Poor dumb Bob - businessman sentenced to ten years hard labour.

Updated: Dec 14, 2019

Bob discovered a small, nimble, nationwide IP network business, that was looking for an experienced manager to invest and take over the running of the company. Bob carefully examined the opportunity, forecast conservatively, built a strategic plan and took the plunge, buying the majority share.

The business employed 7 staff, with a turnover of just over $1 million, but was making a small loss. A 10 year lease for a 110sqm basic office with a functional fit-out had recently been signed. The lease had a rent review clause with a 3% fixed annual increase for the remainder of the term. But this was 2008, inflation was running at around 5% and interest rates around 8%, so the 3% rent reviews seemed reasonable and he saw no issue with it.

Bob set about the task of building the business and soon it was enjoying steady growth over 25% per annum. But costs were rising too and even though the majority of the revenues were recurring, profitability was stubbornly slow. It seemed each year that the only person making any money was the taxman, whilst shareholders continued to plow back any surplus into upgrading network assets.

Cost savings were needed and staff were the largest cost, but Bob needed his excellent team. Suppliers were another biggie, but large companies responded to the market, not to Bob's pleadings. The other BIG cost and potential for any significant savings was the office rental, which somewhat worryingly had grown year-on-year, to stand at $68,000 per annum. Surely there must be some opportunity for savings? Bob approached the landlord explaining his business predicament - that he might as well close his business unless he could find a way to reduce his fixed costs. He explained that similar offices around him hadn't increased rent for 4 years, in fact average rentals in the area had fallen. But the landlord knew, with 6 more years to run on Bob's lease, he had the upper hand and, whilst sympathetic, was unmoved.

Our 2008 lease

Roll forward this story to 2014 and the business fundamentals had changed. Further growth meant sales were over $3 million and respectable profits rewarded the team's hard work. But circumstances had changed too and Bob needed to sell. A broker advised a quick trade sale would attract the best value for the business and a short marketing campaign confirmed a good appetite from the market. But trade buyers only wanted the revenues, the customer base and the intellectual property. Ironically, they wanted the millstone, but not the mill.

That's OK thought Bob, we can sell the company's assets without the lease liability and then liquidate the shell company leaving our intransigent landlord holding his baby. But Bob hadn't thought everything through, after all he wasn't a lawyer. To sell the business assets, liquidate the shell company and take his well deserved capital gain, Bob as a director had to declare that the business had no liabilities - which of course he could not. So Bob was stuck with 4 years on his lease at a price well over market, or a company that he couldn't sell. Yes, the good old rock and a hard place!

So how do I know all this you might be wondering and what did Bob do? I know this because I was poor dumb Bob. A thirty-year corporate career had not prepared me for how change can disproportionately affect a small business. So when we conceived our first i-space dedicated to helping small business, we were determined to create a supportive and flexible work environment. One that would have given me the ability to make the required structural changes the business needed. As for Bob, well let's just say he got lucky.