14:05 – Why “zombie businesses” are dangerous

15:29 – Systemic changes

16:35 – Recent Goverment Subsidies

18:12 – JobMaker and the problem with chasing incentives

19:43 – Why it’s hard to predict what will happen next

21:20 – Greatest risks or opportunities for investors in the years to come

22:41 – Advice for struggling business owners

Q: Then it sounds like you’re the opposite of the grim reaper and gets companies back on track. The traditional stigma with your profession means that people think that you only get involved when it’s too late. Would you agree?

• Preventative maintenance is the aim. Using the medical analogy again, if someone were to come on their death bed, there’s very little that doctors can do
• The same principle applies for corporate – you try your best to save them where you can
• It’s not our incentive to shut everything down. Our challenge is to obtain an outcome for stakeholders that’s not an uncontrollable collapse of the business

Q: As an accountant myself, you get to see a large sample size of how businesses are run. In your years of experience, you would have seen very different perspectives on wealth and investing. I’m curious to know how your view on wealth and how to create it changed over the last 20 or so years?

• Asset classes and risks associated with types of businesses are generally what’s front of mind
• There’s a connection with the management of the company and how they can deal with the type of investments they’re looking to put their money in
• People start with a lot of money, but unless they’re focused, they may not get the outcome they expect and have basically bought themselves a job
• There are assets, and then there are assets – people have passions for some types of businesses, but the return is often not just about the money but also how the business helps feed their passion

Q: As an investor yourself, how has that evolved over the last 20 years?

• A lot more due diligence is done when I invest and how much security and guarantee is provided, and who those parties are
• I’m more likely to delve into the content of what the investment is
• I tend not to take it on face value as much, but most importantly, it probably doesn’t talk me into good investments but certainly talks me out of bad investments

Q: For someone as conservative or as vigilant as you, have you ever experienced financial loss?

• I had previously invested in shares, and as you do with shares, you ride the market and have little control
• When I needed the money, I ended up having to take a loss as a result of it
• The lesson was that you’ve got to manage your losses

Q: With the type of work that you do. You’re often dealing with business owners who are experiencing a lot of financial stress. What sort of advice or support are you offering to these types of business owners in terms of stewardship?

• With these types of business owners, I try to gain an understanding of the level of control and experience in their level of management for the company
• I also want to know whether they’ve done some level of assessment on their risks and how these are controlled such as compliance and accounting
• You’ll eventually find some core issues they need to improve
• It’s usually a refinement of what they need to do to improve as the business has evolved since they started it, such as multiple locations and more staff
• Stewardship is something that changes over time, and it’s about what stage these business owners are up to

Q: Understanding what the current government changes (as a result of COVID-19) being rolled out are challenging even for the best technicians. What’s your expectation of the type of work you’re going to be doing in the weeks and months ahead?

• There are a lot of enquiries and confusion about how restructuring and insolvency work as the law is changing
• Some businesses are cash-strapped who will need some level of refinancing across the next 12 months
• The government has changed the goalposts a lot, and the market for businesses may fundamentally change for some
• The challenge has been getting my head around all of this. There are going to be some winners, but it’ll be at the sacrifice of others
• There are a lot of businesses out there getting access to credit who are being allowed to trade insolvent, i.e. zombie companies

Q: I’ve heard the term zombie businesses being bandied about quite often lately. What’s happening to these types of businesses, and what do you anticipate will happen?

• A lot of businesses have lost their market with an inability to generate new demand
• The government is essentially funding their existence
• If there’s no business and the subsidies stop, there are no assets left because they’ve all essentially been utilised
• These businesses essentially find themselves in a state of inactivity with obligations they still need to meet
• Essentially, a company is dead, and they just don’t know it

Q: Do you see this being a smaller component of Australia’s economic base? Or is this a systemic change for the years onwards?

• There are a lot of unemployed people, and these people aren’t all going to be spending their money. Which means there’s still going to be an impact on companies
• As long as you’ve got unemployment and less spending, there’s going to be an impact on business bottom lines

Q: With the Federal Budget, was there anything helpful or encouraging for businesses to take on more staff?

• There was the JobMaker subsidy for $100 per week for employees over 35 and $200 per week for employees under 35
• This encourages companies to take on low-paying staff
• The scheme is a complete bias to younger staff and ultimately will likely cause older staff to be terminated once the JobKeeper scheme finishes
• Natural human behaviour is to go for the subsidies, but a lot of them aren’t looking at their underlying business and whether it’s sustainable to take on this new employee
• The challenge is understanding the choice between a high-paying employee once JobKeeper ends and whether you reset your cost base with a younger, lower-paying staff
• There’ll be businesses out there terminating these types of staffs just in the name of obtaining the subsidy

Q: At the rate that governments are coming out with new legislation, it’s hard to predict where we’ll be in 12 – 24 months as a nation.

• There’ll be big winners and losers, but it doesn’t impact an investor in the tourism or education industry
• What are the school kids going to be doing when they graduate?
• Huge changes are coming up and it’ll be difficult to predict

Q: Most business owners recognise that the highest ROI will be the business itself. But they also recognise that they need to carry investments outside of the business. Where are the greatest risks and opportunities are for investors?

• I’m not entirely sure given how many industries are being impacted
• There are entire industries such as tourism and education where there’s no pipeline for work
• Investing in these businesses is an opportunity for those who are willing to take on the risk
• However, given the rate of change, it’s hard to gauge whether they’re opportunities or risks. It all boils down to risk appetite

Q: If business owners are interested in taking a preventative approach and want to get in touch with you? What sort of stage do they need to be at to reach out?

• If there’s a concern by directors or managers about their operations going into the future, it doesn’t have to be something that’s immediately happening. It can be a fleeting view of some level of risk that would be good to engage someone like a liquidator for advisory support
• This is where we can assist in giving independent advice on potential restructures