Cost saving is a false economy!

Decision Making from Informed Choices

One thing that any prudent Business Owner should do is to have a firm understanding and control of the company finances, and this includes making cost savings wherever possible. Right?

Well not always.

I recently heard of a Business Owner that decided to only use a lawyer on the formal aspects of a transfer of lease as part of a Company acquisition, in order to save money on additional legal and professional fees. No searches or survey were completed on the assumed premises, and no accountant’s due diligence on the business. The sale completed and all seemed to work out as well as could be hoped.

The premises, which were split in to two separate working spaces, initially had the existing sub-let tenant in the one space paying rent to the Business Owner (which helped greatly whilst his business was so small). Conveniently as the Business Owner’s Company grew the neighbouring tenant moved on and the Business Owner’s firm expanded to take over the additional second space. It all worked out really well.

However, after a couple of years it became clear the Company needed to expand further and the split space was not exactly ideal either. So it was decided that larger and more appropriate offices should be sought. There was not long left on the current lease and so once suitable commercial premises had been found the Business Owner contacted the landlord with a view to negotiating early departure. The landlord was OK with this and a deal in principle was struck over the remaining term and rent, providing the property remained in good order. The landlord, who was based abroad, then instructed a local agent to survey the existing premises and prepare to re-market the space.

All seemed to be progressing well until a few weeks later when the Business Owner received a solicitor’s letter giving formal notices of potential action against the Business Owner’s Company for breaches of the Lease. Proposals for rectification were invited.

It transpired that the splitting of the premises had been completed without suitable permissions by the previous Company owner. In addition, they had installed a mezzanine with additional office space that was also not authorised and almost certainly did not follow suitable regulations. On top of this when the original Company had taken on the lease it had agreed to restore the building to how it was when they took on the premises almost 25 years before. The building had been a ‘new build’, but over time had deteriorated and not been well maintained. Window frames were rotten, there were a few leaks here and there, the heating system was antiquated and the render on the outer walls had started to crack.

The Business Owner immediately sought advice from a recommended firm of solicitors who gave him the bad news. The Business Owner’s Company was the legal substitute on the Lease and liable to restore the premises back to a ‘new’ state, not only to how it was but on a comparable scale based on today. For example the lighting and heating system, which had been very contemporary at the time, now required a fit out to a similar contemporary level now. The cost of this was estimated as totalling over £300,000!!

The last I heard legal challenges were being considered, but a legal contact of mine said that such situations are sadly not uncommon. In a case his firm had dealt with the claim was for over a million pounds and meant that a Business Owner was no longer able to retire as planned.

The moral of the story is that as Business Owners we have to be careful not to take unnecessary risks in an effort to save costs, particularly in respect of specialist professional expertise. If you do then you could find that not only are the financial consequences significant, but it could have devastating longer term affects for your Company.

Having successfully exited three businesses and acquired one, I would be happy to assist if you are considering either option.