It isn’t very often that someone has been big enough to admit their mistakes, is it? Far better to review and correct them before they become obvious mistakes. This is why regular reviews should be undertaken as circumstances change.
A case study engaging a Wise Head Mentor
Jim Gleeson did a financial overhaul for a hairdressing salon which was going out backwards very rapidly. The owners had even stopped paying themselves and things were pretty dire.
The number of customers was excellent, the listed prices for their services were good and their fixed overheads were low? I couldn’t make any sense of why they were not doing well.
They were doing so poorly that they couldn’t even afford my fee and were going to close the doors instead. So I struck a deal with them that if I couldn’t make them profitable in 3 months I would waive my fee. It was an offer too good to refuse and they agreed.
I mulled over the figures time and again and sought a second meeting over a coffee with the owners as I knew there had to be another reason why they were going broke that I hadn’t yet uncovered.
Whilst waiting for the owners I saw a customer paying for the service provided. All went according to plan as the owner totalled up their services according to the fee structure. But then she said and that is less the discount of 25% blah! blah!
Whoa! What is that again? What discount? There was no mention of a discount or a discount offer?
When the customer had left I said to the two owners I think I have found two problems with your business and I’m looking at both of them!
To cut a long story short they were embarrassed to charge properly for their services. Somehow or other they didn’t believe their value and had died a thousand deaths at the prospect of charging ‘old’ friends full value. I was wondering how to solve this dilemma as it seemed patently obvious to me that there would be absolutely no discounts.
I hit on the idea that whoever provided the service did not process the payments. At my suggestion they put up signs advertising the full price so that the customer knew exactly how much they were expected to pay for a certain service.
Then I said whenever the customer comes to pay, the one that provided the service is to disappear and let the other partner do the charging. That way the customer won’t expect a discount and the person providing the service won’t feel guilty at the price.
After two weeks I had a call from the owners saying that they had never seen so much profit since they opened and that they could pay my bill at the end of the month… which was 3 months ahead of the time we had agreed.
A happy outcome with a minor adjustment and some lateral thinking.
Wise Head Case #2
A lawyer had set up his affairs with trusts and provisions that things would be at arms length from him. Then he completed a Will which reflected his wishes, if he died.
However, he had a very acrimonious divorce and then remarried.
- When he remarried he overlooked that all previous wills are void when one marries.
- He also neglected to check his trust deeds. His divorced (acrimonious) ex-wife was the appointor of new trustees to the trust deed.
So, inadvertently he had given his ex-wife power over his affairs. He didn’t have a Will and as things stood if he died he would have died intestate. When someone dies intestate the public trustee would have administered his estate and distributed it according to a formula which required that assets were set aside for his children. His trusts would have been of no use to his family as his ex-wife would have appointed new trustees which carried out her wishes. It was potentially an unmitigated disaster.
He quickly redressed this situation after a review.
Wise Head Case #3
A business owner needed his mother to guarantee loans, when he had started out years ago in business. He was very successful and built up a thriving restaurant business and acquired several properties.
However he was sued for negligence when a customer became sick after eating at his restaurant. Not only that but the bad publicity drove patrons away from his restaurant and he found himself in financial trouble. He tried to sell his properties to repay the loan but there was a caveat on the properties, preventing resale, as the land was contaminated.
He was declared bankrupt as his properties were unsaleable. To add insult to injury the bank foreclosed on his mother’s house as the guarantee was not discharged.
Paying attention to detail would have saved his mother’s house.
Wise Head Case #4
A farmer applied for finance of $600,000 from his bank as he had plentiful equity of $1.4M in his property. Property sales were buoyant and the so-called Pitt Street farmers were snapping up land like if it was going out of style. Purchasing land had become fashionable and primary production land was used for tax deductible purposes by city businesses, so it made good business sense to offset business profits against farm losses.
Then the Treasurer announced the quarantining of farm losses. The Treasurer only ‘announced’ that there would be legislation some time in the future. But it was enough to stop sales of rural land dead, as the Pitt Street farmers were no longer buyers and other farmers couldn’t afford to take on more debt as the (loan to valuation ratios (LVR’s) were hopeless.
The bank panicked and imposed a penalty interest rate on the farmer’s loans, which made it impossible to repay the loan at penalty interest rates.
When the farmer was forced to sale by the bank he received absolutely no bids at all as the property was worthless. By then his $600,000 debt had escalated to $735,000 because of the penalty interest and yet he got no offers of purchase, at any price. The farmer walked away with absolutely nothing and the bank was left with a farm that it didn’t want.
The sting in the tail of this story, was that the Treasurer never enacted the legislation and revoked the rule 18 months later. Pitt Street farmers then came back into the market restoring prices and the property was sold (by the bank) for $1.6M.
The farmer had to start again from scratch as he had very little control over what happened. He was in the right place at the wrong time and whilst he acted very conservatively and responsibly he could not have foreseen such a dramatic change.
