26 Mar

More Building Company Failures As Market Heats Up

Company failuresIn the last few weeks we have seen several Company failures in the building industry – two of which were representatives of the competitive franchise market.

A1 Homes in Hawkes Bay and Taupo went into liquidation, along with the (ex) Landmark Homes franchise, Debec Building Solutions Ltd (who exited the franchise in December only.)

While it is not un-common to see building company liquidations at this time of the year (February in particular is traditionally the worst month for business failures) the question has to be asked why – in this buoyant building environment – is the failure rate starting to increase.

After all, aren’t we in the midst of New Zealand’s biggest ever building boom?

It is well known that builders don’t always make the best business managers. At the same time business managers would know little about building a house. This, however, is the reason many builders sign up to a franchise. With the design, planning, material pricing, marketing and software packages all provided as part of the support, or franchise, package this should leave the franchisee with little to focus on other than what he knows best – build houses.

So, these recent failures raise some concerning questions. With deposit money received on 10 or more houses not yet started by A1 Homes, and in the case of Debec – 13 houses already underway, where has the money gone? These failures can only be put down to poor management and / or cash flow issues. One can only presume the proceeds of these deposits has gone to pay past debt (the less sinister of the options that come to mind) in which case we have the old issue of a reliance on ‘future income to pay past debt” – a recipe for disaster. Or, if one was to think a bit more critically, gone on other more personal issues. No doubt time, and the liquidator’s reports, will tell the story.

What can the consumer do to protect themselves? Well, I was recently requested to pay a substantial deposit to a videographer for my daughter’s wedding some 14 months out. I was then told the balance would be due 8 months out from the wedding! I politely declined and tried to explain Credit Management rule No 1 to them. Never pay up front for goods or services you are yet to receive, unless the money goes into escrow, or some other form of intermediary, where it can be held until the goods and services have been provided and are to your satisfaction. There should be no need for funds to be dispersed in advance, given that builders, tradesmen and other service providers have credit facilities available to them from their suppliers, to access the materials to get the job underway.

If they can’t get supplies on credit, then the question needs to be asked. Why not……?

The answer may well be obvious. Check out www.creditworks.co.nz to find out.

About the Author

Alan Johnston
Alan heads up the Information bureau side of the business (CRISworks) as well as providing credit expertise and consultancy to clients in the areas of Credit Management best practices, credit training, Credit Terms of Trade reviews, PPSR education, and pretty much all other credit requirements of clients in need.

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