Money Matters - A Client Quandary

Money Matters – A Client Quandary

by Melanie Richardson

Sometime in business tough decisions come along. Melanie Richardson shares the story of one client’s financial and moral quandary

One of my clients who is in his fifties, has had a pretty rubbish time over the last few years. He has had problems with cash ow over a prolonged period for various reasons, most of which were not his fault. Sometimes he has only just been able to meet the payroll bill at the end of the month and he has had very little cash out of the business himself.

Through all of that he has managed to keep the business going, giving a good service to customers and recently has started to see the light at the end of the tunnel. Cash ow has eased and the business is starting to grow in a slow steady fashion.

He can envisage a time when he can pay off his bank loans and get his bank account back in the black. But… he is tired of struggling and the pressure has begun to affect him and his enthusiasm to continue to grow the business.

Out of the blue, he received an offer to buy his company. The purchaser would pay off all of his bank debt and give him a market level salary going forward, paying a reduced amount for the overall business as a result.

The company is attractive to the purchaser because my client has spent years getting it to this position. It is well managed and efficient with a good reputation in the industry. The buyer would inject funds into the business to allow it to go out and recruit really good members of staff. He would also ramp up the marketing efforts and believes that the business can double its profitability over the next five years. My client would have a stake in the reinvigorated business and would benefit from any sale in a few years time.

On the face of it, it would appear to be a no brainer. Get rid of all of the company’s debts, put money into its bank account, get a renewed effort behind real and substantial growth, a decent salary and participate in any growth in value in the longer term.

However, part of the push for better profitability would involve my client having to make some of his staff redundant. The purchaser already has those roles filled and doesn’t need additional people. The redundancies would affect staff members who have been in the business for over 30 years. In addition, the purchaser would demand increased efficiencies from the remaining staff and any who didn’t perform to the new standards would be managed out of the business.

My client therefore has a real dilemma – take the money on offer and make his life less stressful but at the cost of his long serving, loyal members of staff, or carry on in the hope that the business will carry on improving. He could also implement some of the initiatives that the purchaser has suggested without getting rid of individuals.

I suspect he will turn down the offer because actually, the purchaser will benefit from all of the changes and hard work he has put in to get this far – he also has a massive feeling of responsibility to his staff who have helped him over the last few years. It’s a difficult one and I don’t envy his position right now.

There are lots of businesses changing hands at the moment, and quite a few purchasers out there with funds available. The trick is to find the right buyer who will be sympathetic to the ongoing needs of the business.

The other issue that often comes up is that the business is too reliant on the outgoing owner. A lot of the value therefore disappears on the vendor’s exit, thereby reducing the price that buyers are prepared to pay. Here it makes sense to start bringing on the next level of managers who can effectively make the business owner redundant by the time he or she decides to sell up.

Money Matters is written by Melanie Richardson – Managing Partner Swindells LLP Chartered Accountants & Chartered Tax Advisers

Tel: 01825 763366

As individual circumstances vary considerably from person to person, the views expressed in this article are meant only as a general guide, and any specific advice required should be sought from your own professional adviser or by contacting the writer at her place of work. No responsibility for loss resulting to any person acting as a result of any material in the above article can be accepted by the writer or Swindells LLP.