Learning the ABCs of growth

What ABC Learning Centres can teach every business person.
 
The journey from high flyer to entrepreneur in crisis is a quick and savage path.

When ABC Learning Centres (ABC) revealed a 42% fall in half-year earnings to $37.1 million their share price was in trouble. The news that a number of the directors including CEO, Eddie Groves were subject to margin calls on their shareholding triggered a major sell off with prices plunging by as much as 70%. The company suspended trading on 28 February, allowing for a joint venture brokered with Morgan Stanley Private Equity for the sale of 60% of its US business for $775 million. The JV which is expected to complete by April will enable the company to reduce their syndicated bank debt by $750 million.

Market speculation and rumour surrounding a potential breach of financial covenants requiring the company to maintain a minimum capitalisation of $2 billion continued despite the company’s fervent denial. The media maintained the message that the company simply ‘grew too fast too quickly’. Off the back of a dropping share price Eddie Groves and his estranged wife received margin calls to pay up, sell, or secure the margin against other assets. Groves did not respond to the margin call and as a result, the collateral stock was sold by Citigroup’s margin lending department. A second margin call left Groves with just under four thousand shares.

While the market’s concern about ABC’s financial position may not have been accurate, the high octane growth of ABC from Australian success story to international conglomerate was enough to fuel the uncertainty. The aggressive push into the US through strategic acquisitions saw ABC become the number two child care operator at a cost close to A$800 million. The consolidation and investment in the child care industry is a vision shared by more than just Eddie Groves. Last May, Temasek Holdings, the Singapore Government’s investment vehicle paid $400 million for a 12% stake in the company.

Maintaining the balance between debt, growth and opportunity is an issue that affects all business people regardless of size. In ABC’s case the market appeal of the stock was its growth profile. This same profile elevated the risk of the stock, and the market allowed no room for error. At the first sign of risk elevating and growth easing, the market turned on its former darling. Every year, hundreds of small and medium sized businesses deal with the same issue. Surely growth is good and more is better. The typical SME entrepreneur chases growth with a passion, but doesn’t always have a good eye for risk. This risk will typically:

• Significantly increase the cost of funds;

• Limit the business’ ability to take up new opportunities;

• Cause the failure of the business; and

• Expose the owners to significant personal loss. Senator Sherry, the new Minister for Superannuation, has committed to removing the double payment burden in the super guarantee (SG) charge.

The key to managing risk is to be able to identify the early warning signs. Once you recognise them, the next step is to do something about it; even if that means taking the foot off the business growth accelerator and consolidating your position for a while.

Measuring by the numbers

While there are no absolutes there are ways that you can test your level of risk. Often your financial statements will tell the story. Here are some quick ratios to help you understand where you stand:

Quick guide to FBT

The FBT year ends on 31 March. Inside this article, we make sure you are prepared for the end of the FBT year, give you a few tips to avoid coming under the scrutiny of a tax office audit and explore planning opportunities available to you and your employees.

Managing motor vehicles

For motor vehicles, it’s important to have a record of what cars are subject to FBT, when things change, periods of usage and the method being used to calculate FBT. There are two methods of reporting FBT for motor vehicles:

• Statutory method - Make sure that you do an odometer reading on 31 March
• Operating cost method - Ensure that your log books are current.

It’s worth reviewing the method that you are using to ensure that it is providing the lowest FBT liability for your business and employees.

Are you at risk of an ATO audit?

The first step is to make sure that your FBT records are in order. If your business is ever audited, this is the first thing that the tax office will look for – the paperwork to back up what you have been telling them. Key areas of interest identified by the ATO include business owned cars (particularly luxury cars) and entertainment expenses

Informal arrangements between employers and employees can unintentionally give rise to an FBT liability for the employer, including the following

• Allowing employees to use company cars for private use (e.g., over the weekend);

• Allowing employees to occasionally use a car park which is located on business premises;

• Allowing employees to use business assets for their personal use;

• Allowing employees additional time to repay amounts owing to the employer; and

• Allowing employees to use housing owned by the employer while not in the course of undertaking employment duties.

Quote of the month

Sometimes a cigar is just a cigar.

Sigmund Freud

The material and contents provided in this publication are informative in nature only.  It is not intended to be advice and you should not act specifically on the basis of this information alone.  If expert assistance is required, professional advice should be obtained.