meeting. They would not have voted in its favour had they not believed that the rescue was achievable.

In addition, the BRP could not allow the business post BR to run into a position where it was trading in insolvent circumstances in its new balance sheet. To do so, opens him up to claims in his personal capacity from thousands of ticket holders.

So it is likely that all ticket holders will get their money back.

As a business owner, you may be able to draw on the above knowledge in dealing with your own customers and suppliers who have gone into business rescue.

Mark Corke