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09 Jun 2016
Over the years I have analysed and advised on many businesses in my professional capacity, mainly at the request of potential buyers but also on many occasions on behalf of the sellers as well.
Without a doubt the backbone of NZ economy is the small business person and anybody that has the vision and courage to give up safe employment or indeed pull themselves out of unemployment in favour of going into business for themselves has my unconditional admiration.
However, the sad fact is that many fail, normally within the first 18 months and the fallout from that failure can often have disastrous consequences for individuals and families.
Yet at the same time most failures would have been avoided had the individuals not only engaged an independent advisor, but more importantly, actually followed that advice. My common response to a business proposition, which sadly I have had to use with increasing frequency, is ’do you really want my advice, or do you just want me to justify what you are going to do anyway?’
I would like to share just a few of the common questions and misconceptions I regularly encounter.
‘I’m just sick of working and paying tax. I can deduct everything when I’m in business”
You’ve obviously never heard of PAYE, GST, ACC, PAYE, Terminal and Provisional Tax. You can only claim deductions for genuine business expenses and then only after you have actually paid them in the first place. You don’t go into business to get tax deductions you are there to make a profit and have fun. It is amazing the number of clients I have had that don’t understand this basic concept.
‘Yes they are asking far too much for the business but there are a lot of ‘cashies’
So the sellers have declared to you they are tax evaders then expect you to not only pay for those activities and as a result run your future business on the same basis. Let me give you my definition of the difference between tax avoidance and tax evasion - about 18 months on average.
If a seller has a genuine business being sold for legitimate reasons, all income, previously declared or not, will have been put through the revenue accounts for at least the last 12 months to improve the value of the business. If they are making false declarations to the IRD at great risk, why would anything else they tell you have any credibility?
“When I’m in business I’ll be able to work my own hours’
No you won’t. You will have to work the hours required by your customers. There is no sick pay, paid holidays or bereavement leave.
‘This is perfect for me as I really love doing this stuff, and I can involve family and friends’
It doesn’t matter how much you love macramé. You have to be really good at it to a standard that the public is willing to pay for it. Not only that but you have to be able to produce it in the quantities and economics that make it a viable proposition. Friends and to a large extent families often disappear once the initial glow of your beautiful business wears off. You were hoping for free labour – it doesn’t happen.
Finally I’d like to address the issue of paying for good advice. I’m happy to give free advice, however what I have found is that the recipients will completely ignore it if it doesn’t fit in with their vision. What has actually happened is that they have placed the value on that advice at exactly what they paid for it. What I increasingly tend to say is ‘you get my advice for free as long as you follow it - if not you’ll get an invoice at the end of the month’.
There is no substitute for good professional advice when considering a business proposition and normally the first port of call is a reputable chartered accountant. Apart from being able to interpret complex financial detail, their key attributes are knowing the right questions to ask and the obligation to focus all their efforts and considerable experience on your best interests. Whatever you pay is usually trifling compared to the cost of getting it wrong and is often one of the best investments you can make. Also a good accountant is much more than a ‘number cruncher’ – it is normally the start of a long and beneficial partnership.
Provided you take the correct steps (this is also referred to as ‘due diligence’),keep your eyes wide open and are prepared to work hard, being in business for yourself can be a rewarding and profitable lifestyle, often creating a foundation for generations to come. I salute you.
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