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Last Updated:
Apr 24, 2009 - 5:31:05 PM |
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| Mazars in Europe |
Many Irish businesses are in danger of being dragged down by their owners’ personal debts according to Brendan Waters of Mazars. “Many directors and business owners are mistakenly trying to get their businesses to bail out their personal financial difficulties whereas what they need to do is take good financial advice and go to the banks at the earliest opportunity to restructure their affairs,” Waters said.
Waters said that many business people allowed their personal and business finances to become somewhat confused during the boom years. “They took large sums of money out of the business to finance borrowings for the purchase of personal assets such as properties which they often leased back to the business”, he said. “However, with the slowdown most businesses are experiencing dramatically reduced cash flows and this is impacting directly on their ability to continue to support their owners’ needs for cash to support their own highly geared positions.”
The danger, Waters warned, lies in the steps being taken by some owners to address this situation. “Many of them are making bad situations worse by making cuts in the business in an effort to boost cash flows. While cost reductions which deliver improved efficiencies are always good in the long term, indiscriminate cuts aimed purely at freeing up cash in the short term will probably damage the business and result in deeper problems in the future.
“Indeed, the cuts could make matters worse in the short term as well”, he continued. “If a business is downsized fairly radically it will no longer need the space it might be renting from its owner and that may cause further problems in terms of the director or owner meeting their personal commitments.”
According to Waters this meshing of personal investment interests and business interests should never have been allowed to happen and should be unwound as a matter of urgency. “It defies all logic for a businessperson to say that because a business generated sufficient cash to enable them to run up high levels of personal borrowings it should now be expected to generate even more to pay for their personal investment problems or indeed their mistakes. That’s not the purpose of a business and a director behaving in such a manner would certainly need to be aware of his fiduciary duties.”
Waters believes that business owners have to approach such situations in the same as any individual who is experiencing debt problems.
“Don’t view it as a crisis, see it as an opportunity to put your house in order. Mistakes have been made but they can be undone. The first thing businesspeople who find themselves in this situation need to do is get good financial advice and help to devise a sound and robust plan which will see them address their personal issues and any issues which the business might have on a separate basis. It’s then a question of going to your bankers and other financiers with this plan and convincing them to back it.
“This plan might see a rescheduling of personal debt over a longer period or the suspension of capital repayments for a number of years or any combination of other measures, but it if gives the banks a reasonable chance of getting their money back and seeing a return on it then it has a more than even chance of succeeding. Most importantly, the business person and the business both come out of it with relatively clean bills of financial health and ready to take advantage of any future economic upturn.”
