CrashProof 2007 Abridged

Second edition

CrashProof
your Business

Peter Carruthers

CrashProof your Business
Foreword .......................................................................................................................................................... 5 Read this First ................................................................................................................................................... 6 How I got Here ................................................................................................................................................. 8 Introduction ................................................................................................................................................... 13 Some hard Questions .............................................................................................................................. 13 Business Success vs Failure ..................................................................................................................... 15 Why Business Advisors are often Wrong ....................................................................................................... 16 Bankers.................................................................................................................................................... 17 Business Plans and Bankers ................................................................................................................ 18 Bankers sell money ............................................................................................................................. 19 The Banking Miracle............................................................................................................................ 20 Money is simple .................................................................................................................................. 21 Accountants ............................................................................................................................................ 22 Why are you in business? ................................................................................................................... 23 Advice geared on tax efficiency .......................................................................................................... 24 Entrepreneurial Impoverishment ....................................................................................................... 25 The Most Important Entrepreneurial Question EVER ........................................................................ 25 Simplicity ............................................................................................................................................. 26 Attorneys................................................................................................................................................. 27 Compartmentalise Business Risks .................................................................................................................. 31 Ideal Business Structure.......................................................................................................................... 32 Unlimited liability ................................................................................................................................ 33 Sole Proprietor ................................................................................................................................ 33 Partnership ................................................................................................................................ 34 Limited Liability ................................................................................................................................... 35 Close Corporation ........................................................................................................................... 36 [Pty] Ltd ........................................................................................................................................... 37 Trusts............................................................................................................................................... 38 All About Sureties and Securities ............................................................................................................ 38 Blank Cheque ...................................................................................................................................... 39 Why you won't win if you fight a surety ............................................................................................. 40 3 Parties Involved ................................................................................................................................ 41 Debtor ............................................................................................................................................. 41 Creditor ........................................................................................................................................... 42 Surety/Guarantor ............................................................................................................................ 42
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Why Sureties are BAD ......................................................................................................................... 42 Excussion ......................................................................................................................................... 43 Division ............................................................................................................................................ 43 Eternal ............................................................................................................................................. 44 How easy it is to get entangled ....................................................................................................... 45 Never Returned ............................................................................................................................... 49 Domicilium ...................................................................................................................................... 50 A Typical Surety Document What the Latin bits mean ....................................................................... 51 Do not sign Sureties ................................................................................................................................ 56 Financing Assets without Sureties ...................................................................................................... 57 Why is Traditional Asset Financing Bad for You? ............................................................................ 58 Buy in separate structure................................................................................................................ 61 Opening new "divisions" in new legal vehicles ............................................................................... 63 Credit Card Budget Account............................................................................................................ 64 Replace the Overdraft ......................................................................................................................... 64 Why Overdrafts are bad, and why banks love them ...................................................................... 65 Reduction of Working Capital ......................................................................................................... 69 Borrow against backing security personally ................................................................................... 71 Trade Suppliers ................................................................................................................................... 87 Landlords............................................................................................................................................. 88 NO! ...................................................................................................................................................... 89 A Banking success story .................................................................................................................. 91 Client Financing ................................................................................................................................... 93 Reducing Surety Damage ........................................................................................................................ 98 Limit to this debt only ......................................................................................................................... 99 Monopoly suppliers .......................................................................................................................... 100 Can the summonses find you? .......................................................................................................... 100 Retrieving Sureties ............................................................................................................................ 101 Trade Suppliers ............................................................................................................................. 103 Banks ............................................................................................................................................. 104 Current Debts .................................................................................................................................... 107 Selling or Buying a Company ............................................................................................................. 108

Compartmentalise Personal Assets.............................................................................................................. 110 TheTrust ................................................................................................................................................ 110 Compartmentalisation ...................................................................................................................... 111 Why does it work .............................................................................................................................. 112 Setup ................................................................................................................................................. 113 Inter Vivos vs Testamentary.............................................................................................................. 114
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Moving Assets ................................................................................................................................... 114 Donations ...................................................................................................................................... 115 6/24 month rule ............................................................................................................................ 115 Sale ................................................................................................................................................ 116 House ............................................................................................................................................ 116 The less you can afford to lose... ...................................................................................................... 116 What does it cost? ............................................................................................................................ 117 Life Assurance ....................................................................................................................................... 118

Build Cash Resilience .................................................................................................................................... 120 Nothing new under the sun .................................................................................................................. 124 Business Resilience ............................................................................................................................... 126 Set up at least 2 business bank accounts.......................................................................................... 127 Build your credit profile .................................................................................................................... 128 Gradually move existing facility to zero ............................................................................................ 129 Personal Resilience ............................................................................................................................... 129 Personal bank account at another bank ........................................................................................... 130 Credit Cards....................................................................................................................................... 131 Testament/will at attorney ............................................................................................................... 132 Life assurance with independent broker .......................................................................................... 133 Action Steps.................................................................................................................................................. 134 Compartmentalise your Trading Risks .................................................................................................. 134 Compartmentalise your Assets ............................................................................................................. 135 Diversify your Financial Sources ........................................................................................................... 137 Restructure your Investment Portfolio ................................................................................................. 137 Identify your Sureties and Retrieve Them ............................................................................................ 138 Financing ........................................................................................................................................... 138 Vehicles ......................................................................................................................................... 138 Overdrafts ..................................................................................................................................... 138 Office Equipment .......................................................................................................................... 139 Trading .............................................................................................................................................. 139 Suppliers........................................................................................................................................ 139 Landlords....................................................................................................................................... 140 Franchisors .................................................................................................................................... 140 Recovery Plans .................................................................................................................................. 140 Read This Last ............................................................................................................................................... 140

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Foreword
Thank you. Not just for investing in this knowledge, but more importantly, for taking the decision to expand your entrepreneurial skills. This book is the result of 12 years of consulting and training (more than 25,000 small-business owners throughout southern Africa) and aims to show you how to take back financial control and thwart the attempts of sundry attackers. I hope you will have as much fun learning how to:  beat your banker,  protect your family,  protect your assets,  and compartmentalise your risks  (and all the other exciting stuff that we will talk about in this book) as I had in investigating and developing the solutions. You will find my story early on -- and you will see that I have already walked the road that most entrepreneurs fear to tread. And I have helped hundreds of others down the same path - almost always with lots of success. (Except mine, of course, but that's what inspired me to do this in the first place.) The format of this book follows the format of the seminar that has been so remarkably successful in southern Africa. I have tried to lay everything out logically, but I welcome any comments on ways to improve it. The ideal way to work through this material is to start at the section titled Read This First. You can, of course, dip in wherever you wish to. You will find that it's much easier to follow the flow however, as each section builds on the previous one. Sureties are evil. That isn't a religious statement -- although the Bible does mention that signing sureties is a really bad idea. A surety is drafted to favour your creditor overwhelmingly - and to leave you with absolutely no rights. This document single-handedly is responsible for almost all the pain that you and your family will endure if your business fails. Speaking of which, here are some statistics. In the first year of operation, 50% of all start-ups will close. (They don't even get a mention in the phonebook!) By the end of five years, 80% will be gone. And by the end of the first decade only 4% will remain. Let's put that into perspective. Only 4 out of every 100 start-ups will survive one decade. To be honest, I am not really interested in the business aspect of that statement. My mission in life is to protect the families behind the 96 businesses that fail - because the pain is terrifying. Not only are there multiple partners involved in many of these businesses, but each individual business owner supports a spouse and children, and impacts on parents and siblings. When a business goes belly up, that individual business owner will share an immense amount of pain with a lot of people. And there is absolutely no reason for that to happen if that business owner has taken a few simple steps to protect himself and his family.

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If I had known this stuff just six months before closing my doors in 1992, I wouldn't have lost everything I had at that time - as well as another R2 million that I didn't have. The book consists of a series of sections covering all the knowledge that you will need to CrashProof your Business. You could also join Business Warriors and get onto the forum, where you can post questions which will be answered by other Warriors. The forum has proven to be a useful resource for all of us. Have fun. We take this business life awfully seriously, and we forget that we have a huge responsibility to suck the juice out of every single day -- because, who knows, it might be our last. I welcome any feedback. Once again, thank you from the bottom of my heart, for allowing me to share these issues with you. I'll try not to abuse the privilege. This book is dedicated to all the thousands of business owners who have attended the CrashProof seminars since 1995, and who have helped me refine this material into a series of basic core thoughts. But especially to those who have successfully gone out of business - without losing their shirts because they applied this simple stuff to their lives. A few years ago a fellow attended the CrashProof seminar in Durban. He had received a 'summons' from his bank manager to bring in his documents and face a reassessment of his overdraft facility. Fortuitously, my fax inviting him to the CrashProof seminar had arrived that same day, so he delayed his visit to his banker until after he had attended the seminar. It was a pretty full house that night. The next morning, as I arrived at the airport back home, my cellphone rang. It was Brian, and he was pretty excited. "Pete" he said, "I have to tell you what happened when I went to see my bank manager this morning. Armed with what I learned last night I walked into his office and before he even had a chance to say anything, I said 'I want this, and that, and I want it this way!' He went pale. "My God!" he said "You are the fourth person this morning to demand that!" I like to believe that these strategies have had some effect on opening bankers to new ideas and to better understand the needs of small business owners. And finally, never forget that no matter what business experience you are having right now – that, too, shall pass. Business - like every other aspect of human life - is seasonal. This means that if you are having a really crappy time right now - this will pass. And if you're cooking with gas, nothing seems to be able to go wrong, and everything you touch is turning to gold - this too shall pass. That's the fun of this experience we call life. Peter Carruthers Tuesday 8.24pm

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Read this First
By far the best way to experience this book is to read it sequentially. This material works much better if you follow the sequence in which I present it, because some of the concepts build on concepts I have worked through in a previous section. I start with my personal story, because I assume you want to know something about anybody who has the gall to try to tell you about small business issues - and because I feel you will have more confidence in applying this material to your own life if you understand what road I have travelled to get to this cyberspace place. Then we look at a few general issues about this entrepreneurial life, and why all is not necessarily as it seems on the surface. This is followed by a discussion on why much of the professional advice we little folk get is BAD advice. We look at a few myths, and the reasons for them, and we ask a few leading questions that you should bear in mind in future whenever you're dealing with your advisors. After that we move to the meat - the first core concept Compartmentalising your Business Risks. In this section we will analyse sureties in depth: what they mean; why they're so dangerous; how to structure yourself so that your risks are in a neat box; how to borrow without sureties; how to retrieve them; how to nullify them; and a whole lot more. By the time you have finished this section you will know more about sureties than you ever wanted to - but you will be equipped with the tools you need to keep your business in a sealed cage - and away from you and your family. Then we look at techniques to Compartmentalise your Personal Assets - so that any fallout won't get near your life savings. We'll look at Trusts and their immensely powerful role in your future, and we will identify a few holes in your life assurance portfolio. [No, I am not going to sell you any more of it, but you will probably want to restructure your existing policies after completing this section.] After which we move onto the topic of Building Cash Resilience. After all, the more cash resources you have ready to meet any emergency, the less likely the firm is to fall on its face when it stumbles. This is followed by a summary of the Action Steps you will want to dive into. I have tried to make this as concise and practical as possible. And, as in everything there is a conclusion - my request to you to be honest with yourself about why we are in business as entrepreneurs - and what this really means. At any time, if you get lost, or bored, or just plain lonely, then click on this link, join the Warrior community and go to the forum. Ask any questions and they will be answered quickly. Before asking a question, though, please search the forum to see if that question has been answered before. This saves us all time, money, effort, and embarrassment. The forum has built up a base of frequently asked questions that anybody can search through to get a rapid answer to something not covered in the core material. It also allows me to respond to you if necessary, in a disciplined way, without your e-mail getting lost en route to me -- something that can
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happen quite easily because my personal e-mail box is deluged by more than 300 e-mails every single day. The forum is like a bulletin board which keeps track of any questions asked, and answers offered. You are welcome to offer answers as well -- to any questions that have been asked -- if you have any experience in that area. I regularly mention breaking news regarding new legislation or government and banking behaviour. It's taken almost two years to compile this material, all of which is completely meaningless if you don't take the principles and apply them to your own life and your own situation -- starting now. By the time you have worked through the core material, you should have identified five simple areas to attack. By the time you have finished these five steps, I promise you that you (in your personal capacity) will be impregnable. So will your business. That is a wonderful place to be. Good luck.

How I got Here
In mid-1984 I was fired from my job as a project manager in a small firm - for daring to stand on principle. Of course, I was a young twit at the time, and probably deserved it! But that left me with an interesting problem - how to earn a living. I suspect that this same problem is what inspires most of us 'business owners' to venture forth for the very first time. In this situation we usually have strong technical skills - in my case in software design and programming - but very few business skills. The end result was that in October 1984 I founded a small software company in Cape Town - Link Technologies cc. With immense good luck (we were in the right place at the right time) we grew and grew by leaps and bounds. By 1989 we were widely regarded as one of the most admired Information Technology companies in South Africa. (That's not by my reckoning, but based on annual surveys done by the computer trade publications.) Our business focused on linking PCs to IBM minicomputers - at a time when this was a new concept and awfully challenging to consistently achieve. We were the first folk to successfully do this, and managed to infiltrate this closed user fraternity rapidly. One would think that's a recipe for success. The first major difficulty any small company faces (and ours was no different) is money. Or more specifically – cash flow - the balancing of cash coming in from clients, with the cash going out to suppliers. You get close to the end of the month and there are more days left in the month than there are Rands in the bank account! Have you ever had that feeling? So it's off to the friendly banker. We set up overdrafts, and used as many of the various financing products available as we could. In addition to financing our clients, however - all of whom wanted 30 day terms, we still needed to import products from Taiwan and from the United States - and they wanted payment in advance!
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We  went  to  a  “confirming  house”  to balance our cash flows. They specialised in imports and exports, and they gave us a huge contract to sign – about 30 pages. I  don’t  know  if  you’ve ever had this experience - but you genuinely try to read the contract. You get to the end of the first paragraph, and you realise you have a bit of a problem, because that first paragraph doesn't have a single word in any of South Africa's 11 official languages!  It’s  in  Latin! Being a prudent South African business owner what do you do at this point? Of course you sign the document! We all do - without  remotely  understanding  what  we’re  signing. You are assured that it's the "standard contract". It is! But that doesn't mean it favours you in any way at all. You are assured  that  ‘everyone  signs  it’. That's not quite true. Any experienced business owner knows that this is a document you should read very, very carefully, before NOT signing it. Bottom line - I signed the infernal contract. And  for  two  years  there  was  no  problem.  One  day  this  “confirming  bank”  that  we  were  using   [Reichmans] was bought out by another bank [Investec]. And that's when my challenges started, because the new owners faxed me a one-page amendment to our original contract. That single page was almost as indecipherable as the original 30 page contract. The SA market was getting tougher at that time, and I was getting wiser, so this time I took the entire batch of paper to an attorney for interpretation. [Attorneys use the word 'perusal' which is a frightfully expensive word that means 'read'. Maybe that's why we regular human beings do not ask attorneys to review documents before we sign them?] I wanted to find  out  what  I’d  already  signed,  and  why  I  was   being asked to sign something else. Just  as  an  aside,  if  you’re  in  an  existing  business  relationship  and  you’re  suddenly  asked  to  sign  a  new   document (agreement/addendum etc.) chances  are  you’re  about  to  shoot  yourself  in  the  foot.  This  is  a   really good time to get an attorney in on your act. Wow! What a rude awakening. Not only had I signed the original contract from hell, but now the bank was trying to strengthen its (already unassailable) position even further. In terms of the original contract our bankers owned our firm. They owned our business stock; our debtors; our furniture; our computers; our vehicles; our cash - everything. On top of that, they owned me and everything I thought I owned. They owned my shares in my business; my loan account; my house; my insurance policies; my investments; my life savings; and every other asset my family thought it owned. And it was the same for each partner in the business. If this bank felt that their investment in us was ever at risk, they had the right to walk into our business; take it over and run it for their own benefit; and operate the cheque account [which was at a commercial bank] until their account was paid in full. If anything went wrong, we (as individual business owners) were going to be wiped out. The only small aspect in our favour in this original contract was that they had to give us seven days notice if they wanted repayment of the R600,000 they had loaned us! [Remember that this was in 1990, when R600,000 was a lot harder to come by than it is today. This would equate to about R2.4 million in 2002 Rands.]

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That’s  what  the  one-page amendment was about. It took away the seven day notice period, and replaced it with a 0 second notice period! Foreclosure on demand! This bank could walk in at any time and take us out. When we realised what we'd signed, we were terrified. So we paid them back in full over the next six months. In hindsight, not a very prudent move, because this massively depleted our cash resources just as South Africa entered an awfully exciting time. This was in the late 80s and it was round about the time Mr. Nelson Mandela was released. This was a wonderful event for South Africa, but dreadful for businesses selling any capital expenditure-related products. Our clients were all large organisations like Shell, Old Mutual, Momentum and the like, and they decided to adopt a "wait and see" approach to the political uncertainty that was engulfing the country. Everyone simply stopped buying computer equipment for a while. In reality, many of us were expecting massive violence and social upheaval - and most firms were struggling. Sales  slumped.  In  fact,  that’s  not  altogether  true.  Sales  kinda  plummeted.  Our Sales Director had, over the years, acquired an expensive lifestyle – funded by large sales commissions. So you can guess that he  didn’t  take  too  kindly  to  this  slowdown. His solution was to set himself up in opposition to us, taking one of our major agencies with him. This was despite a restraint of trade contract we had with him. Contracts in South Africa are interesting. You can have every right in the world, engraved in platinum on  your  contract,  but  if  you  can’t  afford  to  exercise  your  rights  in  court, you have no rights. And it costs a packet to go to court – especially the Supreme Court. We didn't have the R25,000 we would need for each day in court fighting to exercise our rights, and he knew that. The market stopped stone dead, as it simply got confused! We took stock of our situation. At the time we had about R600,000 worth of liabilities and R500,000 worth of assets. If you have ever been involved in a business closure you will see that this represents a reasonable degree of balance. We figured that if we were to close at this time we would do the least damage to our creditors, our clients, and ourselves. So that's what we did - we closed the firm. And that's where my business education really started! How much do you think R500,000 worth of new computer equipment can be sold for? When I did the initial figures I was a tad optimistic. I knew the products and the market, and despite the economic downturn I was confident, that given a little bit of time, the stock would raise almost par value. My worst guesstimate was R250,000. Even if I had to sell the stuff on a pavement in Braamfontein I knew I could beat that. But that's not how that game is played! And that's all it is - a game with very few rules - most of which are honoured in the breach. [A nice way of saying they are completely ignored.] When the stock went to auction it raised a mere R25,000! I had recently relocated to Somerset West . I rapidly developed a remarkably intimate relationship
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with the local sheriff. He used to arrive on a Friday, drop off some paper, and take away some furniture. And this went on for about 18 months. It sure was an exciting time. One morning in July 1993, I sat on the floor in our lounge and spent an hour cursing. The local sheriff had just cleaned out our furniture, and had even taken the watch off my wrist, to settle a tiny debt with one of the banks. [The  same  bank  who  had  recently  “borrowed” R1 billion from the Reserve Bank!] So I sat on the floor and howled. I was so distressed I even managed to add a few new expletives to the English language. When my wife came home a while later, she sat next to me and said "Peter, if this is God's Matric exam - you're failing. There's a reason for all of this, even if we can't see it right now." Since then I have worked on a simple premise - the reason all of that happened to my family was so that I could show other business owners like yourself how to prevent it from happening to you. If I'd had access to these simple techniques and strategies in 1992, I wouldn't have lost the few million that I did, as well as the few million that I didn't have to lose! At this time, my brother, Mike, was one of the leading brokers for the Southern Life Assurance Company. He was amongst their top ten salesmen, and he suggested I consider selling life assurance products to small business owners. [This strange breed of human being - small business owners, not brokers - represented a market that the life assurance industry was desperate to penetrate. My business experience made it very easy to identify with the challenges that these folk faced daily.] For the next two years I wandered around trying to sell life insurance to business owners like you. I had no problem getting appointments. How can you resist an introduction like this? "Hi, my name is Peter Carruthers. My firm just went bankrupt and I'd like to share some ideas about that with you." Actually I didn't share a great deal, but I sure asked a heck of a lot of questions. How can you be sure that you are safe if your business fails? What are you doing to safeguard yourself from sureties? How are you financing your firm without sureties? Where are you hiding your assets? How are you protecting your life savings? Which bank are you using? Who is looking after your will? And a whole lot more... I felt like a complete idiot having lost my business. My self esteem was lower than shark faeces. I felt that nobody on the face of the planet could ever be as stupid as I was. Over the next couple of years I analysed the structures and provisions of more than 300 small business owners - in intense depth - to find out where I had gone wrong, and why. Guess what? With just one exception, everyone was doing exactly what I had been doing - NOTHING!!! In almost every case, the business owner assured me -- intensely earnestly -- that his circumstances were different, and that he was in no danger of business failure. But the numbers do not lie, 96 out of every 100 business start-ups fail in the first decade. And then an interesting thing began to happen. The person that I had been speaking to would go out to a party on Friday evening, and discuss business with his mates.
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We men like to pretend that everything is going well. Meet somebody that you haven't seen for a week; ask them how business is going; and you will always get the same answer, "Business is cooking with gas! Never been better! The future is so bright I have to wear shades!" After a few beers, the story changes. Ask that same question again and you are likely to get this answer, "Oh God, I'm in such desperate trouble. I don't know where to turn." At this point the person that I had been speaking to would say something along the following lines, "You have to meet with Peter Carruthers. He is an expert on business failure!" And that is how you become the country's leading expert on small business failure. I suddenly found myself being inundated with calls from small business owners in desperate trouble. Each call was identical, it went like this, "Mr Carruthers, I believe I might have a problem." He would say. "What has just happened that makes you suddenly believe this?" I would ask. "The sheriff has just taken all my furniture away! I believe I might have a problem." He would answer. I don't know about you, but if the sheriff is already taking your furniture away, you don't have a problem. You had a problem. About six or seven months ago! And now it is too late to do much. I was inundated with people in this position. My life became a constant hell of people begging for help -- but asking far too late for me to be able to offer anything constructive. Unfortunately, that is the reality. We stay in denial about how much trouble we are in because it is too uncomfortable to face at that time. I was reliving the worst time of my life in the lives of other people. And I was hurting. Soon I was doing far more consulting than selling life assurance products. This is a bad business model, because anybody needing consulting after they have closed their business simply doesn't have the money to pay your fees. We call free consulting counselling! And that is no way to feed your family. One morning I just could not get out of bed to face another day of other people's challenges. My wife suggested that I take all the stuff I had learnt and convert it into a seminar for business owners -- who were still in business -- to prepare them so that they never experience the kind of challenges we had had. And that was the beginning of the CrashProof your Business seminar -- in 1995. By 2003, almost 25,000 small business owners had attended the seminar, and had CrashProofed their lives. They included people representing every aspect of industry in South Africa, every age group, and both genders -- ranging from uneducated persons like myself to professionals (doctors, lawyers, accountants, architects, dentists, etc) via a huge range of consultants (business, engineering, marketing, Internet, sex, etc) -- and even a few bankers. (Each individual banker appeared astounded at the antics of his competitors, and assured me that his bank was different!) Unfortunately, the seminar process is extremely expensive -- as well as hazardous. Many groups of business owners find it difficult to attend. Women, for example, are reluctant to travel at night because of the security situation. We cannot afford to run the seminars in the smaller towns. Many business owners are working far too hard, and cannot spare four hours for training. And finally, my
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diabetic status was taking strain with the amount of travel that I was doing. And that is the reason for reassembling all of this material into this book. I welcome your questions and your comments, and anything else that you might have to say related to this topic. I will do whatever I can to make your reading a fun experience, but above all, a life changing experience that puts you in a place where you are untouchable if anything goes wrong with your business.

Introduction
Most  of  us  entrepreneurs  didn’t  choose  to  be  here!  It  kinda  happened  en route to a real job and career. Almost all the  business  owners  I  have  consulted  with  fell  into  owning  their  own  businesses.  It  wasn’t   really  planned.  At  some  point  in  their  lives  they  were  retrenched  or  fired  or  simply  couldn’t  find  a  job.   So they began working for themselves. They leveraged the technical skill they had [software, making coffee, fixing pipes, gynaecology, architecture] and started to sell that skill to somebody [their first client]. As time moved on, they found that other people also wanted what they had to sell, and they began to get busier. And the busier they got, the more help they needed. So they hired secretaries, technical underlings, bookkeepers, salespeople and a few other strange individuals – and then they morphed into business owners. Except that they almost all found that the business owned them and not the other way round. When they analysed where all their time went, it was almost all spent in running on the technical treadmill. They spent so much time honing their technical skills – constantly making the product or service even more excellent – that they forgot to build a few simple business skills. And then they found that they were in trouble. If you look at your business efforts – where are most of the problems arising? I am willing to bet your investment in this book that they have nothing to do with the service or product you provide – but are all focused squarely on the business aspects – sales, collecting money, managing staff, accounting, cash  flow,  banking… Why is it that even those professionals that we know will own their own businesses – doctors, lawyers, architects, engineers, artists – are offered almost no business courses while in school or college? And where  business  courses  are  offered,  they  simply  aren’t  relevant  to  the  needs  of  an  individually  owned   business. A small business is not a little big business! It exists for a completely different reason than does a big business. And it is subject to completely different stresses. The mere scale of a large business demands formality and controls to protect the interests of the [many] shareholders – and such structures cost time and money. Yet the individually owned business exists for just one reason – to prosper the individual owner [or the few individual owners].

Some hard Questions
Exactly what will happen to your home if your business closes this month? Are you certain of that?
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© Peter Carruthers 2007

CrashProof your Business

And exactly what will happen to your furniture, and your investments? And exactly what will happen to the assets your business has acquired over time? And exactly how will you get an income next month if your business closes this month? Exactly how will you open a bank account after that first judgment has landed? I ask these questions because they echo my feelings in May 1992 as I closed Link Technologies cc - the single act that thrust me on this new career path where I now teach folk exactly what will happen. Except that I didn't know that at the time! And before it happened I reckoned I more or less had these answers. But I was a long way off. I didn't know how the game was played - how the assets of the firm get given away for nothing; and how my furniture would be sold for the costs of their removal; and how everybody I had ever bought from would be allowed to take a judgment against me without me being able to defend myself. Judgments which ranged from R241-00 to R640,000-00! And I didn't even begin to understand the soft issues: not sleeping because I had a wife and children to feed; not wanting to see my friends because they didn't understand my challenges; not wanting to speak to my family; not wanting to work because the challenges were insurmountable. We're now more than 10 years later and most folk I talk to cannot conceive that their business might actually close - because they feel that they're not that stupid. But lots of businesses close every day [although it's usually more crowded at the end of the month]. And they usually close because something outside the business happens: a strike; a change in tax law; a change in customs law; a change in the Rand forex rate; a fire; a death... This is why I need to ask you a few questions to which I don't have answers, but I'm hoping you do. You see, as of today, I've given up trying to help people who are going out of business. It's harrowing. It's frightening and it brings back all the old memories that I am happy to have moved beyond. And by the time you need going out of business help you've run out of money. This means that you can't pay for good help. I know this because that's been my experience. When you're going out of business you need more help and support than anyone can offer - except maybe your church group. And free advice isn't worth the money you pay for it. So here are a few questions to help you NOT go out of business. What exactly will you do if your biggest client goes belly up? How will it happen? Will their last cheque bounce? Will they just avoid your calls? When, exactly, will they tell you the bad news? What exactly will you do if your business overdraft is recalled this month? How will it happen? Will you get a call asking you to visit, or will the phone call just tell you that one of your deposits has bounced, and therefore your outgoing cheques will also be dishonoured? Will that call be from your brand new bank manager [who took office today], or from the person who has been supporting you these past few years? What exactly will be your response? Which bank will you go to immediately to replace your overdraft? What exactly will happen to your business if you die this weekend? Who will open the office on Monday? Exactly how will your spouse get access to money while your estate winds up? Exactly who will pay the landlord, and deflect the judgment for outstanding rentals? Exactly who will deflect the judgments that come in from everybody your business owes money to?
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© Peter Carruthers 2007

CrashProof your Business

What exactly will you do if your office/factory burns down this weekend and the insurance won't pay because your bank bounced the short term premium today? Or, exactly what will you do if the insurance company delays their payment by three months because they're “investigating”? How exactly will you continue to operate; pay your staff; put food on the table; pay the school fees; and pay the bakkie instalments? Business planning is an interesting paradox. The more you plan for a disaster, the less likely it is to happen. Yet most of us simply lurch from crisis to crisis - too busy to plan, and too busy to succeed! I have compressed 10 years worth of crisis planning into a simple five point plan in this book. Think of it as an advanced driving school for business owners. If you follow these simple principles you won't ever go out of business. And if you still choose to go out of business you will have exact answers for the above questions. A last thought. If I had known this stuff one year before going out of business, I wouldn't have had to close. If I had known this stuff just three months before closing, I wouldn't have lost any money. And I wouldn't have faced five of the worst years of my life. For what it's worth, the last judgment was finally nine years later! This is not a nice road to travel. And nobody can help you on it if you don't take some steps to help yourself now.

Business Success vs Failure
For most business owners, life is like an inflated balloon. As the business grows, the balloon gets bigger and bigger. At some point it pops - at least statistics indicate that the overwhelming majority of business balloons pop. And when that happens, everything that was in that balloon falls out, and all that is left is a few shards of rubber - or terrifying memories. But here is a question. If so many businesses fail - WHY do they fail? After working in this field for the past ten years - a field littered with small business corpses - there is only one factor that I find is absent in every single failure that I have seen. That same factor is present in every single success that I have seen. In my simple mind, that makes it worth looking at. So what is that factor? I'm glad you asked. But you're not going to like the answer. Let me explain. As an entrepreneur, you are my business hero. Every day you invest your life in your business - more hours going into the business than going into any other aspect. And that time you invest magically creates money, which supports your staff, the government, and your family. Chances are that you're spending around 10 hours each day in the trenches. And chances are that the rest of your thoughts are focused on trying to cope with cash flow challenges, staff goggas, design issues and professional problems. You invest time in staying at the forefront of your chosen field. And throughout this entire process, your family suffers because they don't see you much. But they know that you're doing it for them. And the harder you work, the harder it seems to get, doesn't it? No matter what you do, it always seems as if there is a conspiracy to hold you down. You never seem to have quite enough money to bail yourself out, clear the debts, and take a complete break. If it helps in any way - most of us business owners feel like that most of the time!

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© Peter Carruthers 2007

CrashProof your Business

Take a break for a second and imagine this scenario. You're driving your car down the road when you hear a weird noise coming from the front of the vehicle. Because you're in a hurry you don't stop. Instead, while you're still driving, you open the bonnet and try and check out the engine. Of course, the car wanders wildly across the road while you're trying to drive and peer into the engine compartment. But, being pretty used to holding many balls in the air, you keep control [more or less]. You establish that the problem is with the front right tyre. So, while you're driving - because you're in a hurry [or have a deadline, or the month end looms, or the bank wants their money, or some other urgent reason...] - you try and change the front tyre while the car is still moving! Sounds insane, doesn't it? You'd never do something like that with your car, would you? But that's what we're all doing with our businesses! Instead of stopping to check out the problem, or at least stopping every 2 hours to take a break, we keep driving this business vehicle as fast as we can. And real men don't need breaks, do they? [I use that term purely in its non-sexist form!] And that's the distinguishing factor I mentioned earlier. The folk I see that are constantly under pressure, or whose businesses close - are like those drivers who try and do everything themselves, and simultaneously. As a result nothing ever quite gets finished, and they don't have enough time to even think about where they're going. They're simply too busy to see straight. Here is a cold thought. If you have been in business for more than 2 years, and the business is still struggling - then I bet if you look at where you're choosing to spend your time you will find that 99.99% of your time is spent on the job. I know it's going to sound insane - but I promise that if you spend less time working on the job - and more time thinking about where you're going - you will prosper. In fact, if you think through where you want to go - and look at what you're doing each day - I bet you will find that most of your daily activity is actually conspiring against you getting where you want to go! Your business vehicle needs a driver. You're it! That means that you should get a mechanic to deal with the problems - when they occur. Even if you know how to do everything - your job is to keep your eyes on the road. And you can't do that while you're messing with the engine! I know mechanics are expensive [accountants, attorneys, etc.] but don't discount the value of your own time. Time spent messing in the engine, is time spent not driving - and the car is effectively at a standstill if you're not driving. And mechanics - because they do nothing else - will always know more about engines than you do. If you ask them the right questions, they will surprise you with some excellent answers. The single factor that distinguishes the successes from the failures - the happy entrepreneurs from the troubled business owners - is the amount of time they spend thinking about the business and the future (as opposed to doing the technical stuff). The successful folk spend more and more time dreaming about what they want to do, and putting in place the ideas and plans to get there. The unsuccessful folk are too busy working to do that - and always will be too busy to be successful. Please take some time out now to dream and plan.

Why Business Advisors are often Wrong
An old executive was handing over the reins to a new, much younger MD. The youngster asked the grizzled veteran for the secret of his business success. “Two  words,  my  boy,  two  words. GOOD  DECISIONS.”  Said  the  oldster.  The  new  leader  thought  about   this for a while before commenting that this was all good and well, but how did one get to make such good decisions? “One  word,  my  boy,  one  word.  EXPERIENCE.”  said  the  departing  boss.  The  newcomer   pondered over this “You’re  twenty  five  years  older  than  me”  he  said,  “How  do  I  gain  this  experience?”
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© Peter Carruthers 2007

CrashProof your Business

“Two  words,  my  boy,  two  words. BAD  DECISIONS.” Most of us smaller businessmen have little formal business or financial training. Somehow or other, we’ve  gathered  a  few  basic  skills  and  we  boldly  leap  forth  where  angels  fear  to  tread. Look at the average Joe setting up a business. He’s  either  been  retrenched  or  fired  or  retired early – or he has resigned and now needs something to do. So he gets an idea to make enough money to survive on. He sets up his garage and starts producing something – let’s  say  bumper  stickers. Initially he has a little success and he just keeps plugging away until things begin to improve. Soon he needs to expand. So he goes to chat to his bank manager to ask for advice. About bankers – they will never advise you to do something against their own interests. Your banker will  want  to  “sell”  money  to you at the lowest possible risk (and the highest possible interest rate). His job prospects, his promotion and his career depend on him lending you money at a profit to the bank. Effectively this means that his first concern is to see if you represent any form of risk. If  you  do,  he’s   not going to get his money back – so  he’s  not  going  to  lend  you  money! This has nothing to do with his bank! It has everything to do with him keeping his job! The first major difficulty any small company faces is money. Or more specifically – cash flow. The balancing of cash coming in from clients, with the cash going out to suppliers. One comes close to the end of the month and there are more days left than there are rands in the bank account. Since we ourselves do not pretend to be financial experts, we turn to such people for advice. This segment is to highlight some of the myths about the financial and professional advice we get.

Bankers
When a business needs money, the first place we usually go to is the bank. After all, that's where they keep all the money. Most bank advertising focuses on how generous banks are when lending money to assist you. Yet most of us know very little about how banks really operate. And we know even less about the subject of MONEY. Money is pretty much the last taboo. We openly discuss our sexual challenges - the previous 'last' taboo - but we never discuss money openly. Our income defines who we are as human beings in an economic society - and divulging our incomes to anyone else tells them exactly our economic status. That's why advertising works so well in persuading us to go into debt to buy material goods that reflect a higher economic status than we really have. In fact, most of us feel really guilty if we owe money to anybody. But your bank needs you to owe them money in order for them to make a profit. Banks don't want you to pay their money back. They regard your using their money as a successful sale! As long as you have their money you are paying them interest. If you return their money, you don't pay interest. They don't like that because that messes up their profits for the year.

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© Peter Carruthers 2007

CrashProof your Business

However, money is all about power. As long as you feel guilty, they have all that power. And as long as you owe them money, chances are great that you will not fight with them too much when they mess up -- which they seem to do rather often. In this segment we will look at a few issues regarding approaching your banker for money. Please understand that I am not trying to trash bankers. We small-business owners need them. But we also need a far better understanding of what drives them and how they relate to us. Bankers simply don't understand the challenges and issues that we small entrepreneurs face. We can try to educate them but that is a hopeless task, Or we can simply learn to bypass the idiosyncrasies. That's so much easier. My first job was at a bank, and I spent my first few years qualifying as a CAIB[SA] - Certificated Associate of the Institute of Bankers in South Africa - a qualification most revered by SA bankers. Business Plans and Bankers Almost every book that you read on small-business will focus on something that the author regards is absolutely critical success of the business -- the business plan. I have no doubt that a solid business plan is vital -- in the sense that it is prepared for YOU (the business owner) as a roadmap for the way YOU want to go. Yet most business plans are prepared in a hurry -- just to obtain financing. They are marvels of guesswork, optimism and fiction. And when you present your business plan to your local bank manager you're making the assumption that he understands financial statements. (At the risk of being harsh, you're making the assumption that he can read! One of the reasons for the banks investing so heavily in centralised intelligent software is so that they can operate branches with lesser skilled personnel.) When you place your carefully crafted work of entrepreneurial art on your bank manager's desk and ask him to lend you money, does he analyse the documentation? 99% of the time the answer to that question is -- absolutely not! In fact, at this time, your banker is interested in only one thing -- how much you personally are worth. Despite the fact that you are asking your bank to lend money to your business, in reality your banker is lending money to YOU under the guise of your business. This allows him to charge you a ridiculous interest-rate based on the fact that your business is a tad risky. (He doesn't have to work too hard to achieve this because every business owner knows exactly how risky this entrepreneurial game is.) When you read the next segment, however, you will understand quite how good bank managers are persuading us to pay more interest on a loan that we should, even though their lending is more than 100% secured by the security that we offer. The bottom line is that most business plans presented to banks are a complete waste of a Brazilian rainforest, and shouldn't even be committed to paper. The best business plans that I have ever seen are short -- usually just a couple of pages -- and represent the vision of the entrepreneur, rather than trying to factor in every possible future detail. We cannot predict the future. Why waste time trying? But a business plan that represents a goal or direction that we should be moving in -- that sure has value.

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© Peter Carruthers 2007

CrashProof your Business

One other thing that is important to understand when talking to a bank manager, is that the bank manager is not a bank. A bank manager is a human being with pretty much the same feelings that we normal human beings have. We assume that a bank manager making decisions is doing so purely for the good of his employer. We forget that a bank managers biggest fear -- just like ours -- is the loss of income. Unlike us, however, the bank manager has just one client -- his employer, the bank. If the bank manager makes too many mistakes, he loses his job, and his income. While your idea might represent a wonderful "opportunity" for the bank, it probably represents huge risk for the bank manager. He is more interested in protecting his wife and children, than in advancing your prospects for infinite riches. Bankers sell money Imagine this scenario. You  walk  into  your  bank  manager’s  office  because  you  need  to  borrow  some   money to continue operating your business. You  sit  down  and  he  says  “Do  you  have  a  home?” You  say  “Yes,  I  do.”   He  asks,  “What’s  your  home  worth?”   You think about it a while and deduce that you can sell the house for R400,000, the bond is R200,000 which means that there is R200,000 worth of equity there. So  you  say  “It’s  worth  R200,000." Does  your  bank  manager  then  say  to  you  “Hold  on  a  second,  if  your  house  is  worth  that  kind  of  money,   why  don’t  you  just  go  and  borrow  the  money  from  a  building  society,  or  from  the  bank  that  holds  the   first mortgage  on  the  property?” No,  he  doesn’t. What  he  says  is  “That’s  reasonable  – we’ll  take  a  second  covering  bond  on  your  home   and  we  can  use  that  to  back  up  an  overdraft.” He’s  not  finished  yet. He  says  “Do  you  have  you  any  policies?”   “Yes.”  You  reply. “What  is  the  value  of  these  policies?”  He  asks. "About a million rand." you respond. “No,  not  the  life  value  – what is the surrender value of those policies – the  cash  value.”   That is easy to ascertain. You just telephone your insurance company – which could be Sanlam, Old Mutual or Southern Life – and you ask them what this value is and they will give you the cash value. Does your bank manager suggest to you at this point that you might be better off by borrowing your own money back from your insurance company?

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© Peter Carruthers 2007

CrashProof your Business

He does not do either of these because he is not a financial consultant. Your bank manager's job is to sell as much money to you as he can, at the highest price he can, with the least risk possible. And so, the bank manager presses on. “Well,  that’s  another R100,000 so now we have got R300,000 worth  of  security  so  we  can  probably  lend  you  R100,000  on  overdraft.” He then lends you the money – on overdraft. At prime plus 8% because you run a very risky business. Now,  if  you  don’t  know  what  prime  rate  is,  Prime is the base rate at which banks will lend to their very best clients - typically these are stock exchange listed companies. Prime plus 8% - that’s  hugely   expensive. You’re  probably  thinking  “Who  pays  Prime  plus  8%????” Let me share a fascinating story. During the first year I presented the CrashProof seminar a young lady (who had just been retrenched) attended. She received a retrenchment package of R120 000 and decided to use this to start up a business. She went to see her bank manager and explained her situation. He advised her not to risk her own capital but rather to put it on deposit at his bank. She placed the money on fixed deposit at their current credit interest rate of 10%. The bank manager then advanced her R100,000 -- of her own money -- at prime plus 8% - which was about 25% at that time! She hadn't even thought about it until she attended the seminar. The Banking Miracle In every bank managers office is a piece of furniture that bears a startling resemblance to a chair. When you visit your bank manager looking to borrow money, your bank manager points to this piece of furniture and says "Won't you bend over my barrel?" You see, he knows that 9 out of 10 small-business owners wait until it's almost too late before they look for the working capital that their business needs. If you are one of the 10% who are ahead of this game, then you are under no pressure because you will only be needing money at some future point -- not at the end of this month! If, on the other hand, you DO need the money at the end of this month you certainly are going to bend over the barrel. And if you have already written out the cheques, you are going to really bend over. And if you have already posted those cheques, you are going to hug that barrel! I will probably repeat this point often during this book. That's because it's worth repeating. Your bank manager conducts between 10 and 20 negotiations about money every single day. You will typically meet with a bank manager to borrow money once or twice each year. Honestly, who is going to be better at this game? I am glad we agree on that. Now that you are fully extended over this barrel, your bank manager reaches into his desk drawer and takes out a large Queen pineapple. He grasps it firmly on the green part, holding the large spiky orange fruit aloft. He vaults over his desk and inserts the pineapple into a portion of your anatomy that doesn't often see sunlight.

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© Peter Carruthers 2007

CrashProof your Business

It is called the banking miracle. It isn't a miracle that it is totally painless -- even though it seems that way at first. And it isn't a miracle that you can still walk. The miracle is that you have just signed away every single thing you own; every single thing you have acquired over your lifetime; and every penny you will ever earn in the future -- in return for a small business overdraft. And the miracle is that you feel so good about it! Honestly, tell me that when you walked out of the banker's office you weren't relieved that you had managed to buy another few months? You didn't feel great because you were such a fine negotiator? (I might be going out on a limb on this one, but I was there as well -- signing every piece of paper I could -- and feeling good about every one as well.) Money is simple We’re  programmed  to  fail  financially.  That  doesn’t  stop  us from slaving away every day to make enough  money  to  pay  this  month’s  bills.  The  reality  is  harsh,  however.  Only  one-person in every 100 will retire comfortably. Only 4 business start-ups in every 100 will survive the first 10 years. In fact, the odds against us failing are as high as 160 to 1. It  starts  from  kindergarten.  We’re  not  taught  about  money  in  any  course  in  our  schooling  system  – from grade 0 to grade 12 – nor are we taught about it at Varsity. Of course we can study Economics, or Business Economics,  but  these  are  dry  theoretical  subjects  that  don’t  teach  you  about  cash  and  how  to   use it. [Apologies to our economist friends – but are these people the soul of any party?] As I write this it occurs to me that the only place that I ever learnt about cash [its history, its meaning, its  future]  was  when  studying  for  a  diploma  in  banking  in  1979!  And  even  then  the  course  didn’t  offer   any assistance in budgeting for cash or investing for its growth. Why are the odds 160 to 1 against us being personally financially successful? Simple really – we each spend more than 160 hours per month working to earn money – but then spend less than one hour per  month  looking  after  what  we’ve  already  earned!  That’s  insane!   My personal recipe for doubling the chances of my personal financial success is extremely simple. Spend more time looking after what I already have. After all, I can double my chances by spending just one more hour per month [bringing the total up to 2 hours] and the lost hour is hardly going to impact on my income earning capacity, is it? One of the interesting things about being a business voyeur [often also known as a consultant] is that you get to see all the stupid things other people do and relate them to all the stupid things you have done! Why is it that we individual business owners believe that we can out-negotiate a banker when we handle maybe 2 such negotiations each year, while the banker handles 2 before his tea- break on any given day? And why is it that we, who know nothing about money, don’t  invest  any  time  in   learning about it? How can we whine when we get screwed by those folk professing to look after our money? I never fail to be amazed by folk who abrogate their financial obligations to an insurance policy, sold to them 40 years ago by  a  person  whom  they  didn’t  trust,  and  which  they  haven’t  analysed  once  since   they started the investment. Yet when they retire and the policy pays out just enough for a full meal at MacDonalds they feel cheated. Why? The measure of our success in business,  as  in  most  of  life,  is  money.  It’s  the  scoring  mechanism.  Yet  
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CrashProof your Business

most of us know next to nothing about it. [Practical advice follows a little later, I hope.] Cash – a word derived from the Chinese – is a fascinating subject. What other single thing carries such emotional content. If you have no cash today, the month looms long and arduous, and this lack of cash is going to influence the way you feel more than any other thing. But if your pockets are full and jingly, you feel great and confident. Yet your full  and  jingly  pockets  might  still  be  equal  to  someone  else’s  poverty.   Money [or the lack thereof] is a factor in most suicides and divorces. When last did you see a rich, happy fellow end it all? Maybe  the  problem  is  that  the  payment  of  this  month’s  bills is such an exciting activity? Not exciting in the sense of a Springbok rugby test, but exciting in the sense of impending doom. [Actually, those are very similar these days.] So  this  task  occupies  our  every  waking  moment  and  we  simply  don’t  think  about  the future. After all, the future is still so far away. We get so engrossed in making our business efforts successful that we forget  about  the  life  behind  us.  In  effect,  what  most  of  us  do  [and  what  you’ve  done  if  you’ve  ever   signed a surety for an overdraft] is try to prosper our businesses, but we impoverish ourselves personally in the process. Honestly, how can you be going forward if you sign away the family home to borrow R30,000 on overdraft? If  I  can’t  understand  how  a  particular  investment  works  I  say "No". No matter how attractive it looks. My goal is simple. I want my savings to beat inflation by 5%. Boring really. But if I can manage to do that I will have enough to survive until the age of 90. [Which seems to be better than most folk are planning.] Then focus on this issue of money - as opposed to the technicalities of business - for at least 2 hours each  month.  How  did  the  savings  do  this  month?  What’s  changed  in  the  financial  firmament  – tax, interest rates, exchange rates? How is the rand doing against other currencies? Lastly,  stick  to  the  plan!  Don’t  use  the  money  for  anything  else.  Hide  it  away  where  I  can  see  it  and   control it but not spend it. This article was inspired by the woman of my dreams asking me to explain how she could have enough to retire on. So I created a tiny spreadsheet that calculated the effect of a monthly amount saved, combined with a few assumptions on savings rates, tax rates, inflation rates, and the monthly amount she wanted to draw when retired. Very sobering, but also very heartening. Almost  everyone  I  speak  to  says  that  they  leave  this  stuff  to  their  broker  or  financial  advisor.  That’s   really a bad thing to do. There are a few things in life you have to do yourself – money is one of them. Which brings me to something else of interest. 99% of us choose our financial advisor based on his/her personality – not on his/her financial performance! 75% of us never get a second opinion on any investment decision. Is it any wonder we end up old and screwed.

Accountants
Your accountant spent almost his entire university career studying accounting for large businesses. (Stock exchange listed companies, for example.) Since this is his entire knowledge base, he is going to use the same skills and techniques on your small business – with disastrous results. He  believes  that  your  personal  business  is  simply  a  smaller  version  of  a  public  company.  It  isn’t.  If  a   public company is like a pantechnicon, then your personal business is like a bicycle. It needs a completely different approach.

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© Peter Carruthers 2007

CrashProof your Business

The techniques and advice for large businesses are completely opposite to that applicable to small businesses like ours. Your accountant assumes that you have the same unlimited access to funding that a listed company has. The financial ideas that allow a listed company to shave a few percentage points off the costs and on to the bottom line make a lot of sense when the directors do not have to sign personal sureties. But they are worse than useless when the true cost of that additional profit consists of all the personal assets of each director of the firm! Your accountant is usually focused on growing your business - but your focus should be on growing you. Your goal is to make yourself wealthy, not to make your firm rich. (While the two concepts should  go  hand  in  hand,  they  often  don’t.) Your accountant is usually employed by your firm – not by you personally. The easiest way for him to measure how successful he is, is based on the amount of tax he can save for your firm. But that tax saving is usually at the cost of all your personal assets. Many  accountants  simply  don’t  realise  that  most  of  us  small  business  owners  do  not  want  to   eventually list our companies. We simply want to enjoy a solid income combined with a reasonably secure future. Why are you in business? What’s  the  point  of  getting  up  in  the  morning,  working  for  yourself  and  slogging  your  heart  out  for  18   hours each day, 7 days a week? Is  it  to  make  your  firm  rich?  No!  You’re  working  for  yourself  to  make  yourself  rich. Well, at least that’s   the general idea!! But your accountant hasn't been taught this. Almost all of his extensive education has been focused on doing the numbers for large JSE listed firms. [In fact, he probably dreams of having large clients like this because they pay well and on time. Both his formal education and his articles have been done with large firms. So he has a clear focus on what to do for such organizations, and how to protect shareholder values. And that's where the real challenge comes in. You see, if you are a large listed firm you have unlimited access to money - either by issuing more shares, or by borrowing from banks. So you get to play with money to make your financial statements look good. And it makes sense to finance assets or working capital because these funds are so easily accessible. Do you, as a small business owner, have such easy access to funds? Chances are that you don't. So when your accountant advises that it is better to finance something, he is not thinking the process through clearly from the perspective of a small business owner. In order to finance anything, as a small business owner, you will be asked to sign a surety. That surety will transfer every single asset that you have acquired in your lifetime thus far, as well as everything that you will acquire in future, to your bankers - in exchange for them lending you some money. Doesn't that seem as if you are going backwards? It does, doesn't it? That's because you are! I am going to show you how your accountant actively conspires against you personally getting rich. Don't shoot me if you are an accountant, please. This is simply my experience since 1992.
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Your accountant works for your firm - not you. In fact, there is a case to be made that your accountant actually works for the government, and is merely paid by you. His job is to ensure that your firm does not offend any laws - and he is obliged to report anything suspicious to them - or risk losing his licence to practice. With that looming over his head, what are the chances, do you honestly think, that he is going to give you much slack? When we think of making money we tend to have 2 broad concerns. The first is to cover this months bills. We usually have a pretty good idea of how much money we need to achieve this. And because a month end is usually urgent, this is our overwhelming focus when it comes to making our money. But this isn't the most important reason most of us are in business. Most of us believe that our current business efforts will secure our future. We have a vague unquantified goal of retiring at some future time. We expect to be able to sell our business at that time and live off the proceeds for the rest of our lives. This number is much more vague - for lots of reasons. Firstly, most of us have no real idea of how much money we will need at retirement. We don't really understand how inflation is going to affect the numbers, but we live in hope that we will have enough at the time. So most of us put our hearts and souls into building this business - and being encouraged by our professional advisors to sign our lives away to finance the growth. It's only once you have seen a 60 year old couple lose their business - just prior to their retirement and lose everything else in the process - their home and cars and life savings - that you realise how important it is to re-look at this process. I have counselled 5 couples in this situation over the past decade, and it is the most soul destroying place to be. What do you do when you have no future, and you have no time to recover a future? Advice geared on tax efficiency Let me illustrate how easy we can get lost by looking at the way we structure a very simple deal. I want you to imagine that you are about to purchase a motor car for your business. The motor car costs R200 000 – so it is either a very small BMW or a large Golf! You approach your accountant and ask him to advise you how you should structure this deal. Your accountant will advise you according to what he is trying to achieve in advising. The answer to that is simply this: he is trying to save you tax or he is trying to make the deal as cost efficient as possible. He could also be trying to structure it so that it doesn't damage your business cash flow. He will probably suggest that you purchase the vehicle in  the  company’s  name  and  that  is  what  you  will   probably do – on his advice! Now, in the books of the company, it will have acquired an asset – so  it  will  have  “taken  a  step   forward”.  But  simultaneously  with  the  asset  it  has  acquired  a  debt. So, theoretically, it has gone forward a step, then taken a step back, and returns back to zero. [Theoretically, and on paper, the asset equals the liability.] In reality, it is a long way below zero because the minute you drive the car out of the garage it is worth 30% less than what the firm paid for it. Not to forget that the debt has got capitalized interest so it is
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much higher than the car was worth in the first place! But  can  you  finance  a  car  in  your  company’s  name  without  signing  surety? No! This means that, despite the balance in the books of the company, you personally acquire a huge debt. There are effectively 2 debts covering the same asset. There is balance in the books of your firm, but not in your personal financial life. The firm is balanced. You are deeply unbalanced. If something goes wrong or the firm fails, the bank is probably going to take the car away – and what happens to the acquired debt? The debt stays with YOU! You have no car – but you have the debt! The bank is actually getting two debts for one asset – rather  a  good  deal  for  them,  don’t  you  think? Thinking along these lines, the more assets your business acquires in this accountant-approved manner, the further backwards you and your family are going to go! As your business prospers, you impoverish your future. Entrepreneurial Impoverishment Say you have been in business for about five years. You may have a business that is prospering but in your personal capacity you have signed so much stuff that you are so much at risk that it is no longer any more fun! You are more concerned about your business now than when you started (and so you should be!). That’s  crazy! What I am saying here is that we should ask our accountants the right questions – our focus should be adjusted so that we become enriched by our actions and not impoverished! This is OUR responsibility and  should  not  be  our  accountant’s  decision!  You  should  be  focused  on  growing  YOU  – and not your business. You cannot create personal wealth if you have to give up your assets every time your business needs capital. As your business prospers, you will inevitably run higher and higher risks. The concept is called ENTREPRENEURIAL IMPOVERISHMENT. The Most Important Entrepreneurial Question EVER The most important entrepreneurial question you can ever ask yourself -- and a question that you should be asking yourself with every single decision you make in your business -- is simply this: "In making this decision am I (insert your name here) getting richer or poorer?" Let me give you some examples. In purchasing this R10,000 fax machine over five years (and signing a surety which gives away every single thing I have ever earned in my life, and will ever earn) am I, Peter Carruthers, getting richer or poorer? In borrowing R50,000 on overdraft to fund my business (and signing a surety which gives away every single thing I have ever earned in my life, and will ever earn) am I, Peter Carruthers, getting richer or poorer? In purchasing this R100,000 bakkie to deliver my products (and signing a surety which gives away every
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single thing I have ever earned in my life, and will ever earn) am I, Peter Carruthers, getting richer or poorer? I am going to take a wild guess on this one and suggest that you answered with a resounding NO! The challenge for most of us is that we simply don't know of any alternatives. I will detail a whole bunch of these later in this book. For the moment, may I humbly ask that you ask this question for every business decision. Your business exists to make you rich. You do not exist to make your business rich. Simplicity Business is quite simple when you boil it down to the basics. You buy [or make] something and you sell it. Whatever is left after the transaction is yours. Simple, isn't it? Yet we do our best to complicate issues, don't we? If we get it right we Buy Now, Pay Now, Sell Now, Collect Now - and whatever remains at the end of each day is profit. But we all know that if we can play with the flow of the money we can win even more so we try to Buy Now, Pay Later, Sell Now, Collect Now. This is great because the cash piles up quickly [because we're only going to pay the bills at the end of next month]. Unfortunately, human nature being what it is, we almost always forget that there are some big bills looming, so we do our best to spend the cash pile in the meantime - usually on some essential piece of equipment along the lines of a ML430! [By way of explanation, that's an expensive Mercedes 4X4 for those of us who are automotively impaired.] Much more honourable, and far more common, is the business model in which we Buy Now, Pay Now, Sell Now, Collect Later! In this model we small business owners run out of money immediately, and need to head for a bank to get what our accountants euphemistically call working capital. The bank kindly condescends to lend us just enough money to strangle us with and as security they graciously accept our homes, policies, and everything we have worked for thus far in our lives! [Despite their overdraft being more than 100% secured by our life assets they will still demand a huge interest rate because 'your business is so risky'.] Then, of course, there is the Buy Now, Pay Later, Sell Now, Collect Later style of entrepreneurship which most of us lapse into after a while. The government loves this one because we now need to employ staff to handle all the administration and reconciliation. Accountants love this because it means they too will now have a role in our businesses. Attorneys love it because they get to sue everyone who doesn't manage to quite make the payment dates. [Ever wondered why nobody is interested in helping to make it simpler?] How do we get back to the simplicity and joy of running our own businesses? May I share a couple of simple points that may or may not be easy in your own circumstances? Firstly, focus on those numbers that will give you a quick feel for how your business is doing at any moment. Don't wait for your accountant to give them to you 6 weeks after you're already bankrupt! Pull them out yourself. In any business the most important number is the cash number. How much is in the bank; how much goes out at the end of the month; and how much is left [or needed]? The business game is simple: run out of cash, or cash resources, and you've lost the game! Once you know that you're going to survive this month end you can move on to the next important number - sales. My sales goal is written at the top of every page in my diary. That keeps me very

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focused in amongst all the other stuff that seems to invade each day. The business game is simple: have no sales and you're going to lose the game sooner or later.

Attorneys
When you have a specific legal problem you typically approach an attorney for assistance. His job is to analyse the problem in massive depth, and to tell you what to do at this particular point. You are paying for his time, his knowledge, and his experience. The average attorney does not spend much time focusing on the problems you face as a smallbusiness owner. If you ask him about a specific legal concept -- such as sureties -- he can give you chapter and verse on the subject. If you ask him how to not sign them, or to outline the pitfalls that you might fall into by signing such a document, the chances of you getting a useful answer are somewhat less. In fact, I have seen many attorneys advise their clients to sign sureties "because there is no option". You see, attorneys have spent a lot of years at Law School, and throughout their entire training they have had no (allow me to repeat that -- no) business training. This is not unusual. Most of the professions have the same problem. They spend so much time on the technical aspects of the job, but nobody seems to think it important that they learn a little bit about business -- even though their profession might have 90% of its members in business for themselves -- like doctors, dentists, architects, attorneys, and accountants. Isn't it interesting that many of these professionals experience bankruptcy - but not because they are technically incompetent. (If they were, they would be struck off the respective professional register.) No, they go bankrupt because they have no business skills. What this means in your life, is that you need to learn the correct questions to ask an attorney. If you ask what a document means -- he will tell you. If you ask what the implications are if you go out of business; or if your biggest client goes bankrupt without paying you; or if you are sued by the government for back taxes; or if the building burns down; or any one of the myriad wonderful things that happen in this business life -- then he can probably work through the scenario with you. But asking him to imagine all of that off his own bat -- that's usually asking too much. I want you to imagine, if you will, that you are about to rent premises. You are confronted with a fiveyear lease; starting at R10,000 per month; and escalating at 10% per year. . Let's imagine further that you wisely decide to take the lease to an attorney before you sign it. (Most folk don't do this! They assume that because they can read, they are qualified in Law. They assume that Law is logical, and that legal words have the same meanings as their identical English counterparts. They begrudge spending money for something that they cannot touch or feel knowledge.) Typically, when you hand the lease to your attorney, you will say something along the lines of: "Tell me about this document please." At this point your attorney will happily explain to you what each of the individual clauses means in legal language. And he will probably conclude by saying that the contract appears to be a "standard" contract, containing a "standard" surety clause, and telling you that it is perfectly "normal" for a business owner to sign such a contract. Would you believe that he is right! It is indeed perfectly normal but we business owner's sign this terrible document! Normal, in the sense that everybody does it. Not "normal" in the sense that it is the
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right thing to do. The reason that everybody signs this document, is that they don't quite know what they're signing; they don't understand the implications; and their attorneys advise them that it is "normal". Whenever you see a lease contract, there is a 99.9% chance that this contract also contains a personal surety. We will look at personal sureties in a great deal of depth later, and discuss why they are so dangerous for you, and how to avoid signing them. The point that I'm trying to make right now is that when you sign a lease contract, the chances are incredibly strong that you will also sign a personal surety. Why is this so important? Before I answer that, would you allow me to work through the financial flows that result from this lease contract? At the end of year 1, your business will have spent R 120,000 in rental. At the end of year 2, your business will have spent R 132,000 in rental. At the end of year 3, your business will have spent R 145,200 in rental. At the end of year 4, your business will have spent R 159,720 in rental. At the end of year 5, your business will have spent R 175,692 in rental. Let's imagine, for the moment, that your business fails (and we'll keep this awfully simple) on the last day at the end of year 1. (If you are a start-up business, there is a 50% chance that this will happen. Please don't shoot me, I am merely the messenger -- these are real numbers.) The question I'm getting to, is simply this: How much would you be sued for -- in your personal capacity -- three months after your business closes? And the answer is R 612,612! I know you just dying to find out why. Almost every lease you will ever sign contains a clause that says if the lease is broken the full outstanding amount becomes immediately payable - in this case that full amount is R612,612. Even though the lease was signed in the name of your company -- and the company remains liable for the debt - the surety means that your landlord can sue you personally immediately - even though the company has not yet been finally wrapped up. Before we look at the implications of this, let me share with you how it happens. If you are tremendously lucky, one Friday afternoon there will be a knock at your door. When you open it, there will be a shabby fellow outside - this will be the Magistrates Court Sheriff. (There are two types of sheriffs. One represents the Magistrates Court -- and he doesn't usually look as though he stepped out of the pages of Vogue magazine. The other represents the High Court -- usually for very large matters -- and he is usually dressed in a Gucci suit. The reason most creditors prefer to work through the Magistrates Court is that it is infinitely cheaper for them to attack you. There is usually a limit of R 50,000 for Magistrates Court matters, but believe it or not, when you sign the lease you ask your landlord to attack you in the Magistrates Court -- no matter how high the amount!) Anyway, back to the shabby Sheriff outside your front door.
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"Good afternoon, Mr Carruthers." He says. "I have here an invitation to a party that we are having at the local Magistrates Court at 9 a.m. next Tuesday. We would like you to join us." And so saying, he hands you a summons from the attorneys of your ex landlord asking you to attend court, or face a default judgment against you - for the amount of R612,612 that your firm owes them. This is how it goes down -- if you are lucky. If you are less lucky, you arrive at work on Monday morning, and your bank manager phones up. "Good morning, Mr Carruthers." He says. "What is this judgment that you have against you for R612,612? Oh, and by the way, as a result we have had to cancel your overdraft with immediate effect!" Isn't it interesting how polite everybody is when breaking such bad news to you? Would you believe it is usually much worse than the two scenarios above? Imagine being woken up at 3 a.m. on a Sunday morning. And being confronted with the same Sheriff. "Good evening Mr Carruthers. Do you by any chance have R 612,612 in cash on you right now?" "I am afraid not," I replied, "I am fresh out." "In that case, may I come in?" The sheriff asked. Actually, that was a rhetorical question, because he can come in -- the law make sure of that. He did come in. In Wynberg in the Cape a few years ago a judgment debtor tried to stop the Sheriff from entering his home. The Sheriff shot him dead! I believe they subsequently fired the Sheriff for being a tad overzealous. "That's a nice lounge suite." He said. "Who owns it?" "My wife owns it." I said. In fact, everything left in the house belonged to my wife. I had known there was trouble looming, and I had liquidated all of my own assets to meet the bills that I suspected I would have to pay. There were two challenges associated with this strategy. Firstly, I did not expect the assets of the company to be sold for next to nothing -- and so the money I was able to raise did not last very long. And secondly, I did not expect a range of huge judgments from landlords to hit me. My experience with the sheriff was the result of just such a judgment. "Can you prove that your wife owns it?" He asked. "What do you mean by proof?" I asked. "Do you perchance have an invoice made out to her for this lounge suite? Or maybe a credit card slip in her name? Or possibly a hire purchase contract?" Before I answer that question, can I revert to the present and ask YOU the same question? If a Sheriff were to walk into your home tonight, unexpectedly, could you prove that all the assets in your home actually belong to somebody else? It's not enough to prove that you don't own them. You need to prove that somebody else does.
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In my experience, this is extremely difficult to prove. One of that "benefits" of running your own business is a concept known as "cash flexibility". What this means is that when cash (reserve bank notes and coins) flows into your business, it stays there for approximately 12 microseconds before falling into your pocket and out of the "system"! (Yes, I know this isn't completely legal, but I am enough of a realist to know that it happens everywhere. And, no, I am not recommending it as a strategy!) Once this money has accumulated enough value, it magically turns into furniture, or something else exciting. (In case you haven't noticed this, this comment is made tongue in cheek.) The bottom line is that it's very difficult to prove who owns what. Even your ante nuptial contract probably isn't going to be enough -- mainly because most of the furniture in your home was probably purchased long after you were married -- and the ANC applies to furniture at the time of marriage. What this means, in effect, is that the Sheriff cruises through your home making a note of everything that he can take in execution of the judgment that you have received. In my case, that was the lounge suite, the dining-room suite, the TV, the hi-fi, the VCR, washing machine, tumble dryer, and my drill. On the way out the sheriff noticed I had an elegant wristwatch. (In a moment of madness, on a trip to Switzerland, I had bought a genuine Breitling watch -- with a titanium case.) I had tried to dispose of this watch, but the market for second-hand timepieces is not inspiring. The best offer I had had, was just enough to purchase a cheap Taiwanese equivalent. It hadn't seemed worthwhile. "Who owns that wristwatch?" He asked. "My brother..." I tentatively ventured. He took it off my wrist, put it in his pocket, and that was the last I saw of it. I cannot recall it even getting to the auction. The incredibly harsh reality is that your creditors will do everything they possibly can to take a default judgment. (A default judgment is one which is taken in your absence. Such absence is very easy to arrange when you are not even invited to the party - because ostensibly they cannot find you.) The next issue to come to terms with is the fact that there is no accountability in this process. Your creditor does not have to show any respect for your possessions -- and can take almost anything to sell at almost any price to meet the judgment. At the time that this happens you are simply not in a position to complain or argue. However, we're talking about the advice of attorneys, which brings me to a question. Why doesn't your attorney advise you about the implications of signing this surety? Why doesn't he say that if something goes wrong you personally will be held responsible for the total outstanding amount for this five-year contract? The answer is usually pretty simple. We don't ask! And he doesn't think to volunteer this information. Maybe a word about the education of attorneys is in order here. One of the most important concepts that an attorney learns with regard to litigation is this: Never volunteer information. He learns that if he volunteers information sooner or later he is going to make a mistake and destroy his client's case. This is so ingrained in his education and training, that he simply never volunteers information ever even when consulting. That's a huge challenge for us small business clients. The next question to ponder in the scenario -- how long does the judgment last? Well I have some bad
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news for you. A judgment is effective for 30 years. A normal debt has what is known as a "prescription period" of three years. In effect, this means that if your creditor hasn't tried to chase you for the debt, after three years the debt is essentially uncollectible. In contrast, a judgment that has not yet been settled lasts for 30 years. In effect this means that your creditor can approach you 29 years down the track and take away your stuff to pay this outstanding debt (plus any accumulated interest). Why didn't your attorney tell you that? And the answer, once again, is that you did not ask. Attorneys are not consultants. Nor are they business advisors. They are legal specialists, who will usually focus on the minutiae of a legal problem -- without seeing the bigger picture as it affects us small business owners.

Compartmentalise Business Risks
One of the biggest challenges we business owners face is trying to separate out personal lives from our business lives. It would be difficult without outside interference, but most of our creditors want to have increased leverage against us, so they push hard to ensure that the emotional aspects of your life are tied into them getting paid. One of the strategies of this business game is to keep your private life just that -- private -- and completely compartmentalised from the risks that your business runs. We're going to look at a variety of techniques to ensure that your business is always a long way away from your personal life. Because the linkage between our business and personal lives is so tight, however, this is a large section covering a wide variety of aspects. The core issue to keep in mind as you work through this material is simply this: Keep your risks away from your assets, and keep your assets away from your risks. You may think that you have this taped, because you have already compartmentalised your business risks into a limited company or a close corporation. That is just the beginning. All banks lending money to one of these business entities require that the owners (shareholders, members and anybody else with sufficient financial backing) sign personal sureties to secure the loan. As you will see these personal sureties are simply a bridge between your personal life and your business life (linking the two inextricably together). Consequently, once we have looked at the various legal structures available to you to achieve the initial compartmentalisation of the risks -- we will look at sureties in some depth. Once we understand exactly what the problem is, the answers are simple to develop. By the time you have finished the section you will know everything that you, as a business owner, need to know about sureties including: how to borrow money without them; how to finance assets without them; how to get them back; how to nullify them if you can't get them back; and how to have some fun with your bankers in the process! There is a very important reason we are doing this. In my experience over the past decade in dealing with people going out of business, one thing stands out. The higher the risks are (the higher the stakes) the less likely that we business owners are successfully going to negotiate our way out of trouble. This is because the costs of making a mistake are so horrendous. If you think your home is on the line when you're making a single decision -- how confident are you in making that decision? When the stakes are really high, we seem to be gripped by a paralysis of sorts -- and this allows our creditors to get away with murder.

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Never forget that your bankers chase more people for money in a day than you will in a lifetime. This means that they are very, very good at it. They know all the psychological hooks that are going to make you jump to their tune. By compartmentalising all of the risks a long way away from our assets, we buy ourselves an immense amount of room to manoeuvre -- to negotiate. Ultimately, when the chips are down, that's the most important thing you can possibly have -- and it is even more important than having money at that time. I have no doubt you will see why as we work through the material together.

Ideal Business Structure
Business structure is really boring unless you're an attorney or accountant. One of the most enduring young memories I have is of singing [not very tunefully] that old Sunday School song about the wise man building his house upon a rock. You will never realise the value of your business structure until you really need it. At this point your choice of business vehicle becomes almost exciting [and not in the positive sense]. Getting your legal business structure correct is like using a safety belt each time you climb into a car. It's boring, and sometimes a little restrictive - but the second you have an accident all the hassles over the previous years become worthwhile! The reason you put up with all the hassles is to prepare for that single moment - when you desperately need the safety belt. The challenge, however, is that you must be wearing the belt before the accident occurs. It's too late, otherwise, to try and buckle yourself in. Accidents usually happen really, really fast. We tend to choose our business structures for all the wrong reasons. And the wrong reasons are tax, tax and more tax! Talk about being penny wise and pound foolish. Although I won't be worrying too much about tax issues in this book - almost everything I recommend will be tax neutral or beneficial which means you win. However, we look at the current tax situation - what the current company tax rates are when compared to individual tax rates, and how Capital Gains Tax is applied when the business is sold, and a bunch of other nit-picking tax issues. But we forget a few really BIG tax issues. The most important of these is the question: What happens if you die in the saddle? What happens when a business owner dies while still owning a business - whether as a sole proprietor, a partner, a member, a shareholder, or a trustee. The short summary is that unless the business owner is separated from his business by a Trust [either the business is a Trading Trust or the shares of the business are owned by a Trust] then the following will happen when he dies: The banks will freeze all the business's bank accounts; SARS will conduct a complete investigation into the firm to retrieve any outstanding taxes - based on a CGT (Capital Gains Tax) evaluation of the business as a going concern on the date of death - or based on the CGT valuation submitted as part of the current drive; SARS will demand all such outstanding taxes, including CGT - even though the frozen business would by now be worthless, and since the firm would have no value, to extract these funds from the personal
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estate of the dead business owner; Any business creditors holding sureties will demand payment from his estate for outstanding business debts; leaving almost nothing for his family. [The Law allows just R50,000 to be given to the family from an insolvent estate.] When I think of your business structure, all I see is the depth of personal liability you and your family will be incurring. And that's the way I am going to discuss the various South African structures you can use. Unlimited liability Unlimited liability means just that. No matter what goes wrong, you cannot help but be fully responsible. You can never walk away. OK, I know what you're thinking right now. "Why on earth would I want to walk away?" I know it's not polite, or ethical, or nice. Walking away does not smack of integrity, does it? But what happens if your biggest client goes belly up without paying you this month? Or your biggest client bounces a cheque on you - just after you've issued a bunch of cheques based on his payment? Or your factory burns down and the insurance refuses to pay because your bank bounced the premium by mistake yesterday? Or a bomb takes out your restaurant and the insurance company takes 4 months to settle while you still have to pay rent and staff? Or you have a heart attack and just need to stop now? When you trade as a sole proprietor, or in a partnership, you take full unlimited personal responsibility for any business debts. This is a bad thing! Don't get me wrong. I am not suggesting that we business owners behave without integrity. I am, however, suggesting that the business world is a dangerous place to play in. Almost all of the other players of this business game will take huge precautions to ensure that they personally will not be held responsible for anything that goes wrong in their businesses. Why shouldn't we smaller entrepreneurs do exactly the same? If you look at the inordinate amount of money that stock exchange listed companies spend on structural issues -- group structures that can exceed hundreds of companies -- then you must ask yourself why? The answer is simple. Nobody can predict what is going to happen in the future. That means we must each take as many steps as we can to shield ourselves from unforeseen disaster. Putting yourself in line to pay any business debts -- irrespective of how they are caused -- is insane. To say nothing of downright irresponsible. We each carry a primary responsibility towards our families -especially our children. When we place ourselves in line to pay unexpected business debts, we also place our families in the same target. Makes you think, doesn't it? When you trade as a sole proprietor, or in a partnership, you take full unlimited personal responsibility for any business debts. This is a bad thing! Sole Proprietor
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Most of us start our businesses because we have to. Most of the entrepreneurial books I have read tend to put a very positive spin on the subject -- suggesting that we do it because we want to earn much better incomes, or because we want to risk our capital in the business market, etc. I can only believe that these books have been written by people who haven't ever run their own businesses! Most of us start our businesses because we have been fired, or retrenched, fallen ill, or some other seriously nasty reason. That means we need to start up fast. That means we start up with a minimum of formality. Typically we start out as sole proprietors. Starting out as a sole proprietor simply means that we start working for ourselves without registering a company of any sort. It also means that we usually do it with out any form of licensing. We are simply desperate to raise any sort of income. Who cares about accountants at this time? The advantage of trading as a sole proprietor, at least initially, is that the government doesn't know you exist as a business. That buys you a degree of tax flexibility -- even if it is illegal. (Trading as a sole proprietor is quite legal. Not declaring your taxable income -- which most sole proprietors forget to do initially -- is illegal.) The major disadvantage of trading as a sole proprietor is that there is no compartmentalisation between your personal affairs and your business affairs. You may recall me talking about a submarine earlier -- and how it is comprised of lots of watertight compartments? Any damage in any one compartment can be contained because that compartment can be sealed off. When you trade as a sole trader any damage spreads throughout your entire structure instantly. This makes you extremely vulnerable. Let's look at a sole proprietor who is married in community of property. His financial universe consists of his business, all of his assets, and all of his wife's assets. If somebody sues his business, immediately everything is at risk -- his home, his life savings, his car, everything that the business owns, and everything that his wife owns including her life savings and jewellery, and everything that the children own. If his wife drives into the back of somebody's Porsche, and she is sued -- immediately everything is at risk -- his home, his life savings, his car, everything that the business owns, and everything that she owns, and everything that the children own. You get the picture. Trading as a sole trader might be easy and incur less formality than other structures, but everything you own is at risk from every single business decision, as well as any personal challenges or setbacks. I think it is fundamentally unwise. We are looking to compartmentalise all of your business risks into a single structure -- just like a watertight submarine compartment. Partnership There is only one thing on earth worse than being a sole trader, and that is being in partnership! I am not talking about being a fellow member of a close corporation, or a fellow shareholder in a limited company - people we loosely call partners. I am talking about a legally constituted partnership. A partnership is almost as informal as a sole proprietorship. A partnership can be legally constituted on a handshake.

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When a partnership starts, each partner automatically and involuntarily contributes to the partnership everything he owns. And if he is married in community of property, that includes everything that his wife owns. If one of the partners can persuade somebody to lend him money, based on his belonging to that partnership, all of the partners take responsibility for that debt. (And for any partner married in community of property, his wife also takes responsibility!) Probably the worst aspect concerning a partnership is that when a partnership goes bankrupt - by force of law each individual partner is also immediately declared bankrupt. (I hate to repeat this, but any partner married in community of property will find his wife bankrupted as well.) A partnership carries all the negatives of the unlimited liability of a sole trader, along with a whole bunch of more negatives, because each partner takes responsibility for the actions of all the other partners. I think we can agree that this is not a good place to be. Limited Liability Governments worldwide recognise that no entrepreneur worth his salt is going to put his life on the line for every business decision he makes. The risks would be enormous, and would discourage anybody remotely intelligent from going into business for himself. Did you know that Roman soldiers were paid in salt? To say that a man was worth his salt was a strong compliment to his fighting prowess. Consequently, there are limited liability legal structures in almost every country in the world that allow an entrepreneur to set up a business in such a way that the business carries responsibility for itself. The only risk that the entrepreneur runs is that he might lose his initial investment in the business. Probably the best example of such a legal structure would be a firm listed on the Johannesburg Stock Exchange. This firm is owned by thousands of shareholders and is usually managed by a team of professional managers. No individual - whether shareholder or manager - can be held responsible for payment if something goes catastrophically wrong. At worst, the management loses their jobs if the firm closes, and the shareholders lose some (or all) of their investment in those shares. Such structures exist for us little guys as well, and it makes immense sense to bury/compartmentalise all your business risks in one of these perfectly legal structures. I know how important it is to all of us to meet our financial commitments. And I know how confused we all get when comes the time to distinguish between business commitments and personal commitments. And I know just how hard your business creditors will work to make you feel personally guilty if your business cannot meet its obligations. But, this is business. Just as your creditors are legally structured to minimise any risk flowing in their direction, and will walk away from any debts they economically can - so must you be prepared to do the same. I am not saying that you must walk away - just be in a position where you can walk away. I promise you that your ability to walk away will make otherwise intractable creditors become very negotiable. Let's look at a few of these limited liability structures.
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Close Corporation When you register a CC (a close corporation) you create a "box" in which you can compartmentalise all your business risks. Allow me to illustrate. Imagine that when you arrive at your factory tomorrow, all you find is a smouldering heap of ruins. Your staff are dancing in the streets because they face a few months of unplanned holiday. As you survey the remnants of your business, your bookkeeper sidles up to you and mutters guiltily that due to an 'administrative error' yesterday, there were insufficient funds in your bank account last night to meet the debit order from your short term insurance company! Consequently, the chances that you will be paid out are infinitely remote. This leaves a few questions. Who will pay all the creditors? Who will pay the staff? Who will pay the bond holder of the factory? If you are trading as a sole trader -- then all of these responsibilities will land directly in your lap. If you are trading as a CC, you have a wonderful option. You can walk away from the responsibilities! You can get in your car and drive to your holiday home at the coast and forget about all these challenges. (I am not suggesting that you actually do this, but it sure is a wonderful option to have at this trying time, isn't it?) Whose fault is this disaster? It doesn't matter. What really does matter is that everybody that has done business with your firm -- in the full knowledge of the risks that this entails -- is going to want money. If you are trading as a sole trader, they will exert immense pressure on you by threatening to take away your home, your life savings, etc. Because you are trading as a CC, their only recourse is against the CC itself - not you personally. This means that they are forced to be a lot more negotiable, and a lot less aggressive, when talking to you - because they also know that you can walk away at any time. "But what about the sureties?", I hear you cry. "I am still responsible for these debts because I have signed sureties!" Indeed you are. I will show you how to borrow money for your business without signing sureties shortly. BUT, if you hadn't signed sureties, would you agree that you have the option of walking away safely and with integrity? The CC Act allows you to operate with limited liability provided that the business is not trading insolvently, and provided that you are not trading maliciously - that is, with the intent to defraud or hurt others. These are extremely difficult things to prove - especially when all the papers were vaporised at the time that the entire factory was! Registering a CC is ludicrously simple. You complete the blanks on a form known as a CK1. This document goes to the Registrar of Close Corporations in Pretoria, and when it returns -- duly stamped and certified - - you have a new company. You can even register your business online at CIPRO -- Companies and Intellectual Property Registration Office -- http://www.cipro.gov.za - - a web site that is the result of a merger in 2002 of two former directorates of the Department of Trade and Industry. They have a call centre at 0861843384.
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The primary advantage of trading as a CC (against either a partnership or a sole proprietorship) is the compartmentalisation of all your business risks into a watertight compartment. This structure is infinitely better than a sole proprietorship or a partnership) but and is probably the best structure available - as at 2006. Here are a few of the issues. The registration cost for a CC is currently just R125. You will need an accounting officer -- not necessarily a chartered accountant -- to sign off your annual financial statements each year. This involves more formality than is the case for a sole trader. The CC is a registered taxpayer. That means that any income paid to any employee is subject to monthly PAYE -- Pay As You Earn -- tax. As a sole trader, or partner, your provisional tax payments occur twice a year. As a CC employee, you pay tax monthly. That can mess with your cash flow. Until January 2006, the real disadvantage of the CC structure was that only real live human beings could own a CC. This meant that you could not encapsulate your CC inside a Trust. This was very important from a tax perspective. On your death as business owner, your business forms part of your estate - with massive tax implications. By 'hiding' your firm inside a Trust the 'owner' never dies - and consequently does not precipitate these harsh tax consequences - which I have discussed more fully elsewhere in this book. However, this is no longer the case. A Trust can now hold the membership of a CC via a nominee - the Trustee. And given that auditing has become a hugely expensive and complex operation, and that auditors now have to report anything suspicious directly to the authorities - without giving you time to rectify the situation - it makes sense to opt for a CC as a structure.

[Pty] Ltd The formalities associated with setting up a Pty (Ltd) [limited company] are a little more burdensome than for a CC. And the costs are much, much higher. But the watertight door (think submarine) is tighter and safer. All of the advantages of limited liability -- as discussed in the previous section on close corporation's -apply to a Pty (Ltd) as well. The law pertaining to limited companies has been around for much longer than the law pertaining to close corporation's, and there are far more precedents in law. This means that the shareholders and directors have a higher degree of protection. It is also much more difficult to try and liquidate a limited company than a CC. Whereas liquidation proceedings against a limited company take place in a High Court (much more expensive and formal), the same proceedings against a CC take place in a local magistrates court (cheap and nasty). Given the current state of our local magistrates courts, and the way the magistrates are politically appointed, there is no guarantee that you will get a reasonable decision.

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The next advantage behind a limited company is a purely structural one. Anybody, or anything, can own the shares in a limited company. This means that you have flexibility. For example, if you own the shares in your business in your personal capacity, and you die, those shares immediately form part of your estate. This means that you will probably end up paying some form of estate duty (death tax). But if those same shares were held in your Trust (we will talk about Trusts shortly) then there is no estate duty. There are many reasons why you might want your shareholding out of your own personal name. We will talk about these when we talk about ideal structures later. Trusts A Trust is a limited liability structure as well. Trust law is constantly evolving. Some years ago Trusts were all the vogue as business structures because they allowed you (semi-legally) to avoid paying tax -and they were very difficult to police. Since then they fell into disfavour, but are now making an interesting comeback because they provide a few interesting advantages as trading entities. Registration is usually within 72 hours. There is no concern about name reservation - although calling your Trust the MacDonalds Hamburger Trust will probably provoke that esteemed purveyor of haute cuisine to question your motives. Although the registration cost is higher than for a (Pty) Ltd, a Trust does not need a CA or Accounting Officer to prepare the annual SARS return - which makes it less expensive from the first year. Trustees are not required to pay PAYE, UIF or SDL on the fees they receive - and this recent introduction is hurting a bunch of smaller businesses. [They still have to pay provisional tax on the income - but not every single month as is the case with PAYE. This frees up a bunch of cash flow.] As an entrepreneur you have some flexibility with the tax you pay on the proceeds of your Trust's efforts. Depending on the circumstances, the tax can be paid at the marginal rates of the beneficiaries. Even if you elect to pay tax at the rates that a Trust would normally pay - these rates are only about 2.5% higher than for a Pty Ltd or CC. I am assuming, of course, that your business ventures will generate a profit. [It seems sometimes that my primary goal as an entrepreneur is just to raise enough money to pay my taxes!] We will look at Trusts in much more detail later when we look at them as a structure to protect your personal and business assets - and in this regard they are the finest mechanism available.

All About Sureties and Securities
We loosely interchange the terms "security" and "surety". Yet they are completely different things! When your banker uses the term "security" he is referring to hard assets that he can convert into cash quickly and easily. For example, your home is security. It is a fixed (hard) asset. It is relatively easy to sell (convert into cash). And it is relatively easy to value. Your banker looks at the property in the surrounding area to determine an approximate value that he can sell your home at. He then finds out what is still owing on the mortgage bond. The difference between the price he can sell at, and the amount still owing, represents the equity/security value of the property. This is the value that he will use in determining how much money he can lend you against the "value" of your home.

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Your insurance policies are usually also "security". They are even easier to value. Over time, most of the older life insurance policies will acquire a "surrender" value. This is the investment value of the policy as it accumulates over time. A simple phone call to the insurance company offering the policy number will get the information your banker needs. The more guaranteed the value of the security, the higher the amount of money your banker is prepared to lend against it. Interestingly, some of the "investments" that the bank themselves sell they regard as very poor investments. Let me illustrate. Imagine that you have R100,000 cash. Your bank will happily accept this into a fixed deposit, and lend you R90,000 against the "security" of that fixed deposit. Your banks investment broker will try and persuade you to put that same money into a unit trust investment because it will offer you a better return -- even if it is a tad more risky. Yet that same bank will not lend you more than R50,000 against the unit trust investment! A surety, in contrast, is a contract in which you guarantee payment of the debts of a third party. Read on... Blank Cheque Let's put this into perspective. Imagine that you need R100,000 for your business. You approach your bank, because that is where the money usually hides. When you meet with your bank manager, he will ask you what assets you have to "secure" his lending to you. For example, he will ask you if you own your own home. He will also ask you if you have any insurance policies. He will get values on these assets, and these values will determine how much money he is going to lend your business. I don't know if you have noticed this yet, but we are talking about your personal assets backing a business loan. Your banker is not lending your "business" money. He is actually lending you money, disguised in the name of your business! And he will not lend more money to your business than you personally are worth! Having established that the value of the hard assets (that you are offering as security) exceed R150,000, he is happy to offer you a loan (usually in the form of an overdraft - about which more shortly) of R100,000. A simple question: is he at any risk at this time? After all, his lending to the business is 150% secured by your personal assets. When you are called in to sign the papers that he has carefully prepared, you will find a pile of documentation that a medieval library would be proud of! Being a prudent South African business owner, you will wade through all of the documents carefully signing each one in the indicated place. As you complete the last document, and just before your banker hands across his cheque for the loan, imagine that he asks you to give him a personal cheque of yours -- leaving the date and the amount open -- that he can use at some time in the future "if he needs to"! How comfortable would you be borrowing money from this man! At no time in the discussions prior to this has he mentioned this "personal cheque". I am willing to bet that you would back off so fast that you would fall over backwards! That blank cheque is exactly what a personal surety is! But if a personal surety looked like a blank cheque, that would be really poor marketing on the part of your banker. After all, nobody on earth would borrow if they knew that they had to give away a blank personal cheque.
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A surety document printed in a dignified dark grey, and in an extremely tiny font, and using words from ancient languages is so much more reassuring, and so much less threatening. Yet a blank cheque and a personal surety have exactly the same effect when you get past all the Latin bits. Bankers have had hundreds of years of experience in drafting these documents. We have somewhat less experience in understanding them. Please treat these documents with the immense caution they deserve. Forsyth  and  Pretorius  in  “Caney’s  Law  of  Suretyship”  say  that  the  “vast  majority  of  sureties  are   dictated by large financial firms. They’re  drafted  with  all  the  skilled  legal  advice  available  and,   inevitably,  favour  the  creditor  in  almost  every  respect” (Emphases mine.) Treat them with the respect you would a live rattlesnake cuddling your leg. The Bible says that the borrower is the servant of the lender. In reading the surety document carefully, and seeing what rights it gives the lender (typically your bank or landlord) you will see why it is couched in such delicate Latin terms! The burden in places on you is extremely onerous. Yet we happily sign them in the mistaken belief that our signature is an indication of our integrity. We will discuss this in much more depth as we work through these issues. Until recently people were sent to jail for willy-nilly signing these documents. Before the first World War people were even sent to Australia for signing these documents! And history is littered with stories of entire families being sold into slavery because the father signed such documents. We like to believe that we are more civilised now, but the bank (especially) wages a constant battle to ensure that you cannot escape the clutches of the sureties you sign. Why you won't win if you fight a surety Banks take sureties extremely personally. They are the cornerstone of commercial banking. You will understand then that the banks have spent hundreds of years perfecting these documents. Every attorney with any expertise in this area is already on retainer with one or other of the major banks -- if not all of them. When you fight a surety, you are fighting for a piddling amount of money in the grand scheme of things -- maybe a mere R1-million. Your bank, on the other hand, is fighting for its survival. If you were to win this case, they would be faced with thousands of claims on the same technicality that you have succeeded with. You are fighting for R1-million but they are fighting for billions. They are definitely going to spend more money and more effort on winning. (If they win, the money becomes immaterial -- because the loser is expected to pay the winners legal fees!) In effect, this means that if you win, the bank will simply appeal to the next highest court. Not only does this take immense amounts of money, but it also takes immense amounts of time. They have plenty of both. Chances are that when the bank sues you in terms of a surety, you will also be facing summonses and actions from a host of other creditors. This implies that you won't have the funds necessary to adequately defend yourself, even if you could find an attorney who would be prepared to help!

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When the summonses are coming in thick and fast -- one simply tends to lose track of them and give up. I have seen this often - both in my own situation - as well as in the circumstances of almost everyone I have since consulted with. Finding an attorney under these circumstances can be quite a challenge. Firstly, most attorney's are on retainer to one or other of the banks as debt collectors or conveyancers. (Conveyancing is an intensely profitable activity, and attorneys vie with each other to be on the banks "approved" list of conveyancers.) Why on earth would any attorney risk this profitable source of income and bite the hand that feeds him? The simple answer is -- he won't! Secondly, any attorney you do find is going to want to be paid in advance because he too knows it's a vain quest. And it's usually pretty difficult raising that kind of money at this point in your entrepreneurial career. 3 Parties Involved When we talk about a "personal" surety, there are always (at least) three parties involved. The reason we call it a personal surety, is that you take personal responsibility for the debts of somebody else. If you understand this structure behind a surety -- the various parties involved, and the relationships -then you will easily see how to thwart sureties later.

At the end of this section, it should be quite obvious to you that a sole proprietor cannot have signed any personal sureties for his own business -- because he is the business. [In his case it is not a separate entity.] Sureties are only called for when the business is a separate legal entity. Of course, this doesn't stop enthusiastic bankers from getting sole proprietors to sign these documents! That would be the equivalent of yours truly (indisputably male) signing a document that declared me to be female! It would be meaningless. Let's look at the three parties in more detail. Debtor The debtor borrows some money from a creditor, or incurs some obligation to a creditor. This debtor is usually your firm [the cc or (Pty) Ltd]. Although you might be the only shareholder, this firm is a separate legal entity and is not you personally. Your creditor will assure you that they run a huge risk in lending to your business. They have no guarantee that the firm will ever repay the borrowing. Consequently they want you, in your personal capacity, to guarantee that they will be paid. This will be their justification for presenting you with the surety document for signature. To repeat, as a sole trader, you and your business are indivisible -- you are the same legal entity. This

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means that you personally are responsible for the debts anyway. Signing a surety at this point doesn't give the creditor a stronger claim against you -- which makes it a meaningless exercise. If, however, your spouse is asked to sign a personal surety in favour of you (and you are trading as a sole trader) then you would be regarded, for the purposes of this discussion, as the debtor. Creditor The creditor lends the money. This is typically your bank or landlord, or trade supplier. The creditor is trying to tie you personally [and your wife/husband and children] into the deal so that if business misfortune strikes they can take away your personal assets. At the time that you enter into these arrangements, you will find that all the parties involved are fun, friendly, and enthusiastic about your future relationship. They will minimise the dangers of a surety, and assure you that it is their "standard" document, and that "everybody signs it", and that there is "no risk to you". They are lying -- albeit unintentionally. The people that you enter into a commercial relationship with are not the same people that collect the money when things go wrong! The creditor is trying to protect its advantage. They want to minimise all of the risks involved in the relationship -- and their preferred method of doing this is to transfer ALL those risks to you personally. I think that that is unfair. Interestingly enough, even if they themselves don't perform, you will still bear the brunt of any financial outfall. Surety/Guarantor The third-party in the surety relationship is you -- commonly known as the surety or guarantor. In signing this document you guarantee that the debtor will meet its obligations. The surety guarantees that the debt will be repaid – even though the surety is not the entity borrowing the money! Since I go into the obligations of the surety signatory in tremendous detail in the next section, I will simply reiterate one thing at this point. Do not sign surety documents! Ever! Under any circumstances. Why Sureties are BAD The most important clause in the surety document is in English, and it is just above the place where you sign. It  says  that  you  ‘fully  understand  everything  in  the  document’. Once  you  have  signed,  it’s  a   little difficult trying to explain to the court that you  didn’t  understand  it  at  all. Nowadays we blithely sign anything that doesn't move, and we forget how damning such a signature can be. Two thousand years ago that signature [or the 'X' that our ancestors used] was enough to commit you and your whole family to slavery if you failed to meet your obligations. There were no excuses and no exceptions! About 200 years ago you were consigned to Australia as a convict. Even recently - until 1994 - you could still be thrown in jail in South Africa as a result of failing to meet your financial commitments under one of these dreadful documents.
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Nowadays, about the worst that will happen is that you will lose every single asset you own, and collect a whole bunch of judgments which will effectively stop you from operating a business for the next 5 years. This section will explain what the various Latin terms in the surety document mean, and why they are so distressingly important to you. Excussion Imagine, for a moment, what happens when the bank becomes sensitive after they have lent your business R100,000 and now want their money back. The logical thing for them to do would be for them to sue the business for the return of the money. Once they have retrieved as much as they can from the business, the logical thing would then be to summons you -- personally -- for the remaining balance in terms of the surety that you have signed. There is nothing logical in a surety document. I am not even sure that there is anything logical in Latin! Almost every surety document I have ever seen requires that you renounce the benefits of excussion. What this means is that you are asking the creditor (the bank or landlord) to attack you personally before they attack the firm if they want their money back. They seem to be quite happy to do  this!  It  doesn’t  seem  logical  that  it  should  operate  in  this  way,  but   it does give the creditor a lot of leverage when they want their money back in a hurry. This means that the first you know of a problem might be when the sheriff arrives to attach your home. Division Once again, I'm going to ask you to stretch your imagination. Imagine that you are a 1% shareholder in your business. While your creditor takes advantage of your renunciation of excussion -- and sues you before suing the firm -- he can also sue you for the whole amount (plus costs) even though you will hold a minuscule percentage shareholding (or CC membership). When you renounce the benefits of division, you invite the creditor to attack you for the full outstanding amount – irrespective of your shareholding in the firm, your relationship with the other partners, or even whether you hold any shares at all. A seminar delegate approached me after a seminar a few years ago. He was the administrator of a hospital - not a shareholder - and in the course of setting up supply lines for his employer he had signed surety documents to the value of R4 million. He wanted to know where he stood as an employee. Could he be sued for any amounts outstanding - even after he had left his job? Unfortunately, he was right in the firing line. A recent court decision held that any employee signing a surety document could be forced to pay any debts in terms of that surety. This is not a good document. Typically, you are not even allowed to approach the firm (the debtor) for assistance until you
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personally have paid the debt in full, and been released by the creditor. Of course, your partners at this time are running for cover because they don't want to face the same challenges that you currently are facing! One of my fellow directors at Link managed to fly off to London, spend an enormous amount on jewellery on the company Diners Card account, and then return to declare himself bankrupt. Never forget that when all hell is breaking lose there is very little accountability, and even less integrity. Eternal The vast majority of the sureties that you will be asked to sign are unlimited in their scope. We tend to  believe  that  they  apply  only  to  the  debt  currently  being  negotiated,  but  that’s  not  true.  They  apply   to all debts in the future as well. A real estate agent in Durban attended one of my seminars in a few years ago. He had sold his business about five years previously. When we discussed the issue of surety is being unlimited in terms of future debts, he got a fright. The next day he went to see his ex bank manager. "You may recall that I sold my business about five years ago?" he asked. "Indeed I do." said the bank manager. "I don't recall getting my sureties back at that time." said our hero. "No, you didn't. We still have them on file." said the bank manager. "In that case I would like them back, please." said our hero. "That's impossible," said the bank manager "because those sureties are the only reason we are lending the current owners money!" We assume that because we are signing a new surety for each borrowing, that the surety applies specifically to that borrowing. That's wrong. The vast majority of sureties are eternal. Sometime ago I was asked for help by a business owner in Bellville. He had been approached by one of his staff members for financial assistance. He didn't have the cash to help her. She approached her banker who agreed to assist provided the employer signed a surety document. He did! She borrowed R5,000, which she repaid over the next two years. She then left his employ. About a year later he was summonsed by this same bank for R5,000! He called them to tell them that the money had been repaid before she left his firm. They knew that! But she had subsequently borrowed another R5,000 - which she hadn't repaid! He paid! It was either that, or collect a judgment which would have created a whole range of new challenges for his business. We're not dealing with morality here. We're not dealing with what's morally correct or incorrect.
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With what we're dealing are legal rights. And when you signed that surety document you gave away all your legal rights. The  question  to  ask  before  signing  any  surety  document  in  future  is  “In  signing  this  document  I  am   giving away every single thing that I and my family have worked for up until this point of our lives – is it  worth  it?”   This is an uncomfortable question because it invites a discussion of how else to finance the firm. We will begin addressing that in the next section, just after we have looked at how easy it is to get deeply enmeshed. How easy it is to get entangled May I outline a story that illustrates how easy it is to get entangled in this vast malicious web of sureties? Imagine that you have been working for a business -- we'll call it Hope Marketing -- for the past couple of years. You have added real value to the company, and the owners have decided to give you 10% of the shareholding in an attempt to prevent you from leaving in the future. Of course, this isn't quite how they present the offer to you! The bottom line is that you are being offered an opportunity to become an entrepreneur -- a business owner. Without any cost. At this point it would be wise to ask to check out the financial statements of the company, but I have yet to find anybody who has actually done that when presented with an offer of this nature. I am going to outline below a quick summary of some of the important items that our aspirant entrepreneur should know about before taking a shareholding. MD BMW Financial Director Mercedes Benz Bond on Office Premises Overdraft Surety for MD Home Surety for MD Brother United R1,000,000 Bankfin Bankfin R300,000 R300,000

Trust Allied

R200,000 R500,000

Volkskas

R500,000

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The items above are not unusual. You will notice a few things. Firstly, these banks no longer exist. They have all been amalgamated into a single bank - ABSA Bank. If you were to check out the financial statements, you would probably see the motor cars that have been financed. Accountants and banks, however, specialise in financing items "off balance sheet". They do this to make the financial records look better. The two sureties listed above would probably not appear anywhere in the financial statements. This isn't malicious, just negligence. Contingent liabilities (the polite term for sureties) are hardly ever listed, even though they should be. Getting back to our story, one of the first things you will need is a new car because your job involves visiting clients. We have discussed the matter with our accountants, and they have suggested that the car be financed through the business to achieve the maximum tax benefit. That seems to make sense. The car we have chosen for you, as a junior shareholder, is a green Golf Chico -- the ultimate in 2003 Spartan motoring! The 2003 price for this vehicle is R75,000.

The day arrives to collect your brand spanking new Golf Chico 1.4 at the agents, and you arrive to be confronted with a stack of documents representing an acre of denuded Brazilian rain forest. I have no idea how women deal with this, but I sure know how we men do. We pull up our trousers, stick out our chests, and look awfully important as we sign these first few entrepreneurial documents. God forbid that anybody should suspect that we have absolutely no clue about the real meaning in the documents we're signing. After all, everybody else in the firm must have had to sign them before, surely? And we cruise through the documents with big bold signatures [signed with that new Mont Blanc fountain pen our wives gave us for this important promotion]. But suddenly we stop, because in front of us, at the bottom of this almost never-ending pile of paper, is a document that clearly says 'Surety', or 'Guarantee'. We KNOW we should NOT be signing this. We have all heard horror stories abut folk who have signed these documents. Hell, Uncle Frank even went bust over one of these: it's a family
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legend. But here's the problem: we don't know how to say NO. Of course, we all try. We timidly say something along the lines of "I don't sign sureties." And then we wait. Bear in mind that the big fellow behind the desk does this all day - and that means he is going to be much better at this than you are. His  response:  “If  you  won’t  stand  behind  your  firm,  how  can  you  expect  our  bank to stand behind  your  firm?”. That's a killer argument, isn't it? Suddenly you feel like pond- scum for even daring to suggest it. And he is even questioning the integrity of your business - which [as we want him to know] is more solid than Table Mountain. Most of us cave in at this point, and sign. But let's assume you have another shot at trying to wiggle out of signing the surety. "God says I mustn't sign it!" You say more boldly this time, because you can even quote the biblical reference. God basically says "If you've signed a surety in favour of your brother, do not rest. Go to him now. Give him your coat, and beg him for release." Now you need to understand what a coat is, because a coat back in Biblical days is not the same as what we're wearing today. Back in Biblical days your coat was your most important possession. You wore it when you travelled. You wore it when you slept. It was the one thing that kept you alive in the desert. It was your most valued item. Your coat in Biblical days was a combination of a Gucci suit, a home in Sandton, and a BMW cabriolet! And here God is saying "Give away your most important possession and get rid of the surety." Now that's pretty powerful advice. I actually had a delegate a while back who came to a seminar and the next morning was involved in a negotiation for some floor space at a major Cape Town mall. He phoned me at seven minutes past one and said "Pete, I have a bit of a problem. These guys are insisting on a surety, and I told them I'm a reborn Christian and God says I mustn't sign this. And they said they don't care - they're Jewish!" Don't get me wrong this is not a religious story - merely an illustration that not much is going to get you out of this surety at this point, unless you have prepared well in advance. Irrespective of the arguments you use at this time, your banker finishes the discussion with: "If you don't sign the documents we don't give you the car."Now that is a pretty persuasive argument. At this point you start to rationalize. We all do. You take stock of all the risks. "After all, you say to yourself, it's only R75,000. And there are 2 other partners - which means you're only in for a third - R25,000. And the vehicle is comprehensively insured - so what's the worst that can happen? And, heck, it's only for 4 years - and look at the tax benefits! And, of course, everybody signs these documents when financing. After all, somebody must take responsibility for this debt. Hell, what would happen if we all ran away from our responsibilities?"
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At this point you have mentally reduced the risks to an acceptable level, and you're feeling downright noble about doing this. And so you sign. Let's just stop for a moment and look at the document that you have just signed. In this case it is a Bankfin surety form. You will have noticed [in the table above] that all our vehicle financing is done via Bankfin? The document that you've signed basically says that if anything goes wrong with this deal; if there are any financial problems with this deal at all; you personally are going to be responsible. There's a part of me that says "But hang on a second, that's fair. Somebody must take responsibility for this deal." What this means is that if you drive out off the forecourt of the dealership, and a bus comes down the road and goes straight through your car - and the insurers refuse to pay because your assistant/secretary forgot to notify them of this addition to the policy, then you personally must pay - if your firm cannot. That's almost acceptable, but the challenge is that there is more. Let's have another look at the document. If you read the document carefully you will find that: nowhere on that document are the following words mentioned:     Nowhere are the words "Green Golf Chico 1.4" mentioned; Nowhere is the amount of this deal mentioned; Nowhere is the registration number of the car mentioned; And nowhere is the engine number of the car mentioned;

Even the bank’s account number for this deal is not mentioned in this document! In fact what the document says is: "I, Peter Carruthers, take full responsibility for all current debts between Bankfin and my firm." Now if I can just draw your attention to the list above you will see that we have indeed got a few more debts with these guys. I'm driving a green Golf Chico costing about R75,000 and I have just acquired R600,000 worth of additional debts! That's in addition to the green Golf Chico. This is starting to look like a really good deal, isn't it? But let's take another look at that document. In fact, the only place that Bankfin is mentioned is in the logo. Bankfin is a division of ABSA - a bank comprising the remnants of Trust Bank, United Bank, Allied Bank, Volkskas Bank, and Bankfin. And the surety document states that: "I, Peter Carruthers, take full responsibility for all current debts between ABSA and my firm." Now if I can just draw your attention again to the list above you will see that we have indeed got a few more debts with ABSA.

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I am driving a green Golf Chico and I have just acquired responsibility for R1.8 million of debt! Plus the Chico! Tell me again about the integrity inherent in this document. But that's not all! The surety document also says that I take full responsibility for all future debts - no matter how these are caused. I am driving a green Golf Chico and I have somehow acquired the National Debt - more than R2.8 million and uncontrollable! I bet you didn't want to hear that, did you? Now lets look at a few more issues... Never Returned One of the issues that has interested me over the years -- immensely - - is how reluctant banks are when it comes to returning sureties. They will use all sorts of excuses to avoid giving you back the surety that you signed. They will tell you that they have filed it in their "obsolete section". Or it has been sent for "archiving". In both cases these statements would be fine -- provided that the surety document you have signed applies ONLY to the specific account that you signed for. For example, if the surety document applied only to the vehicle you financed, and you have repaid that loan in full, then the surety would certainly be obsolete. We have already discussed how all-encompassing the surety document is, and how it also applies to any future borrowings. Frankly, it doesn't matter where they "file" the document -it is still like a loose cannon waiting to go off. In the event that something goes wrong in the future and the debtor owes the bank money, the first thing that any competent attorney is going to do is to search out any old sureties. At this time the bank is only interested in money, and the certainly not interested in where the paperwork is located. And it won't do you a great deal of good at this time to try and explain your efforts to get it recalled. The story below will illustrate that in some detail. The background to the story is that I spent almost two years assisting a friend of mine through a business closure process. In September 1999 Colin closed his firm. At the time he banked with ABSA in Somerset West and the firm had an overdraft, a few petrocards, as well as a 'credit line facility'. On closing he approached ABSA and asked them what he should do about the outstanding balances. Some background. Colin had signed joint surety with a partner. Despite this he was summonsed within a few months for the entire balance - which he paid in full [about R45,000]. He also paid the outstanding balances on the petrocards. The balance outstanding on the credit line facility was R22,200, and Colin also settled R11,000 of that. This left about R11,200 outstanding. [There is some irony in all of this as Colin was lent this money by ABSA extending his mortgage bond.] Of course, the partner [isn't it always like this] didn't offer any assistance at this time.
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My involvement as an advisor at this point was to insist that Colin get a written release from the sureties in return for his payment. Colin settled for a verbal assurance from his ABSA manager that by settling the surety debts he was free of any future commitments. In February 2000, ABSA again summonsed a stunned Colin - this time for R68,531 - for the same money he had already paid them! Turns out that the funds he had paid them completely outside of the estate of the firm - were transferred to the liquidators in error! [Such a payment in settlement of a surety is never paid to a liquidator - ever.] A few months of boxing - with an attorney between the two of them - and it was agreed that ABSA would go back to audit the irregularities in the account. But on 7 February 2003 Colin received the latest ABSA missive in this ongoing financial discussion - but this time the ABSA summons was demanding R165,000! Of course it's back at the attorneys - but it would have been such simpler to get the paperwork signed right at the beginning, instead of relying on the 'word' of the banker in question. A verbal agreement is simply not worth the paper it's written on. The point of this story is simply that we small business owners are merely cannon fodder in the minds of our bankers, and their actions belie those generous promises that permeate their advertising. We take our businesses and our commitments awfully personally, while our banks seem only to focus on the money - without any regard for any personal relationship. And in closing, some immortal words from a German philosopher: If you want to get rich, don't rob a bank. Start a bank! Domicilium One of the clauses on the surety document is the domicilium clause. The full wording is domicilium citandi et executandi which, as I'm sure you know, is a Xhosa phrase that means "where you used to live"! This is the address you lived at when you signed the original document. Since most of us move house every five years, chances are great that you no longer live at this address. Why is this important? The answer is simple. This address is the LEGAL address for summonses -- and if anything goes wrong this is where any legal documentation is going to be sent. This is where the Sheriff is going to be sent. Even though your creditor KNOWS that you live somewhere else, he is legally entitled to sue you at this address knowing full well that you no longer live here, and that your chances of receiving the summons close to zero. Why would he do this? Like most things, the answer is simple. He will sue you at an address with you no longer live because this will allow him to get what is called a default judgment. It's much easier for him, and much cheaper for him, to go this route -- rather than to chase you, find you, and then spend the next six months fighting with you in court. In my particular case, ABSA bank sued me at an old address in Randburg when they were looking for me in 1993. They did this, despite knowing that I lived in Somerset West at that
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time. (I know that they knew where I lived, because they were sending me bank statements -pertaining to the account they were summonsing me for -- at my physical address in Somerset West.) Of course, I never saw the summons. This allowed them to obtain a default judgment at the Randburg Magistrates Court. Within days, they served the execution order on me in Somerset West. (The execution order allowed them to take all my furniture away. Fortunately, you can no longer be put to death for debt!) Not only is it cheaper and easier to obtain a default judgment, but the execution order tends to stop most negotiating dead in its tracks. Before the judgment, you have options. You can run, or hide your assets away (even though that's illegal), or raise some obtuse legal defence, etc. But once the judgment has been granted the game is over. No more discussion. It's no longer a negotiation. Unless you do what your creditor wants you lose your assets. A Typical Surety Document What the Latin bits mean Just a thought – why is it in an era of mail merge and powerful word processing that an attorney can’t  make  the  surety  document  more  readable?  For  example,  which  of  the  2  paragraphs  below   is more readable? Regular legalspeak I hereby bind myself/ourselves jointly and severally to – Crappy Bank [Pty] Ltd - ("the creditor"), and their successors- in-title, as surety/ies for and co-principal debtor/s in solidum with –Petes Company [Pty] Ltd -("the debtor") for the due and punctual payment and performance by the debtor of all debts and obligations of whatsoever nature and howsoever arising which the debtor may now or in the future owe to the creditor from any cause of indebtedness howsoever arising, including, without limiting the generality thereof any claims which the creditor may have acquired or may in future acquire against the debtor from any company, person, partnership, association or other legal persona whomsoever or whatsoever by way of cession or otherwise, legal costs on the attorney and own client scale, collection commission, interest and any other charges of whatever nature ("the obligations"). Common Sense English I hereby bind myself/ourselves jointly and severally to – Crappy Bank [Pty] Ltd - and their successors-in-title, as surety/ies for and co- principal debtor/s in solidum with – Petes Company [Pty] Ltd for the due and punctual payment and performance by Petes Company [Pty] Ltd of all debts and obligations of whatsoever nature and howsoever arising which Petes Company [Pty] Ltd may now or in the future owe to Crappy Bank [Pty] Ltd from any cause of indebtedness howsoever arising, including, without limiting the generality thereof any claims which Crappy Bank [Pty] Ltd may have acquired or may in future acquire against Petes Company [Pty] Ltd from any company, person, partnership, association or other legal persona whomsoever or whatsoever by way of cession or otherwise, legal costs on the attorney and own client scale, collection commission, interest and any other charges of whatever nature ("the obligations"). Neither is easy to read, but in my mind the bottom version is a heck of a lot clearer. So why is that  the  banks  don’t  personalise  the  document  to  make  it  this  easy  to  understand?  Anyway,  I   digress – here is a real surety document. If you want to get to the real skinny – just read the blue

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bits. Black text – the normal content of a surety document Green text – the bits normally filled in with a pen Red text– ugly bits Blue text – what it really means

-------------------------------------------------------------------------------DEED OF SURETYSHIP INCORPORATING CESSION OF CLAIMS 1. I/We, the undersigned [you put your name here] hereby bind myself/ourselves jointly and severally to – [the bank/landlord/etc puts his name here] ("the creditor"), and their successorsin- title, as surety/ies for and co-principal debtor/s in solidum with– [your put your company's name here] ("the debtor") for the due and punctual payment and performance by the debtor of all debts and obligations of whatsoever nature and howsoever arising which the debtor may now or in the future owe to the creditor from any cause of indebtedness howsoever arising, including, without limiting the generality thereof any claims which the creditor may have acquired or may in future acquire against the debtor from any company, person, partnership, association or other legal persona whomsoever or whatsoever by way of cession or otherwise, legal costs on the attorney and own client scale, collection commission, interest and any other charges of whatever nature ("the obligations").

In English, this paragraph means that you will pay any money owing for any reason at any time in the future – even if you are no longer involved with the firm – even  if  you  don’t  know  that  the   amount  is  owing  in  the  first  place.  Even  if  it’s  10  years  later.  There’s  actually a lot more in here – but we need to keep it brief. [But if your firm owes me money, and I owe the bank money – I can give them my claim against your firm and then they can chase you personally as well!] 2. I/we hereby expressly renounce the defence of prescription and the benefits of the legal exceptions of "order", "excussion", "cession of action", "no value received", "non causa debiti" and all or any exceptions which could or might be pleaded to any claim by the creditor against me/us or any one of us, with the meaning force and effect of all of which exception I/we declare ourselves to be fully acquainted.

In English this means that you have given away any defence that common law and common sense would give you, and you have confirmed that you completely understand what you have given away. 3. The rights of the creditor under this suretyship shall not be affected or diminished if the creditor at any time obtains additional suretyships, guarantees, securities or indemnities in
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connection with the obligations. Notwithstanding that this suretyship may for any reason whatsoever be held to be or become not binding in whole or in part upon any one or more of us and notwithstanding that it may not be signed by all of us, it shall be and remain of full force and effect and binding upon the others of us. In English, this means that even if the other party [the bank etc] gets another 5 sureties to sign, they can still attack you for the full amount. 4. I/We shall be bound by all admissions or acknowledgements of indebtedness made or given by the debtor to the creditor from time to time. The English version says that if your company signs anything or makes any commitment to the bank – even if you no longer own it – you agree to pay. 5. Should the debtor fail to discharge any of the obligations on due date, the creditor shall be entitled notwithstanding any contrary arrangement with the debtor, to demand from me/us immediate performance of all the obligations then owing by the debtor to the creditor, whether the due date for the performance of the obligations shall have arrived or not.

This one is good. If your company reaches an agreement with the bank to pay over time – the bank can demand that you personally pay everything now instead – even  if  the  amounts  aren’t yet due! 6. This suretyship is a continuing suretyship and shall remain of full force and effect notwithstanding any fluctuation in, or temporary extinction of the debtor's indebtedness too the creditor. It may not be withdrawn, revoked or cancelled by me/us without the creditor's prior written consent. Any consensual cancellation or withdrawal of this suretyship by me/us and the creditor shall only be valid and effective if reduced to writing and signed by both parties thereto.

Even if the bill that you think you signed for is paid – this means that you will still be responsible for any future bill. And the ONLY way to get this cancelled is to get it in writing and signed. Doesn’t  that  mean  that  all  those  old  sureties  that  ‘have  been  filed  in  our  obsolete section’  are   still valid? If you have ever tried to get a surety back then you will know how dangerous this clause is. 7. The creditor shall be entitled, whether before or after the due date for payment or performance of the obligations, without reference or notification to me/us, without affecting its rights hereunder and without releasing any surety hereunder, to release other sureties and securities; to grant the debtor extensions of time for payment and other indulgences; to compound or to make any other arrangements with the debtor for the discharge of the debtor's indebtedness; to accept any dividend in a liquidation or judicial arrangement on account and in reduction of the debtor's indebtedness; to alter or vary any present or future agreement between the debtor and the creditor.

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The bank and the company can do what they want, when they want, without telling you – but you must still pay for any arrangements they make. 8. A certificate under the hand of any director or manager of the creditor (whose appointment need not be proved) as to the existence and the amount of the debtor's indebtedness and the surety's indebtedness to the creditor at any time, as to the fact that such amount is due and payable, the amount of interest accrued thereon and as to any other fact, matter or thing relating to the debtor's indebtedness to the creditor and the surety's indebtedness to the creditor, shall be sufficient and satisfactory proof of the contents and the correctness thereof for the purpose of provisional sentence, summary judgment or any other proceedings of whatsoever nature against the debtor and/or the surety in any competent court and shall be valid as a liquid document for such purpose.

The short version says that the bank never makes any mistakes, so any document signed by them that says you owe them money means that indeed you owe them money – and they can use that document to get a judgment against you. 9. In terms of section 45 of the Magistrate's Court Act, I/we hereby consent to the jurisdiction of the Magistrate's Court having jurisdiction in terms of section 28 of the said Act in respect of any action to be instituted on this suretyship. This consent is without prejudice to the creditors rights to proceed in any other court having jurisdiction.

Since  it’s  cheaper  and  easier  for  the  bank  to  attack  you  in  a  lower  court,  you  have  just  said  they   can do it that way. 10. I/We hereby choose domicilium citandi et executandi at the address/es set out below at which address/es all notices and communications may be addressed to me/us and all notices addressed to me/us at the said address/es and despatched by prepaid registered post shall be deemed to have reached me/us three days after the date of posting.

You have asked them to summons you at this address [usually where you live right now] and the only way to get them to find you elsewhere is to send them a registered letter. Otherwise they can get a judgment against you without you even knowing about it. 11. As security for the fulfilment of all obligations hereby undertaken I/we do hereby pledge, cede, assign, transfer and make over unto and in favour of the creditor all right, title and interest in and to any amounts and claims from whatsoever source arising and which are now, or which may hereafter become, owing to me/us from any source and from any cause of indebtedness howsoever arising. In the event of any prior ranking cession existing at the date hereof the aforegoing cession in favour of the creditor shall operate as a cession to the creditor of any right of action which I/we may now or at any future time have against the prior cessionary.

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Since you owe them so much money you have just transferred all your future rights to them – including the right to your salary. 12. I/we hereby indemnify and hold the creditor harmless against any damage or loss of whatever nature which the creditor may sustain arising out of or in connection with the enforcement, cancellation or invalidity for any reason whatsoever of any agreement between the creditor and the debtor. I/we warrant and undertake that the debtor will perform all of its obligations of whatever nature which are at any time owed by it to the creditor.

If the bank incurs any costs at all – you’ve  just  offered  to  pay  them. 13. Should the creditor cede its claim against the debtor to any third party, then this suretyship shall be deemed to have been given by me/us to such cessionaries, who shall be entitled to exercise all rights in terms of this suretyship as if such cessionaries were the creditor hereunder.

If the wonderful person that you owe money to sells out to the Mafia – the Mafia get all the good  things  you’ve  given  away  in  this  document. 14. Any reference herein to the creditor, shall include a reference to all the companies included in the definition of creditor and to each of them separately and individually, jointly and severally, as if a separate suretyship had been entered into by me/us in favour of each of those companies for the obligations. Consequently, any company referred to in the definition of creditor in 1. above, may enforce this suretyship, any payment in full or in part to any one of them will extinguish to the extent of such payment that indebtedness, to the others of them, as the case may be. 15. The debtor shall be liable for and undertakes to pay the stamp duty applicable to this deed.

You even get to pay for the privilege of signing your entire life away! Signed at on this the day of 20... As Witnesses 1………………………………..  ……………………………….… I/We acknowledge and confirm that this Suretyship was fully completed at the time of signing it. 2……………………………….. --------------------------------------------------------------------------------

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If you feel that I have been unduly harsh – then please remember that I have met business owners who have been hammered on all of these issues – so I speak from experience. And it isn’t  pretty.

Do not sign Sureties
Thus far almost everything I have told you revolves around the seamier side - the distressing side of running your own business. We have looked at almost all the risks you are going to run as an entrepreneur, and in highlighting some of the solutions [keep your risks in a separate box from your assets] I have outlined a few horror stories. True, unfortunately, but scary nonetheless. This section is almost all good news. In fact, if you are following this book consecutively, then there remains one small piece of bad news to share - but since it concerns life assurance and is easily fixed - you won't mind. We're going to evaluate a few common scenarios - and look at how to finance them in a powerfully different way. Much as I would like to show you how to 'screw' your bank for all the money they have taken off you in the past, I am not going to do that. You see, almost everything that I am going to share now is not going to hurt your bank at all. In fact, they will love it! BUT, when you apply these ideas and strategies you will find that you come out of each scenario in a magnificently BETTER position than if you had used the banks 'standard' way of doing things. In other words, we have a true WIN-WIN situation. The bank is no worse off, and you are much better off! In fact, in a few cases the bank is better off than they would normally be - but I don't care too much about that as long as YOU are winning every step of the way. I emphasize this because I am often asked how we can 'get away' with this stuff. The questioner almost always believes that we are pulling a 'funny' in adapting our financing structure to suit ourselves. We are not going to do anything underhanded, or anything that will prejudice your bankers genuine interests. We are going to evaluate the pitfalls in the way banks currently finance small business, and adopt simple changes that ensure that the bank does not have undue influence on you and your family in future. Specifically, we are going to look at safe ways of borrowing money that do not involve sureties. And if any methods we adopt do involve sureties, we are going to look at limiting the damage these can do to us. And finally, in this section we are going to look at a few techniques for retrieving any sureties you may already have signed, as well as nullifying any that are not realistically retrievable. However, I need to ask your indulgence. Would it be fair for me to say that you do not have a formal business education? [99% of small business owners do not have a commercial degree B.Comm, MBA, etc - of any sort.]

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As a result, almost all of the knowledge we have gained has been through a lot of trial and a heck of a lot of error. [We always learn more from our mistakes than from our successes.] This means that you have an ingrained set of 'values' that you have acquired thus far in your commercial career. I am going to challenge a few of these values in this section, so I need to ask you to do something with me as you work through this material. Never, never, never say "NO" to any idea I share in this section. The moment you do that you will mentally switch off from the idea, and will not consider how you might use it. Rather ask yourself HOW you might apply this to your current situation. If you genuinely feel you can't, or you genuinely feel I am talking nonsense, please ask a question in the forum or chat room - giving me an overview of your situation. Please remember that more than 25,000 business owners are already applying this material to their daily business lives - very, very successfully. They include every profession, and virtually every service and industry imaginable. There have been very few places where the ideas suggested in this section have not been applicable. And finally, there is just one person who is responsible for your business success. That's you! My role in your life at this time is simple: to share some ideas that will prevent a catastrophic business disaster in your future. These ideas are like safety belts. The more you apply them before your have an accident, and while your business is simply driving along, the less chance of a crash. These ideas are not like airbags - to try implementing in the 12 microseconds after a crash. At that point it is too late! Financing Assets without Sureties As the needs of business have grown, a variety of financing mechanisms have developed ostensibly to assist business owners in acquiring the assets the firms need to produce income. That, at least, is the truth we all believe. In reality, the banks aren't interested in helping you make money. But they are really interested in helping themselves make money. Consequently, in developing products to assist us in financing our assets, where do you think their core concern lies? They are far more concerned about protecting themselves against disaster, than they are in protecting you. There's nothing wrong with that, as long as you understand it. We call that business. We're going to start out by analysing the traditional structure for financing an asset, and looking at why it's bad for you as a business owner. We are then going to look at some alternatives that work just as well, but succeed in protecting you quite dramatically - without impacting on the security of the lenders in any way. This makes them win-win strategies for all of us. A few core thoughts before we progress through this section, however. The second your firm is liquidated, EVERYTHING to do with the firm is handed over to a liquidator. You have no more input into the firm at all. This handing over includes all the assets whether still under finance or not. This handing over includes all the debtors and creditors, the furniture, the paperwork, the computers, the buildings and premises, the last payment to the staff, the last payments to SARS - everything! Even the administration.
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You no longer have a role within your [ex] business. You are free! I raise this issue because you need to understand that at this point it is too late to try and fix things, or restructure them, to suit your own interests. You must do that NOW! I raise it for another reason. I am stunned at how many of us business owners - in handing over our firms to liquidators - get inveigled into 'helping' the liquidator collect debts or deal with staff or suppliers. At this point it is his problem - no longer yours. You don't need to do anything unless you are going to be paid for it! Sounds callous, doesn't it? But please remember this section when you face that request. Why is Traditional Asset Financing Bad for You? When the firm needs an asset, the firm simply buys it. And if the firm doesn't have enough money, the firm simply borrows the necessary money. Traditionally that has been the approach. Simple, isn't it? And that's why it has been so effective for the banks. In a single, seamless, sales process, they managed to ensnare us and tie our family fortunes directly to our business fortunes. However, as we have already seen, 96% of all businesses fail in the first 10 years of their existence. Unless you have been there yourself, you can have no understanding of the anxiety that we go through as our businesses are collapsing around us, and we see a clear vision of every personal asset we have going down the same tube. The traditional structure is wonderful for your banker. It is terrible for you. I need to, if I may, digress for a few minutes about the quality of assets that we purchase. One of the advantages of being a consultant in this field is that you're able to look up the skirts of pretty much any business -- and it is often not a pretty sight! I am stunned by some of the stuff we buy when there are so many alternative options. Instead of buying we can rent on a short-term rental. For example, instead of purchasing a truck which is going to work one day a week, wouldn't it makes sense to just rent a truck for that day? It's not just the direct financial cost of the truck, but also the maintenance, insurance, risk, management, administration, and driver (which brings with it its own huge range of issues). Or a photocopy machine, my current bug bear. In my experience, once you have photocopy machine people find a zillion reasons to copy stuff - most of which doesn't need to be copied! Forcing your team to walk around the corner at the local copy shop and at 20 cents per copy is enough of an inconvenience that most of them won't bother. Or try attaching a scanner to one or other of the various PCs in your company and using that as a copier for the very few documents that need to be copied. (Which brings me to the concept of digital filing. Why not simply scan the documents and file them on a PC for reference -rather than filing them in filing cabinets (which cost money and take up space) where it's unlikely that they will ever be referred to again.) And when we purchase assets, why buy them new? Or why buy the best of breed? Often our need is so slight that any product will do.

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I have diagrammed below the traditional process of buying a motor vehicle. The firm decides it needs a motor vehicle. Since it doesn't have enough money, it approaches a bank for financing. Since the bank is lending to a legal entity (as opposed to a natural person) the bank wants to be sure that the owners of the company don't just run away if something goes wrong (at least that's how they explain it). Consequently they approach the owners of the company and ask them to sign a personal guarantee (surety) to ensure that if anything goes wrong with this deal in the future, the owners will pay the bill. It sounds so goshdarned reasonable, doesn't it? We need to take a deeper look, however, at this structure and look at the pitfalls before we can look at the alternatives. Let's imagine that you have financed a vehicle using this particular structure. My first question is this. What happens to that asset when the business closes? There are two answers to this question. If that asset is still being financed (the loan has not yet been repaid) then it is repossessed by the bank. If it has been repaid then the liquidator of the company takes it. Do either of these two fine people sell this asset for anything remotely close to its true value in the marketplace? The bank repossessions department know that if they don't raise enough money on the sale of the asset to cover the outstanding debt (including, of course, the costs of repossession), then they can rely on the personal surety that you signed to claim any outstanding money from you. They simply have no incentive to try and raise adequate funds from the sale of the asset, and consequently they simply give it away. If you have ever been to a repossession or liquidation auction, you will know what I mean. In my case, when I returned a Honda to Wesbank in 1992 -- with a street value of R40,000, and outstandings of R32,000, I was taken by surprise when they sold it for R17,000! I shouldn't have been. In fact, I haven't been surprised by anything that the banks have done since then. We have established that you will lose the asset, because it never belonged to you in the first place. It belonged to the company. Is your family rewarded for putting its life on the line in order to secure this asset? Were you paid anything extra for the responsibility you took in signing your family's life away in order to secure this asset? Nope, I didn't think so. One of the core aspects of a healthy financial life is to balance your assets and your liabilities. If we look carefully at the strong section in the books of your company, it indeed does have balance. On the one side it has an asset -- the vehicle, and on the other side it has a liability -the debt to the bank. However, if we look at your personal balance sheet, have you progressed or gone backwards? On the one side you have a liability to the bank for the total amount outstanding on a motor
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vehicle. What do you have on the other side? There isn't an asset, because that belongs to the business. There is just the sword of Damocles hanging by a terrifyingly thin thread (and if I may carry this allusion further, 96% of those threads break). Earlier we spoke about the most important question you can ask yourself when taking any decision for your business: Am I (me, in my personal capacity) going backwards or forwards in making this decision? If you are signing a personal surety, and taking on your firm's debts, without an asset to match that liability, then are you going forwards, or backwards? Whenever I speak to a business owner who has been operating a business for more than five years, we talk about whether things are going better now than they did in the past. Almost everyone I speak to tells me that they are making more money now (more cash) but that the risks have become so overwhelming, that it's like riding a tiger by hanging onto its tail. The business is doing better, but there are terrified, because they are trapped in entrepreneurial impoverishment. Most of us entrepreneurs do not have companies that work for us. Rather, we are trapped in working for our companies. We are in so deep that we cannot let go -- no matter how "exciting" the ride gets. The next challenge we face with this traditional structure is that within the firm, the assets are intermingled with the risks. This means that any one minor setback - such as the loss of a major client, or a staff member messing around with the money, or a large (even frivolous) lawsuit --can force the company to close. When the firm closes, all the assets are seized and sold (usually for far less than the market value) to satisfy the liabilities. This means that this kind of structure is like a house of cards, just waiting for a stiff breeze. One of the real problems we small-business owners face is that we are much more comfortable dealing with the technical challenges associated with our jobs, rather than the structural issues associated with our businesses. Have you ever wondered why stock exchange listed companies consist of so many discrete components? In any listed structure they have a variety of limited companies and trusts all held within the entity that appears on the stock exchange. They do this to protect their investors (shareholders) from a disaster in any one section of the business. Shouldn't we consider doing something similar for ourselves? Before we move on, may I summarise the risks of the traditional approach? You personally have guaranteed that you will pay any debt that remains (no matter how it happened) if the company cannot pay the bill. You have not been rewarded in any way for endangering your family.

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Hello. We must now skip 80 pages to the final part of this saga. My publisher has invested a lot of time and money in producing the paperback version of this book, and she has already been wonderful in letting me share this much. If you want the rest of the book, you can: • Join Business Warriors where we can help you implement these ideas, while giving you as much help as you want on both the operating and ownership aspect of your business. You will find us here. (No contracts and no tie-ins, as you’d expect.) • Order the paperback from Kalahari or Red Pepper or AardvarkPress. • Head down to your local Exclusive Books and buy it there. (And enjoy a fine coffee at Fego while you are at it.) And if you just want a weekly nudge about the travails of this small business life, browse over to PetesWeekly.com and add your name to the list to get your personal copy of the free weekly I have been writing since 2000. Thank you for reading this far. There are just a few more pages to go. I hope that you have time to put these ideas into action in your life. Good luck. Peter Carruthers [email protected] http://www.facebook.com/petesweekly January 14, 2am

© Peter Carruthers 2007

CrashProof your Business

I'm going to close with the final part of my personal story -- at least as regards the closure of my business in 1992. Right now, if you are reading this material, the chances are strong that your business is not facing imminent failure. In fact you're probably on the crest of a wave, and cannot conceive of how quickly and how bad things can get. If you have already had the intense learning experience of a business closure, then you will relate to this story. We often say that bad news comes in threes. That may be so, but when you are closing a business down, the news comes in a seemingly unending stream of brown pain. I'm going to share exactly what happened with me, but I have seen this sequence of events happen in so many other lives at the time of business closure, that I am almost convinced that it is part of a universal principle. We closed the business in June 1992. Not a great deal happened initially, but towards the end of that year the summonses began to arrive and the stress began to increase. In January 1993 I went into a diabetic coma. I have been diabetic since 1970, and usually well controlled. Stress destroys your control. I woke up in the emergency room of the Somerset West public hospital -- without a clue as to how I had arrived there, my tongue massively punctured as I had thrown a grand mal seizure as my blood glucose had dropped overnight. It cost R16,000 to finally get back home, and since I had no medical aid at this time, and no money, you can imagine how interesting it was. The next month, February 1993, I crashed my motorcycle while travelling towards Cape Town. This smashed my collarbone, and I invested yet another R16,000 in medical services. A few months later, on the last day in May, I loaned my car to a colleague overnight. This was to allow him to fetch my kids from school as I took my wife out to dinner. (We celebrated surviving each month with a month end dinner, something we still do.) He did not arrive at work the next morning. When we finally tracked him at about noon, he gave us a long, convoluted explanation. In essence, he had gone to a pub the previous evening in Somerset West. It had closed a little early for him (at midnight) and he had decided to drive the 50 kilometres into Cape Town to visit an all night pub. This section of road is probably the most dangerous section in the country, and when he fell asleep behind the wheel and rolled the car into a black township, this shouldn't have taken anybody by surprise. On that same day, however, my bank had bounced the short term insurance premium for the car -giving the insurance company a perfect reason not to pay. At this point, you're probably thinking to yourself that it is unlikely that you might ever experience such a stream of unfortunate coincidences. Trust me on this - when you close your business without taking the steps that I am asking you to take - you will have a very similar sequence of experiences. I had seen this happen in every case that I have dealt with since my own. It's almost as though, when things go wrong with this magnitude, you become a magnet for all the brown stuff floating in the universe. It is almost as though God has put his knee in your groin, and keeps pressing down. You simply don't have the resources to cope, because the bad stuff is coming at such a pace. This is
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why people commit suicide at this time, and why so many marriages fail at this time, and why so many people never recover. You owe it to yourself to take steps to prevent this. And this wasn't the end. In September of that year, I was left with one mode of transport -- a bicycle. At the end of September, my gardener stole it! In January of the next year (1994) I was selling life assurance. I was afflicted with an interesting disease called Bells Palsy. This is where all the muscles on one side of your face are paralysed. About the only good thing about this disease is that you lose all the wrinkles on your face - because none of the muscles work. It means that you have to sleep holding your eye closed. Selling life assurance is difficult enough, but selling it when you look like a ghoul, and you are involuntarily drooling onto the documents you are asking your clients to sign -- well, that is an exciting experience. By the middle of 1994 I had reached the lowest ebb of my life. It was midwinter, and winters in the Cape are cold and wet. One day I was at home at midday, having drank far too much the night before, and suffering from a hangover the likes of which you have never seen. I felt a complete failure. I was a failure as an entrepreneur. I was a failure as a husband. I was certainly a failure as a lover. (Business failure and all the attendant hassles does not do a great deal for your libido.) I was a failure as a father. And I was a failure as a human being. I was too embarrassed to see my friends. I had lost so much money -- more money than the rest of my family had ever earned. We were surviving because the Church was dropping food parcels at our door. I had made the transition from a mansion in Sandton to a hovel in Somerset West. And from a Porsche 944 to a VW Beetle 1974. You will gather I wasn't feeling great. My son came home from Playschool at noon. (He was there because his mother was working to support me, as I struggled to make ends meet selling life assurance.) It was raining. He rushed into the house, saw me lying on the couch, and jumped onto me. "Hi Dad, I love you. Let's go play!" Suddenly, for me, a light went on. My reality was one of abject failure. My son had a completely different view. Most of his friends at school were lucky to see their fathers after golf on a Saturday afternoon, because they were so busy working the rest of the time. But here was his Dad at home -for him to play with. As far as he was concerned, I was still a cool Dad. We tell ourselves constantly that we are doing this for our families, don't we? But that doesn't give us the right to risk everything that we -- as a family -- have ever earned -- no matter what the business reason might be. I no longer have the right to do that. Do you? If I had known the stuff that I know now, and that I'm sharing with you in this book, just six months prior to my business closing -- then my life would be very different now. The business would still have closed, but I would have lost almost nothing. It has been an incredibly challenging time since then, with lots of ups and downs. I am happy that I'm able to share this with you, so that you don't have to go through these experiences yourself -- or your family. My experience has been that if you do not attack any one of these strategies within a week of finding
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out about them, then the chances are strong that you not going to attack them at all. If that is the case, you do not have the right to contact me when things go wrong. If you cannot take steps now to protect yourself and your family, you cannot expect anybody else to bail you out of trouble later. But if you start taking action now, when something does go wrong in the future, you can call on me and my team for help -- and we will do everything we possibly can to help you. Put the strategies in place in your life and you will find that you don't need them, because being prepared is 90% of solving the problem. Good luck.

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