How to Avoid a Financial Disaster in Business
Starting off in business for herself was a dream for Marion Messih but, as the banking royal commission heard, it proved a financial disaster. The Melbourne woman is hard working and enterprising. By 2014 she had brought up a family, had a long career as a bookkeeper and manager and had lots to show for it financially. She had both a home and an investment property, but in 2012 all that changed after she decided she needed a “change of occupation; to earn some money and retire early”.
With her sister-in-law she looked around and decided on a food franchise. “We looked at Subway and Gloria Jeans then chose Pie Face,” she said.
To buy in to the deal they needed a loan of $362,500 which bought them a Pie Face Concession at Werribee Plaza in outer Melbourne from an existing operator.
Ms Messih said the franchisor insisted she move all her banking, including mortgages, over to Westpac as they had a franchise-funding arrangement with them.
Pie Face provided them a month’s training in Sydney before they opened for business which cost them a total of $10,000. When they opened they were enthusiastic and aimed to make $50,000 each a year. But their hopes were dashed. “The figures the previous owner had presented were slightly exaggerated. If we earned $500 a week that was a good week. It was woeful, we were working 14 hours a day.”
They built that up to $1200 by mid 2013 but their accountant said they were still not making money. Then disaster struck as the shopping centre was renovated, dramatically reducing foot traffic. The business shrivelled despite their move to open early to serve breakfast to the building workers doing the renovation in 2014. With no business, she decided to sell her investment property which brought her in $750,000.
That, she thought, would clear her home mortgage of $330,000, the investment loan, the debt on the business and leave her with $170,000 in the bank. But a day before she was due to settle, Westpac dropped a bombshell, telling her they would take all the money from the settlement to pay off her sister-in-law’s debt.
“It clearly shattered me because that was not all my debt,” she said.
“It was overwhelming and stressful, the worst time of my life. I worked hard to get to where I am and it’s all gone. I still owe money and I should be retired by now.”
So far, legal measures and arbitration have given her only $6750 in compensation and some relief from interest and bank charges.
Principal of Heart Financial Advisers Stu Varidel said there were lessons in the story for anyone wanting to go into business. “If you’re going into business you need to understand any personal guarantees you give over loans taken out with other people,” he said.
Often the banks will make you give guarantees for a business partner if you have more assets than they do.
“If you are in that situation you might want to think about why you are going into business with them at all,” Mr Varidel said.
He went on to say that anyone planning to go into a franchise should do their homework. Look at the history of other franchises in the group, get any figures you are given checked by someone reputable and most importantly, manage your excitement and seek advice. People get over excited and don’t do adequate due diligence.
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