Banks have changed their guidelines on what they will lend to people purchasing a newsagency. People coming into our channel are experiencing this change. It is only a matter of time before existing newsagents with considerable bank borrowings feel pressure from the change.
If your borrowings are more than 30% of the current market value of your newsagency you need to be ready to respond to your bank. Indeed, you need to be ahead of their call or letter.
The last thing you want is to have to reduce your debt level in a timetable not of your choosing.
Reducing business debt should be the highest priority in every newsagency in Australia in my view. Sadly, it is not. Indeed, some newsagents thanks to offers of cash from card companies and other sources, go way beyond maxing out bank borrowings, taking their businesses beyond crazy debt levels … and then some blame others when their debts are called in.
So, reducing debt should be the top priority of every newsagent. If you do not do this you risk someone else driving it for you and that could be unpleasant.
There are considerable benefits throughout the business from a debt reduction plan. Often, the business becomes more efficient and more commercially successful.
The best approach to debt reduction is to consider what you would do if you were given no option but to eliminate 50% of your current debt in a short time. Think about it. Your back is to the wall. The back has written to you and called. You have no option. Selling will not happen in time. You have to reduce debt and free cash right away.
The only option in this scenario is to convince the bank that you are able to improve cash flow and thereby pay down the debt in a reasonable time frame.
Here are some suggestions to get you thinking:
- Quit stock. Start with stock that is not selling. Move it around, get it together in a high traffic location and run a sale. But not a cheap sale. Give the sale a name, a purpose. Try and free up the cash from this older stock you have probably already paid for.
- Quit stock part 2. If you have stock stored outside the business consider hiring a local hall (cheap) and running an off location sale.
- Cut your roster. Every $30 saved equals $100 in sales.
- Reward your sales staff in a smart way. Let’s say you sell $1,000 in stationery a week. Get your staff selling $2,000 in stationery in a week and tell them they will share in a $100 bonus.
- Order carefully. Order based on sales data. Stop stocking up without though.
- Upsell at the counter. Everyone at the counter has to spruik products to every shopper.
- Chase creditors. If people owe you money get serious about collecting this.
- Look carefully at your prices. There are bound to be stock items or services you offer which could carry a higher price. Increase your prices. Don’t be crazy. Small steps across the board can deliver good value to the business.
- Be frugal. Question every dollar you spend. Assess the value it will bring to the business.
This last point is vital. Frugality is key to running a financially lean newsagency. Zero debt must be your goal. This will leave you with lower costs and a better return.
If your debt level feels hopeless do not let this debilitate you. Own the problem, face it and take small steps through the fog. Your small steps will stack up and get you close to the other side.
If you are facing massive debts and feel overwhelmed, feel free to email (mark@towersystems.com.au) or call (0418 321 338). I’d be happy to talk. You’re not alone.
Powerful post Mark, thank you.
We addressed our debt after 10 years in business, because, after all we had a ten year plan when we started didn’t we !
We still have some debt, ( after 16 yrs) bit it is on purpose debt, because we have a robust SM super fund and it has done very well in the last 6 years, and children still dependent on us. Every circumstance is different.
I’m about to replace a staff member casual, three 5 hr shifts a week – except the new person will get 3 FOUR hour shifts a week and I will be at the shop at 7.15 instead of 8.00 am.
Every tiny bit helps.
Thanks h. I see this as mission critical for our channel this year, right now. Unfortunately, those who need to focus on this are likely to not act until they are forced to … and this will weaken us.
About 5 yrs ago we had a talk to our outgoing bank manager and he told us the same thing. Banks see no future in
“newsagencies” as businesses so they are not lending against them as they once did. It has gotten worse since 2009.
When we renegotiated our loans our business was not even calculated into the valuation, it was down to our house and other assets as security even though the business was paying off the loan. We were lucky we got the heads up early and have worked overtime to pay off most of our business debt so when and if we sell we will not be relying on it to settle debt.
Well what are banks lending on, would think a business that has multiple cash streams to be north of average. This is the problem with our banks they just won’t lend to small business it”s wrong
Exactly my thinking Fred. A ex-newsagent now post office franchisee customer, advises that the banks are lending for Post offices and not newsagencies. This surprises me as aren’t Post offices in a worse position because of email? We have multiple income streams, paper run pays my rent alone. From talking across the counter to other business people, I gather they aren’t lending much at all to any business. You can mortgage yourself silly for real estate but putting your ands on the line to support yourself is seen as a sin in this country. I would have thought I would be more determined to feed myself and my family than a person in a 9 to 5 job at the mercy of someone else to pay me.. But clearly I am misinformed.
They will still lend partially against newsagencies but they are very selective of which ones. I was just able to secure an extension on a loan I had secured against my business though interestingly in relation to what newsagent has posted above they did comment that having an inconjunction post office puts me in a better light with them than just a newsagency.
Mind you it’s also not just newsagencies. They commented that they will no longer lend for coffee shops inclusive of the franchised ones without very substantial guarantees over other assetts. They also mentioned there are a swag of businesses that they won’t even look at with securities now.
I think Marks point is that you want to carry as little debt as possible in the current climate and you see this echoed in some very large businesses as well at the moment.
Personally I’m a bit like H in that I’m spending more time at the counter as every cent saved is letting me pay down my loans at a rapid rate. I probably “over borrowed” but have managed to make substantial inroads into my loans and hope to run under the 30% debt level within 6 years of my takeover of the business which was two years ago.
Thanks once again for a thought provoking post Mark that has yet again got me thinking about my business and making notes to adjust the business plan.
Thanks for the above contributions. It concerns me that more have not commented on this post. I can write about early returns and get 80- comments yet here I write about something far more important over which we have control and only a handful comment.
Hi Mark,
I agree wit you… this is probabaly one of the bigest concerns I have in general with small business.
The days of easy borrowings have dried up, however they will return… Having worked in the recovery side of banking in the late 80’s/90’s the knee jerk reaction of banks back then cause a lot of viable businesses to fail, as overnight the perceived asset values had halved ad they panniced.
We have gone full circle since then and are back in the same boat – banks are nervous and rightfully so. Residential prices have been overstated for 5+ years and we are yet to see the real downturn in the commercial sector. This then follows through to the small business that occup a lot of these commercial centres…
I am not as conservative as you with 30% debt, I beleive any reasonable should be able to carry 50% debt on valuation (excluding stock etc). Those carry more should implement a debt reduction startegy quickly.
In my other role (outside of Newsagency world) I have had to advise a number of friends to either 1) sell the house or 2) sell the business and find a job. This is not easy, for anyone.
The tough times are comming and will be here for a while. I am lucky, generating more outside the shop than inside. I am structured as such that I was carrying 120% of the value of the Newsagency, but over the past 2 years have reduced this to 80% and intend to have it down to 50% by the end of next financial year.
Also, the old startegy of the capital value of our business increasing has gone. Multiples achieved have been reducing and will continue to do so, so the ONLY strategy is to reduce debt, carry less and then when you sell you may have excess cash…
Just my two cents worth…
Cheers
Peter
On topic.
I did not use stock control to its true potential and thought for a long time that it was too hard to catch up. BUT, I bit the bullet, hired a teenager for a week and we did the whole shop.
NOW all I have to do is stay on top of it, electronic ordering is the next project
Brett
I think you are in the wrong post… this is about debt reduction not stock control…
Cheers
Peter
Thanks to Mark and everybody for all of the above comments. We are going through a debt reduction plan at the moment and it is great to read some feedback on this issue. I got something out of each and every post and hope (like Mark says) to read some more. Just like buying a business in the 1st place i think debt reduction should be carefully planned…..hindsight gives us 20/20 vision and i wish i had some now….LOL!!!!!
Cheers
Al
Hi Mark
Thank you for another thought provoking post. I am struggling with the current thinking around debt. In my lifetime we seem to have encouraged debt and now we live in the new frugal times and everyone (including me) is rushing to pay down their debt.
I remember an old timer many years ago saying to me in relation to businesses never have more debt than your level of stock. I don’t know why it was just his logic I guess and for some reason I hung onto this piece of throw away logic.
When I purchased this business I remembered the old guys comment and my debt was around 3.5 times my stock and I began to worry. I have paid down my debt so that it is now just slightly less than the cost value of the stock and it feels ok – but I am still frantically trying to pay it down – whereas years ago I would not have worried about the level of debt.
Do we all figure that there is a tidal wave of misery coming or do we now live in a new age of frugality.
Thanks again for the post Mark you brought back the memory of some advice which makes no sense but I guess he lived in another frugal age.
Glenn
Thanks again Mark for this blog site.
In reply to Marks post, I think it is in some instances a case of ‘head in the sand’ and hoping tomorrow the problem has gone away.
Perhaps the whole topic is too scarey for some to even want to think about as they dont know what to do. (but this blog spot would certainly give them some tips).
Having said that, when I am out and about I visit other newsagents and engage them in industry talk. Many times I get amazed at being told they are busy and doing well – well clearly cards/ mag shelves are half empty.
I am also amazed at the amount who are not even on technology let alone have access to this blog.
Im paying down my loan but my rent is what I need to pay attention to. I have a 10 year lease with 10 option and dont know whether to renegotiate and get a lower rate, but then they will give me a shorter lease or just struggle through and sell up. Hmmm……
dont ignore taking on further debt to grow the business, debt reduction is fine, but not the be all and end all. We have just taken on more debt to buy out a competitor. Could easily fallen for the debt is bad syndrome and not gone for a growth strategy. Bank thought it was a sound business decision. Paying down debt is fine and a good use of free cashflow, but in some instances taking on more debt is also ok.
While there are situations where increasing debt is good and wise for the business, my core concern is newsagents with debt levels above 50% of the value of the business. There are too many of these, many, as indicated by ‘newsagent’ above with their head in the sand. This is dangerous for them and for the channel as a whole.
The issue of debt is mission critical to our future and no one is to blame for the situation other than those who have taken on the debt.
Personal accountability.
Glenn,
It depends who you believe. My view is that it does’t matter what is coming. The lower your debt level the better you are equipped for any eventuality.
Nice post Mark.
Your comment “The lower your debt level the better you are equipped for any eventuality” is a good summary. Like the list you have up their, all relevant, by being Frugal to being rewarding. Just this post will save some business’s some pain in the future. Is their anymore ways to reduce debt (cost savings) without detriment to one’s business.
Today my bank called for the yearly survey about their performance and my opinion of it.
During the 30 seconds of introductory preamble, I decided not to participate in the facade, and politely told them so.
Boy, did that feel GOOD !!!!!!
We have a covenant to meet each year. Its related to interest cover, not equity. The only unfair thing about it is that the bank use the overdraft limit in their calculation and we have not once dipped into the OD.
We’d in be trouble if debt / equity was a covenant. When we bought the business we were below 30% debt, but goodwill has declined so much in the last 2 years, even taking into account what we have paid back on our loan, debt ratio is heading up, not down.
We work hundred hours a week to make sure we don’t go backwards anywhere. We have given up our lifestyle for now. Our goal is to pay the debt off so that we can get to a point of choosing how much we want to earn and just apply the effort to achieve that – and maybe get a bit of our lives back.
We love being newsagents. The work we do every day is most enjoyable. But we never fully appreciated just how hard it would be to run the business profitably. We pay out well over a hundred thousand dollars every week to staff, suppliers, banks and tax departments and its just getting harder and harder to make sure there is some left over for us at the end.
Ricky this is what we have to do. I bet you have good and consistent customer traffic for core and traditional items. The question you have to ask yourself is what are you doing to leverage this core traffic to drive purchases of new and better merging items?
Hi Mark,
I’ve just come across your blog, superbly written & thought out.
Well done!
Regards,
James