Monday 2 November 2020 – Mediation Today
Eddie speaks with Vesna Cvjeticanin – Mediation Today on FM Radio 98.3 about what he’s been up to in the mediation field lately.
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Mediation
Fire and Hail
"What do you do when you’re faced with disaster? Talk, that’s what you do.
I've been working pretty hard and my business is doing well. I have a lot of good clients. I was looking forward to the new year, excited and ready to jump in.
Then disaster.
A spot fire burning in the outer suburbs, it came up to the rear of my workshop yard. It ultimately found itself into the back of my warehouse.
The firefighters were too busy looking after the houses that circled and enclosed the industrial estate. Access was not possible. There I was in the back of my yard with a hose. Hosing down my warehouse and the back fence. I did eventually put out the fire.
It wasn't too bad, but there was some damage.
I'd lost about a quarter of my stock.
All the metal frames I use to fix in my glass frames had buckled and some of the timber had caught on fire itself. I still had plenty of stock left though and I thought I could get on but some of the stock that was burnt was critical to my work program. My clients were understanding when I explained I had to push back jobs.
It did in fact get worse. I didn’t think slowing down my work program would be such a drama, but when you are coming out of the Christmas slow down, money wasn't coming through the door. I still had to pay for overheads somehow.
I was trying to get back into it, then two weeks later the worst hail storm in seven years, hit my area, punched holes in my roof and the water that came through, flooded the back end of the warehouse. So not only did I have steel frames that were warped and some of my timber that was burned, I now had a lot of rain impacted timber.
Now I’m in trouble.
Now I have lost about 60% of my stock. It was either buckled, burnt or swollen.
Yes, I had insurance but that was another problem. I geared-up late last year. I bought a lot of stock at discounted prices. My insurance claim will only partially cover the cost of my stock.
Now I have this situation where the money I'm going to get in from the insurance is not enough to replenish my stock, no money in the bank, my overheads need covering and I have a whole bunch of back orders to fill.
I found someone to help me.
I think it's unfair that I should go bankrupt, when this situation I’m in wasn't my fault.
We formed a plan, talked to my customers and suppliers and most of them were good. Clients were particularly good. They were happy to wait for their projects to start and the Australian Taxation Office was good too. There were a couple of creditors that were getting a bit antsy, but it seemed like they were having some problems themselves. So a bit of communication and some skillful negotiation, I hope that I can stick this out and get back on my feet.
A Builder’s Story
"It was a good lesson. A hard one to take. I spent 10 years working on my business, being an industry leader, building new homes. Not just any old house; not your rectangular box shaped house; complicated homes. Pushing boundaries with design and adopting new materials. You know it’s one of mine when you drive by. Like each homeowner, it’s unique in its own way.
I have won plenty of awards, the usual awards from industry judges but the awards I really cherish are the people’s choice awards. When I win these, I know I have had an impact. I am part of their lives and the creation of memories. When they are asked about their home, I feel so satisfied and proud that my name gets a mention.
At the height of my business I employed over 20 people and owned my own design company where we would methodically work and rework designs making sure my signature design and construct would show through. Usually my designs were approved by local authorities in a 4 to 6-week wait. Lately the turnaround has blown out the 3 months and I have clients screaming to have their homes built.
The reason - I ran out of money.
The more and more intricate my designs became, the longer it took to design, build and unfortunately, they cost more. I didn’t factor in the additional costs associated with managing these projects.
I was juggling the cash.
I would take a deposit from one homeowner and use it to pay the bills for another. I took some advice and the choice was stark. I would have to file for bankruptcy and put together a plan to work out my financial situation.
While the advice was that there would be some short-term pain associated with this choice, the long-run would work out. I thought to myself that’s not really a choice. My reputation, my homes, my design, would all be mud. I couldn’t possibly risk all that. I decided to keep going and be more diligent with how I managed the cash and also I would try and sign-up as many new clients as possible.
I lost control. Money coming in here and there, but it was going out just as quick there and here. The more I tried, the more the merry go round picked up speed. Phone calls, delays, anger and stress. I just wasn’t thinking straight.
It all came to an end when someone I owed money to filed for my compulsory bankruptcy. It wasn’t me, it was someone else who forced my business to be closed down. I thought I had a relationship with them. I had lost touch.
My business collapsed. I owed over $4 million in debts, not to mention half built houses.
Now families will have a different memory of my designs and construction. I discovered when you are under pressure you don’t see things as you should. You simply can’t do it on your own. You need help and that’s okay.
Small Business Disputes
Small Business Disputes
Options, options, options
Resolving small business disputes is tricky, with little by way of options. The usual plays are thrown out as alternatives; sell the business, appoint an external administrator (the type will depend on the circumstances) or some form of court intervention.
Here’s why you should consider the mediation process first.
1. Confidentiality
Business mediation is a confidential process, unlike litigation where you bare all to the public. It is arguable confidentiality is in a company’s best interest (and as a corollary a director’s duty). Public knowledge may tarnish a company’s reputation and value. Keeping conflicts private makes sense.
2. Providing options
Ideation is a bedrock tool for innovation. So to mediation. Mediation enables option generation. In mediation it is the business owners who determine which course of action is appropriate; the parties will construct and resolve their affairs. No one else.
3. Cost and time
We don’t have enough of either. Mediation is an alternative to costly litigation for example. Mediation will save money because it can bypass court fees and associated costs. Mediation can move quickly as the parties choose when to move forward rather than move to someone else’s schedule.
4. Flexibility
Following on from controlling time is flexibility. The parties can call on mediation at times when it works for the parties. Video conferencing mediation is also an option.
5. Control
By far one of the key benefits. The parties control the outcome, not the court. Usually the court is about winning or setting principles. Mediation enables parties to find some common ground and develop an agreement that could even provide mutual benefits.
Of course not all matters will resolve themselves. One thing is certain, commercial mediation services and facilitation (before conflicts escalate) should be key interventions to be considered.
Working with those in business to stay in business
This document below discusses many solutions to your business problems , including start up funding, working capital and cashflow. The information is also available as downloadable PDF about the tools of business.
Why businesses fail and how you can keep it from happening to yours.
Business Failure.
This is a phrase that strikes fear into business owners and entrepreneurs, and for good reason. Simply put, a lot of businesses do fail.
Why? This could be your product, your market, or uncontrollable and unforeseen economic events - or this could be you.
Ouch. That is not an easy thing to hear.
As an entrepreneur and business owner, you do not want to fail, and if this does happen, you want it to be despite your best efforts. You do not want it to be because of something you did or did not do.
Yet a lot of the time, that is exactly why failure happens. The person running the business does not understand one or more basic fundamental business principles, so they are not able to take the necessary steps for success.
Don’t let that happen to you.
How to avoid being the reason your business fails
In the over 30 years’ experience of helping business owners, I have yet to come across a truly unique way of going bust. In the interviews conducted with business owners and entrepreneurs who have personally experienced business failure, I see the same problems over and over.
Understand the reasons why businesses fail, and take the steps to make sure that yours does not. Get control of the fundamentals.
Let’s back up a bit and go over some numbers.
What the statistics tell us.
Statistics tell us that experience, planning, and capital management skills are major factors for why businesses succeed or fail. See page 6 to see research results on business failures.
Although statistics like these are helpful as a starting point for understanding what could go wrong, they do not tell you the whole story. They certainly do not give you a way to identify and overcome the problems that may crop up in your own business.
That is why I’ve written this business fundamentals primer. Entrepreneurs and small business operators need to be able to find and fix leaks in the pipes before they become gushing rivers of lost money.
I have many years of experience working with struggling businesses, helping them to get back on track, and I have found there are seven big elements that determine success or failure.
Whether you are starting a business and want to get it right straight out of the gate, or you have become worried that maybe everything is not as it should be with your existing business, tackle these elements one by one to make sure you are on the right track.
- Lack of experience
- Poor location
- Poor financial control
- Ineffective strategic management
- Cash flow planning
- Lack of experience
- Insufficient capital
- Poor location
- Poor inventory management
- Over investment in fixed assets
- Poor credit arrangement management
- Personal use of business funds
- Unexpected
Statistics maintained by the Australian Securities and Investments Commission in Australia reveal the reasons why businesses fail.
Within the last couple of years, the US Small Business Administration cited these as the major reasons businesses fail.
Here is a record of the top 5 reasons for business failure from the Dun & Bradstreet Business Failure Record, 1981.
- Inadequate line experience
- Inadequate managerial
- experience
- Unbalance experience
- Incompetence
- Unknown
Gustav Berle in The Do-It- Yourself Business Book adds the following two reasons.
- Competition
- Low Sales
What I've gathered from years of working with struggling businesses.
Get these elements right, and you are well on your way to a thriving enterprise. Get them wrong, and well… you end up talking to someone like me to try to avoid disaster.
Following are the top seven elements.
Startup Funding
Startup funding is all about the money you will need to start a new business. Here are some of the issues you face when you make these decisions.
How much will you need? Expenditures fall into these three areas.
- One-time expenditure
- Operations
- Growth and expansion
Step One: Estimate your costs
This workup should give you a good idea how much cash you will need.
- Formulating your business idea, product or service
- Validating your business idea, product or service
- Licenses and authorizations
- Legal costs
- Accounting costs
- Insurance
- Rent
- Materials / inventory
- Business coaching
- Marketing
- IT systems
- Staffing costs - salaries and other payroll expenses like workers’ compensation
You have probably heard the old startup adage “Halve your revenue predictions and double your cost estimates.” The point is, you should always expect something to come out of left field and surprise you, because at some point, it will.
Most businesses scream out under capitalization or lack of startup funding – money is tied up in their working capital. When the cash is tied up, it leads to further problems. You delay production and your scheduling falls behind. That means you now need more money to cover overhead costs you had not budgeted for, which in turn reduces your profit. When your money is tied up like this, you tend to start relying on bank financing and avoid paying your creditors or taxes.
Next thing you know, you are a business failure statistic.
Step Two: What will be the source of the capital?
What will be your mix of startup funding – equity or debt?
With both forms, you can raise money from traditional or other sources such as:
- Banks
- Friends and family
- Angel investors
- Government grant funding
- Crowd funding – internet sites that facilitate funding for projects by collecting small contributions from the general public
- Large venture capital investors
Equity
This means taking a stake in your business. You will only get a return on your stake if you make enough money to pay all the bills and have some left over; that is when you make a profit.
The more equity you give away, the more control of your business you lose. If the business is wound down, you will likely lose the lot, unless of course you sell your business for more than what you invested in it.
Debt
With debt you borrow money on a promise to repay the loan. The repayment comes with conditions. You will be required to pay interest and probably provide some form of security, whether it is in the form of the business, your personal home, or in many cases, both.
The more debt you take on, the more debt you have to repay, and if you get in over your head, the higher the probability that you may risk bankruptcy.
Whilst you make the loan repayments you are in control of your business. Miss the loan repayments and you will lose control of your business.
Working Capital
Working capital is the money used in the day-to-day trading operations. It is a measure of the current assets of a business less its current liabilities.
Working Capital = Current Assets - Current Liabilities
Current assets include cash, debtors and inventory. Current liabilities include any items which are due to be paid within the next 12 months.
Simply put, you need to have enough cash to keep the business liquid; that is, enough to pay the bills as they fall due.
Here is the tradeoff.
"Hold high levels of cash and stock, and you will remain liquid, but with lower profits. Hold lower levels of investment, and profits may be higher, but with greater risk of liquidity."
Get this wrong and it will destroy you. Working capital is a complex mix of time and money, and you should have defined policies for it.
Policies around working capital
- What level should you have
- How to manage inventory, receivables and payables
- What level of investment
- How much of each – inventory, receivables and payables
- Who to have accounts with, what are the terms of trade
Ways to fund working capital
- Cash reserves – subject to what return business owners want
- Overdraft – usually repayable on demand, with an interest cost
- Fixed term loan – usually long term, with a higher interest cost
- Trade creditors – subject to terms offered by suppliers
Again, there is a trade off between risk and reward.
"You could fund your whole operations with long term funding, and whilst you will be liquid. It will cost you more, so profitability is lower. Using short term funding to cover the whole of your operations trades profit at the risk of liquidity."
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"Try to match short term funding with short term needs and longer term financing for your stable working capital and longer term asset needs."
The Cash Conversion Cycle
Making money is one thing and converting it into cash is another.
The cash conversion cycle is the number of day’s cash sits out of the business (inventory and sales of account) less the days you can have with the cash in your business (how long it takes you to pay your bills).
How quickly can you convert the capital you invested from a spend, to putting it through whatever you are doing, to a recovery back into your bank account?
A very simple practice to get cash back into the bank is to make sure your customers pay on time. If you have given your customers 14 days to pay the amount you are owed, then you should make sure the amount is actually paid within 14 days.
Letting this blow out to 21 days or more just means you are giving your customer a loan without charging interest.
Here are some issues that will affect how quickly you can convert your investment in working capital into cash.
What sort of trade terms are you getting and how long does it take you pay?
The more time you can get from those to whom you owe money, the better. Paying accounts is a little tricky. How long you get to pay your accounts will depend on your supplier and the deal you negotiate with them. Risk your reputation if you don’t manage this well.
How long is it taking you to convert raw materials into items you can sell?
Take into account waste, inefficiencies, and losses. How long does it take to make the goods? How long does stock sit on shelves? Improving these times will shorten your cash conversion cycle.
How much time are you giving people to pay, and how long are people actually taking to pay you?
Let’s say your average debtor days equal 55. The more time you give customer to pay, the longer it takes to convert to cash. You can play with the number of days customers have to pay – you could offer 45, 30 or 21 days. The better you manage this process with follow-up and enforcement, the shorter this period becomes.
Cash or Profit
Understanding the difference between profit and cash is critical. Cash is the money sitting in your bank account. Profit is the difference between revenue (sales) and expenses.
Profit = Revenue - Expenses
Revenue may include such items as a gain on the sale of an asset. Some revenues are not cash, such as gains in value of a stock.
Expenses may include depreciation or amortization (these items are not cash either).
Payments that do not go into your profit calculation include your principal loan repayments, tax payments, and asset purchases.
Just because you have cash in the bank, does not mean you can spend it all. Some cash must be kept in reserve to cover deferred expenses.
The most obvious deferred expense is tax. Businesses have collapsed because they spent the money that should have been kept in reserve to pay their taxes and other large periodic expenses.
Just because you make a profit, does not necessarily mean your business is in good shape. If you do not collect what is due to you from your customers, or if you spend on investments or non- core items such as luxury motor vehicles, that profit figure is meaningless.
If you take the cash out of the cycle by spending it on items other than the ones for which it’s been set aside, it needs to be replaced. That replacement may be in the form of borrowed money, which then increases your interest expenses and erodes your profit, or additional startup funding, which means you lose more control of your business to others.Strategy
Research, plan and document, but maintain some flexibility. In other words, make a plan, and expect it to change with circumstances.
Validating your business may be the only planning you need to do. We all make assumptions about our business. Validating is a process of testing those critical assumptions about your business, such that if the critical assumptions fail, your business would fail too.
Assume that things will go wrong; some of those things will involve factors that are outside your control such as economic and technological factors, or change in trends. There are some elements you can control, such as the people you employ and the client base you target.
Have a robust system of review and analysis, and try to keep a good, authentic support system around you (we will address this further down).
Here are the elements your strategy needs to address.
- How you use your startup capital (see the first two sections on page 9 and 11)
- How you position yourself in the market
- What you sell
- How you sell
- Your competition – who else is in the game and how to play against them
You need strategy to manage these elements. It is easier than you think, and it does not have to be perfect, but you do need a plan.
Management
Just because you love or are good at doing something, does not mean you will be good at running a business, nor love it. There are a few different skill sets that need to be in place on a successful management team.
- Product development and production
- Human resources
- Capital management
What we often see with struggling businesses is a manager or team that has strong technical skills but poor capital management experience. Without that critical element, it doesn’t matter how good your product or service may be. A business, which by definition exists to make a profit, needs good money management if it is to be viable.
Good money management means:
- Balancing your start up capital – how much startup funding do you need, what is the source, and what is the mix between equity and debt?
- Getting your working capital right.
- Understanding what is cash and what is profit – how much of your profit gets invested back into the business and how much goes to stakeholders.
- strategic planning for all of the above.
Business life cycle
How much capital you need, where you position yourself strategically and how well you need to understand business will depend on at what stage you business is positioned in its life cycle.
- Pre-startup – product/service validation
- Startup – the business is unstructured, simple bookkeeping, simple product/service lines
- Survival – the business is gaining some traction, channels firm up with increase in sales
- Growth – market gets broader, but still simple product/service lines, start to develop systems and more management skills needed
- Expansion – products/services broaden, systems become more sophisticated
- Maturity – you are the top of your game
You will face different business issues at different points in the life cycle of your business.
For example, a pre-startup will be grappling with its product and testing its validity.
Compare that with a business in its growth or expansion cycle, which is about funding growth of the business or introducing new product lines or markets.
Simply making it from one cycle to the next does not increase your chances of survival. In fact, the old cliche “The bigger they are, the harder they fall” is true. A more mature operation has a lot of resources invested, and so has a lot at risk.
If you do not have proper management, you will simply fall harder.
Advice, support and sharing.
Sharing, seeking advice, and getting support makes good business.
Just searching and reading this primer shows you are looking for advice and support, which puts you ahead of everyone who is trying to go it alone.
Surround yourself with others who are facing the same problems and issues, and not just those in your own industry. Diversity is a bonus, because it lets you see a common problem from a fresh perspective, and that allows for solutions that you may never have considered had you stayed within the boundaries of your own niche.
What to do with this information
Now, you do not have to be Einstein in dealing with these critical business elements. You do need to be aware of them, address the key fundamentals, and have a plan in place to deal with them, so you do not lose control. Reading this primer is a good first step, but there is a lot more to explore.
Here is what to expect next.
- A series of emails that will explore the seven factors more deeply. These will include checklists and short tutorials, so you can take action instead of just reading about it.
- Regular updates.
- Detailed information around key business fundamentals.
- Stories from others in business, so you can see how other people have found solutions to their problems.
- Information about my latest training sessions and other learning tools, such as webinars.
I welcome the opportunity to talk to you one on one. Help me find out more about what it’s like to be in your business. And as always, if there anything at all that is causing you confusion, please let me know. I welcome your questions and feedback.
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Listen to more content about each phase of the business life cycle
Startup Phase | Survival Phase | Growth Phase | Expansion Phase | Maturity Phase
Mediation and insolvency
According to former US Judge Peck one primary objective of mediation is to restore communication between parties to mitigate against further deterioration in relationships, allowing parties to explore solutions and options without their legal position has being compromised which facilitates the discovery of mutual interests, as another objective. Building trust is hard work, especially in insolvency. Mediation creates the possibility of settlements so long as there is a willingness.
There have been a couple of large-scale insolvency cases in which mediation has been used successfully. This includes the Lehman Brothers bankruptcy and MF Global Holdings Limited where the courts encouraged mediation between US, Wales and English counter parts resulting in a global settlement being achieved.
Nortel Networks Incorporated is a case were mediation failed. Of the $7.5 billion in assets banked, over $1.3 billion in professional fees have been paid, while creditors ranging from hedge fund managers to retirees wait.
Judge Peck suggests that the mediation process should include some key success factors. Firstly, there is a window of opportunity within which to mediate; with US Judges and attorney’s getting better at identifying this window. An important skill I would imagine. Secondly, decision makers need to be in the room. Decision makers not only need to understand the solutions and settlement proposals, but more importantly be part of the consensus building process. Lastly, and importantly, there must be a willingness or sincere desire to settle the dispute. When the process is undertaken voluntarily and initiated by the parties, success is more likely; compulsion led mediation less so.
Judge Peck also recommends any resulting agreement should include a clause enabling parties to refer an agreement to the relevant court, so that the agreement has teeth. Unusual.
I’m not suggesting for a minute litigation is irrelevant, far from it. Litigation has its place, whether it is to set legal precedent or facilitate a quick outcome in cases where there is a developed set of procedures such as summary judgement or when courts are well placed to handle the dispute on hand. However, there are some distinct advantages to mediation including:
· Lower costs – costs are agreed and fixed
· Quicker than litigation
· Less adversarial – solution focused, claims not being forced to fit common law
· Easy to follow and understand – less jargon
· Less process – pre-trial, directions, request for particulars, discovery, security for costs etc
· Private and confidential – material cannot be used subsequent to mediation
· Can be terminated at any time
Lehman Brothers requested the Bankruptcy Court to approve a set of alternative dispute resolution procedures using the Bankruptcy Code to approve the process. There were objections raised, with arguments against being alternative dispute resolutions should only apply to adversarial proceedings; that contracts did not provide for mediation; that mediation is inconsistent with the centralised decision-making process that bankruptcy entails and other jurisdictional arguments. Objections were also raised around impact of substantive rights, scope of procedures, mediation logistics and other special needs.
Not to be.
Alternative dispute resolution was approved by the Bankruptcy Court enabling Lehman Brothers to commence mediation prior to filing for litigation. As the dispute resolution process is entirely confidential, parties do not have to settle nor waive rights. It proved successful with 77 of 202 alternative dispute resolution matters involving 224 counterparties being mediated with all but 4 settling.
In Hong Kong a scheme was used to manage the Lehman Brothers bankruptcy mediation process. There was the pre-mediation phase which involved information gathering, pre-mediation briefings and preparatory meetings.
The Hong Kong Monetary Authority established an office, with trained staff who would educate potential users on the mediation process. This would include simplified information, forms and guidance notes. When information gathering is complete pre-mediation briefing sessions are conducted. Mediators discuss the suitability of mediating specific cases to both sides – in the case of Lehman Brothers both investors and bankers were briefed.
These sessions enable informed decisions to be made as to whether or not mediation could be used to resolve claims. If so, preparatory meetings commence. A mediator other than the mediator who undertakes the mediation itself helps prepare the parties for mediation. This would include assisting with exploring solutions and settlement options. Parties are then required to complete a consent to mediation, claim and claim response forms.
Solutions or offers can be put at any time, even before mediation has commenced.
Then mediation takes place, either the parties resolve their dispute or narrow down the issues. Mediation must be concluded with 21 days and mediation meetings should not last more than 4 hours.
The downside? As mediated outcomes are confidential there is no sharing of lessons learnt or issues ventilated, nor the resolutions achieved.
