How pre-insolvency consultants can cost a distressed small business

This article was current at the time of publication.

Small businesses facing insolvency can often be in desperate straits.

On average, about 8000 Australian businesses go into liquidation every year. While insolvencies are on the rise, it’s down to a COVID blip says Shabnam Amirbeaggi FCPA, a Registered Liquidator and Registered Trustee in Bankruptcy at Crouch Amirbeaggi.

“The rise in insolvencies that we are seeing in media reports and current statistical data is more as a consequence of the liquidation of businesses that probably should have been liquidated pre-COVID or during COVID but were kept on life support with the government stimulus packages.

“The impact of rising interest rates has not translated to a flurry of insolvencies to date. 

“The increase in the cost of supplies, and the impact of fixed price contracts or overheads, has seen a few business liquidations, but the overall number of insolvencies remains within historical trends.” 

Pre-insolvency advisers

However, distressed and desperate businesses are at risk of advice that may end up costing them even more if they turn to unqualified or unlicensed “pre-insolvency advisers”.

Jason Robinson CPA, Director of Future Advisory, notes: “Any small business owner who ends up dealing with a ‘pre-insolvency expert’ is generally vulnerable and doesn’t know where to turn.

“These advisers rely on people being scared of tax debts or confused about their options and they fly in an unregulated space.”

Amirbeaggi agrees: “Over the years, the term ‘insolvency advisers’ has been diluted by the introduction of pre-insolvency advisers who claim to have an expertise in the niche industry of insolvency.

“There are many examples where these advisers are being paid between A$20,000 and A$30,000 for strategies that are ultimately implemented by registered liquidators or trustees in bankruptcy.”

Amirbeaggi believes the lack of regulation for the pre-insolvency market means it has become dominated by unqualified and unlicensed practitioners.

“I often hear that clients are told stories about the ‘scary liquidator’, instilling a sense of fear at a time when people are in financial distress.

“They may be discouraged [from making] contact with a liquidator or trustee in bankruptcy, with the pre-insolvency adviser claiming they can ‘sprinkle magic dust to make it all go away’.”

Robinson had one client who had been left with debts by a business partner who had taken money and left the company.

“He ended up handing over close to A$20,000 to a ‘pre-insolvency adviser’ for a 30-page report that could have been used to pay down tax debts and superannuation debts to staff.”

Where small businesses should turn for advice 

In Australia, there are currently 662 registered liquidators and 210 registered trustees in bankruptcy. These numbers give an indication of how specialised the industry is.

Liquidators provide insolvency advice for corporate structures. Trustees in bankruptcy provide insolvency advice for sole traders, partnerships, and individuals. Registered liquidators and trustees in bankruptcy frequently offer a free initial meeting and provide options for your client’s specific financial situation. 

Amirbeaggi notes this advice is best left to the experts. 

“In the same way I refer my clients to a registered tax agent for tax advice, or a licensed financial planner for financial planning advice, a client who needs insolvency advice should be referred to a registered liquidator or trustee in bankruptcy.

“This will give a client the best opportunity for survival of their small business, or the best strategy for closure while minimising the impact on everyone involved and leave business operators with the opportunity to start a fresh path, whatever that path entails. 

She believes seeking advice from a registered liquidator or trustee in bankruptcy earlier may also improve a business’s chance of saving an insolvent business through legitimate strategies.

“Their experiences in dealing with high pressure, elevated emotional crisis situations, which are sometimes volatile; combined with their education in both accounting and law, provide the platform to put into action strategies that first aim toward the survival of a business,” says Amirbeaggi. 

Building client relationships

One of the strongest messages to accountants dealing with small business clients is that they need to build a great relationship with an insolvency specialist, says Robinson.

“We need to feel comfortable, and the client needs to feel comfortable, to at least have a conversation about options when a business is in trouble.

“An insolvency adviser can review all options, from trading out of debt successfully to liquidation, voluntary administration or bankruptcy.

“The new Small Business Restructure regime is also designed to help more business owners survive a rough patch by remaining in control of the business rather than having to liquidate.”

SMEs can continue trading while they pay off debt over a period and continue to pay employees.

“To qualify, they must have liabilities [of] less than A$1million, have not been through debt restructuring before, have all employee entitlements up to date and have lodged all returns with the Australian Tax Office.”

Robinson says about 60 per cent of small businesses fail in the first three years and debt is a huge contributor to this failure rate. 

How businesses can remain debt-free

Besides advising on cash flow management, there are some proactive ways accountants can help SMEs avoid debilitating debts. Here are Jason Robinson’s tips:

• Guiding clients in creating a realistic and robust business plan or strategy, which includes a comprehensive budget. This helps businesses forecast their financial needs and avoid unnecessary borrowing and expenditure.
• Assisting businesses in regularly reviewing and optimising their expenses. This can involve renegotiating with suppliers, cutting non-essential costs, or finding more cost-effective ways of operating.
• Conducting periodic reviews of the business’s financial health. This includes analysing financial statements to identify any potential issues early on, such as increasing debt levels or decreasing cash reserves.