Unless you are a receiver manager or bottom feeder, opportunistic buyer, receivership can be a very ugly word.
As property & business agents we have mixed feelings about receiverships, on the one hand it can mean a lucrative marketing job that ultimately leads to a sale and commission. On the other hand it means that someone in our very close industry has gotten themselves into a heap of trouble and just may lose everything.
Receiverships paint banks in a very bad light and people often see them as the villains, but is that the case or do we just not understand how banks work?
So, the wolves are circling, business is down, what can you do?
First of all let’s look at some of the reasons businesses may get into trouble.
- A) Global Financial Crisis or economic downturn. Although this is not a common occurrence, the GFC caused more receiverships in the motel and management rights industries than we had ever experienced before. Occupancies were down, tariffs were down, the dollar was up turning tourism on its’ head. In many cases there was very little anyone could have done to save their business.
- B) Unfortunately we all get sick from time to time. The problem arises when the sickness becomes so severe that we can’t work or we need extensive amounts of treatment with illnesses such as cancer. These illnesses will tend to also take spouses out of the business to look after their sick partners which leads to further complications, and raises the question, “who is running the business”.
- C) Quality of the property. We have seen motels and management rights dig a hole for themselves because their properties get run down and there either isn’t the money available to fix things or in the case of management rights, unit owners are reluctant to spend money on refurbishing. Business slumps because guests are reluctant to stay in tired accommodation unless it is very cheap which in turn cuts through profits.
- D) Body Corporate issues. Tragically we see businesses get so run down that they end up in the hands of receivers due to managers fighting with bodies corporate. The manager spends his days and money on legal action fighting committees (in most cases just one committee member) and takes his eyes and mind off his business leaving himself open to the circling wolves.
- E) Simple inability or unsuitability. It’s a sad fact but it has to be said, some people should not be in business for themselves. You may have been the best lawyer, accountant, teacher, bank manager, tradesperson, golfer or real estate agent in a previous life, but that does not qualify you to run a resort or property management business.
So, we can identify the problems easy enough, what can we do about them?
Let’s work through them in the order above:
- A) As I stated there isn’t a great deal we can do when a GFC hits. Our financial future is in the hands of politicians and banks. The first thing to do is phone your bank to discuss options for your loans and business in light of the global downturn. In a case such this there will be hundreds of businesses in the same boat and the banks don’t want that much blood on their hands.
- B) This can be a disaster that unfolds and disrupts every part of your life virtually overnight. Your first reaction is to forget everything else and deal with the treatment. Can’t agree with you more, however there is a bank manager down the road who suddenly sees your loans and bills going unpaid and he has no idea what is going on so he takes positive action to protect the bank’s money. It doesn’t have to happen. A phone call to the bank manager to explain the problem, another phone call to an organisation such as ARAMA or your broker who sold you in to arrange temporary managers can alleviate the problems. The business may not run as well as it would if you were in control but it won’t be put into receivership either.
- C) Quality of the property. We have all been to a motel or resort and thought, “I don’t want to stay here.” The carpets are dirty or the furniture is threadbare, the walls need paint. Yuck! In a motel it’s the manager / owners cost to replace things, in a management rights it is the responsibility of the unit owners. Motel owners ask where will I get the money to refurbish? If the business hasn’t got a spare $100,000 lying around then there is only one other place. THE BANK. Bank managers get these calls all the time. They can arrange terms and payments to suit your business that will have the motel uplifted in no time. Management rights owners will be thinking, “That’s not going to work for me, I have 50 unit owners to deal with”. The question has to be asked, “Do your 50 unit owners know that their units need a refurb and what have you the manager done to help them. Unit investors are a funny breed, they don’t really care about their unit as long as a cheque turns up every month. When the cheques start getting smaller it is “always” the manager’s fault. Manager’s need to bring a solution to their unit owners, not just a problem. A chat to your local bank manager and interior designer who between them can price up a refurb package and repayment scheme can greatly assist a manager in selling the concept of an upgrade to cheque hungry owners on affordable terms.
- D) Body Corporate issues. Fact of life, in body corporate schemes with multiple owners of all different origins and persuasions, a manager will rarely get on with everyone. Fights and arguments occur from time to time. Don’t get personal in these matters, the minute you start calling committee members names and insulting them, they will make it their life’s mission to get rid of you. Before you spend many thousands of dollars on court costs and legal bills, seek advice from others that may have been through the same trouble. ARAMA is a good place to start or one of the various manager groups in your area. Failing that speak with your broker to see if he knows anyone that has experienced a similar problem and can offer help. If the problem becomes too personal, there is really only one solution, sell up and get on with your life elsewhere. It is not worthwhile ruining your health and bank balance over a personality clash that simply won’t go away. These businesses are all relationship and personality based, unfortunately you don’t need a personality or able to maintain a relationship to be on a committee.
- E) Simple Inability or unsuitability. It may be a very hard pill for some people to swallow, but they need to realise quickly if they are not suited to a particular business or they simply don’t possess the ability to run such a business. It happens, we can’t all be good at everything. Yes, there is a cost involved to sell early in your tenure, but better to realise a mistake and get out early than to lose everything when the business goes pearshaped. The other option is to seek expert help from other managers, organisations such as ARAMA or one of the management help companies specialising in the accommodation industry. Again it may help to keep your bank manager informed of your plans.
I will finish with just one piece of advice that has been gleaned from 22 years as a broker in the real estate and business brokerage industry. If you are having problems in your business and your income has dropped, profits are down and you are struggling to pay the bills, don’t make that first call to your brother or sister to complain about the business and the people. Make the first call to the bank manager, make an appointment to explain the situation and try and work through it with them. Bank managers don’t get any rewards or merit badges from their organisations for putting people and businesses into receivership. They do it as a last resort and it is usually because they have been left in the dark by borrowers and the file gets dumped on their desks to deal with a loan when it becomes a problem.
Knowledge is the key, an informed bank manager is a happy bank manager.
It’s a jungle out there, keep your head down.
RCA Business Brokers Team