Unfortunately, both scenarios can end up being very damaging to your reputation with investors, suppliers, customers and staff. So, when should I get an accountant? The answer is from day 1.
It’s why we’ve provided these examples of where business owners avoided hiring an advisor, or didn't do so soon enough, with disastrous consequences. Be sure to learn from their expensive errors.
Dan had a new software service idea. Being from a software sales background, he took on a coder to develop his new internet based service. This meant Dan soon found himself under cost pressure. He had the core of his website set up in terms of content and structure but he wanted to refresh his basic, initial brand and redesign the site around it to add credibility to his new service.
Given his predicament, Dan’s thoughts were, why hire an accountant to do the bookkeeping and management accounts now, when he could do this himself in the early days and so cut out the costs. He could talk to his start-up cluster and tech networks to find out what they’d done to achieve significant savings.
Unfortunately, this is where things started to go wrong; Dan found that the intricacies of his finances became very complicated quickly. Given everything he was implementing in his new business, recording and keeping track of transactions was increasingly difficult with disastrous consequences for his cashflow management.
Dan’s bookkeeping and management accounts ended up being consistently inaccurate. This meant when he needed to raise finance, he found he couldn’t approach investors. That's because his business’ performance and cash position were unintelligible. He couldn’t accurately gauge how well he was doing or what his actual funding requirements really were!
Very quickly Dan ran out of money. An unnecessary, short term opportunity cost decision proved detrimental to the long term survival of his business, something a business advisor would have helped Dan avoid from the very start.
Lucy ran an exciting food ingredients and menu delivery service with her business partner, Anthony. Thoughts to create some sort of shareholders agreement kept popping up in Lucy’s mind, but she never deemed it an immediate priority and kept pushing it to the bottom of her to do list. After all Lucy had many other aspects of her business to focus on; hiring employees, managing customers, and most importantly making a profit.
This proved a significant error with severe consequences. Not putting such arrangements in place left Lucy very exposed with no set structure to resolve any potential future shareholder issues that could arise.
Unexpectedly, Anthony had a tragic accident and subsequently passed away. The lack of planning to determine what should happen in this instance meant Anthony’s shares passed on to his wife under his will!
These events left Lucy feeling bewildered and frustrated that she had lost her business partner and friend, while also ending up with Anthony’s wife as a significant shareholder in the business – someone who was inexperienced in the trade and whom she had never intended to work with. Without the shareholders agreement it wasn’t certain what the next steps for the business would be.
Given these issues, Lucy decided it was best to exit and the circumstances surrounding the disposal meant it was a distressed sale. The business eventually sold for significantly less than what Lucy anticipated it was worth. Furthermore, a non-compete clause in the deal, which Lucy failed to pick up on, prevented her from starting or working in something similar for at least 18 months.
This had the effect of preventing her from getting a job, let alone running another business, in the area she's always made a livelihood from. It also consumed enormous amounts of time and energy, alongside high financial and emotional cost.
Had she worked with an accountant from the start, Lucy would have had peace of mind that the shareholders agreement with Anthony was being taken care of, including what would happen in the event of a death! Consequently, she wouldn’t have been left with what amounted to next to nothing.
Alongside the shareholders agreement, her advisor would have also recommended she take out Key Man Insurance which would have provided her with 100% control of the business. It would have also provided sufficient funds to hire someone in Anthony’s place, thereby avoiding all the financial and emotional sacrifice she endured.
Tom ran a new children’s learning app which in beta phase earned a lot of plaudits in the tech world. Soon his concept attracted the attention of potential investors. Naturally he sought the advice of entrepreneurs from his network and followed their tips about how to get investors on board to help him develop it and launch his business.
In following their guidance and typical (if understandable) tech ethos of "do it yourself and keep costs minimal", he researched some of the rules and regulations regarding the Seed Enterprise Investment Scheme (SEIS), to see if his organisation qualified. That way the business would be even more attractive to investors with the personal tax reliefs they'd receive through SEIS for taking on the risk of putting their money into an early stage business.
Bringing investors on board was an accomplishment for Tom, but managing this surge of attention and money was a huge challenge he hadn't anticipated for. To make things easier, Tom chose to acquire the money from all of the investors and then issued the shares 4 weeks later. His thoughts were that as long as he had the money from them then he could spend it on what the business needed because the SEIS scheme allowed him to.
The financial support helped the business grow and become successful. The app was made available on different devices and operating systems while new features were also introduced over time. Tom's plan was always to sell the business which he attempted to do after running it so well for 5 years. This was where things went wrong, because any disposal is subject to a due diligence investigation, so that potential buyers know exactly what they’re getting into.
In a major shock to all parties involved, the SEIS tax relief was disqualified from Tom's original investors. This was despite Tom's valiant attempts to ensure he was complying with EIS & SEIS regulations. His thoughts were it must be a mistake. Soon however, his critical error came to light.
The issuing of the shares four weeks after the money entered his business bank account meant HMRC looked upon Tom's action as converting a loan from the investors into shares. This disqualified the business from tax relief under the SEIS scheme!
The result was anger and frustration from all parties involved. The business had been so successful yet 5 years later his investors would not only have to pay back the income tax relief they claimed in the first year, they would also have to pay capital gains tax on the uplift of value between their purchase and sale date. Under SEIS this would have been exempt.
Doing it yourself, in whatever form, to try and save money is all well and good so long as you know exactly what you're doing. If you don't then the likelihood is your choices and decisions will very quickly end up having the opposite effect to what you intended. They could, as the examples demonstrate, cost you a lot of time, money, effort and stress which in turn could be devastating to the survival of your business.
We've seen hundreds of examples of such errors over the years among the start-up and tech communities. Instead, you should view the technical guidance, business counsel and even compliance work of an accountant and tax advisor as a very valuable and essential investment in your business. We keep you legal, identify efficiencies, ensure you understand how well you're doing and help you save time and money.
This financial role combined with a practical mindset (from running our own firm) means this relationship will reap sufficient long term dividends to take your start-up into good times and growth.
The content of this post is up to date and relevant as at 03/01/2017.
Please note that the names and characters used in the examples mentioned above are hypothetical. Please also be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.
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