Beware the rise of the digital phoenix

In March 2010, SmartCompany reported: “So-called ‘phoenix’ activities have been around for quite awhile. They arise when a business is deliberately liquidated in order to avoid the payment of tax liabilities, wages, superannuation and leave entitlements and other responsibilities, such as supplier accounts.

“The business then continues, free of liabilities, in the form of another corporate entity, controlled by the same person or group of individuals.”

The federal Assistant Treasurer, David Bradbury, said the problem is a serious one, and he was “utterly determined” and prepared to “wear some flak” on this issue in order to protect employees’ entitlements and also legitimate businesses who lose out when not paid for their supplies. It is understood the government is keen to bring legislation forward this year to make the changes.

It is not uncommon for SMEs to be out of pocket when one of their customers goes out of business. That is a fact of business life. But when the loss is caused by “phoenix” activity, it’s that much harder to stomach. SMEs should keep a watch on what the government ends up doing about this problem.

In 2012 the government cracked down, releasing new laws on phoenix companies. The reason a digital strategist is writing about this is that in an industry where the majority of web/mobile developers or designers demand 50% upfront payment, it is easier if you are going broke to not deliver and walk off with the money. When pursued they liquidate/phoenix and up they pop again called something else.

The problem with this is that usually a few more people have been hurt on the way. Not just the ATO. They are usually down the list of the creditors. However, there are laws on your side.

The new laws hold directors far more accountable for their actions than ever before. This means a SME owner with a good lawyer cannot only report and investigate the owner/director of the “phoenix” business; there are also options to pursue their personal assets.

Does this really matter? Cash flow management does matter, as it is being blamed for a 50% rise in small businesses going bankrupt reported by Dun & Bradstreet’s Business Failures and Start-ups Analysis report for December, bankruptcies were up 48% over the last 12 months and small business start-ups down by 95%.

So how can you protect your business in a digital industry where upfront/in advance payments are mostly mandatory?

Having learnt the hard way, and we do have to pass on upfront payment terms to our clients when required, there are some mechanisms to help protect you and ensure you contract a good operator.

Protecting yourself when contracting digital services:

1. Always insist on references. These should be references you can check out, over the phone or face-to-face. Ensure they are legitimate. In the world of social media, another Twitter or Google + recommendation is not enough.

2. Ask for proof of work. Many companies especially in the marketing & digital industry often promote “clients” and use client logos they have had a small part to play in, as opposed to being the main force behind the client’s campaign. Ensure you know what the supplier has done and achieved for the clients that they promote they have worked with. Look for testimonials from real people, not just logos.

3. Check out their capabilities and visit their offices in person. In the digital industry, sub-contracting to specialists is commonplace. Ensure you know whom they are sub-contracting to, how, and who those sub-contractors are. If the sub-contractor goes belly up, it is likely they have done so with part of your money paid in advance. Ensure you have the right agreements in place, so that you don’t suffer the consequences of a chain event.

4. Be specific about your requirements. Scope creep is one of the biggest failings of digital projects. It almost always happens. Clients have one expectation and a digital services company has another. Ensure you know what you are getting. If it is, for example, a web build, mobile app build; a tangible asset you are paying for. Ensure it is proto-typed in advance and then agree in clear terms about the implementation plan, the functionality list, the timeline, the budget.

5. Work closely. Learn as you go. Do not be bamboozled by technology. Technology ultimately should do what you want; you are its master not the other way round. Make sure you ask lots of questions. Ensure you understand what IT or digital geeks mean and don’t be overwhelmed by complex terms. Simply keep asking questions.

Lastly, aim to build long-lasting trusting relationships with suppliers. In the long run, building good relationships is better for everyone than rising from the ashes a little burnt!

Fi Bendall is the managing director of Bendalls Group, a team of highly trained digital specialists, i-media subject matter experts and developers.