Recently I flew with the Dutch airline KLM, and I had the worst flight I’ve ever had.
Halfway through the flight it came to light that behind us was sitting three Interpol agents who were extraditing a felon back to Ecuador. I cannot begin to tell you want is wrong with this scenario – especially when they gave him metal cutlery with his in-flight meal!
This was one in a long line of shortcomings which I haven’t got enough time to go into here.
Why am I telling you all this? Because this is a lesson that all firms – including KLM – should learn: that good old word of mouth advertising is still the best advertisement any business can generate even in this day of high technology.
Literally billions of pounds are spent by the huge corporations getting brands established in the public eye. Yet when all is said and done, a simple recommendation from a good friend or acquaintance will count for far more than any glitzy advertising campaign ever will.
Put simply, word of mouth advertising is the most powerful advertising medium any business can harness. In a world full of advertising noise and hype we become quite immune to the continual bombardment of the senses by the big spending companies and mostly ignore the message they are delivering.
This is why so much money is thrown at advertising by all business just to get themselves heard.
Did you know a full 80 to 90 percent of many company start-up budgets are directed into advertising? Spectacular failures have been witnessed in recent times as many Dotcom companies have failed to live up to the hype and glamour projected by the advertising agencies.
Often the collapse occurred after many millions of unwitting shareholders’ money was wasted.
In a conventional system of manufacturing and retailing the company produces the product for a known figure. Say the company is a vehicle manufacturer and a car they sell through a dealer is sold for (not worth) £10,000.
The manufacturer of that car would produce it for around £4,000 net cost which would include them making a profit from the car when sold to a dealer.
However this is just the start of the costs. To establish a strong position in the market place they then allocate perhaps 50% of the cost of manufacturing the car to advertising. So they have to make £6,000 to break even. On top of this they also have many hidden costs of running and maintaining expensive machinery and research and development projects.
This is all before the car even leaves the factory floor. So by the time the car is shipped to a dealer the actual price has been increased by a staggering 100 percent.
Then to top it all off, the dealer does their advertising so they can compete with all the other dealers vying for the customer. In all, 60 percent or more of the retail price of a car can be eaten up in distribution and marketing costs.
How much do you think a can of Coke would cost to manufacture? If you answered 5p or less you are close to the mark. It is somewhere under 5p to produce.
Yet that same can of coke after everyone has had a slice of the profits is sold to the public for about a pound. Now if someone tells someone else about this “great drink” do they get paid for it? Not on your life!!! The advertising agencies account for a great slice of the profit and the retailer makes the rest.
To harness the power of word of mouth is really the key for success in business nowadays, considering that consumers believe more about what other consumers advise than anything else.
Friday 28 November 2008
Saturday 15 November 2008
How To Turn Business Goodwill Into Cash
Setting-up a company is usually a relatively easy process; but now closing it down again is likely to prove much more troublesome and expensive.
First there is the administration. You have to notify suppliers and customers. Apart from that there are the tax challenges: in short, there are tax reliefs available that ease the way for the self-employed to incorporate, but there are no comparable tax reliefs to assist disincorporation.
Instead, there are additional potential tax liabilities that may be generated as a result of the merry-go-round of setting up and closing down a company.
The most costly of these is the possible treatment of business goodwill. For example, say you have a fairly typical small firm, which might be regarded as having goodwill worth £50,000.
The ‘goodwill value’, which will often need to be agreed with the Inland Revenue, is generally calculated on the basis of a multiple of prior years’ profits (three years in many sectors).
As part of the assistance provided to incorporation, a ‘tax election’ can be made by the sole trader under which no tax is paid on the gift of the transfer of goodwill, which would otherwise be deemed as transferred at market value.
But the situation is horribly different on disincorporation. The business’s goodwill might by now have increased to £60,000, but there is no equivalent tax election available for the company. This means that tax is payable, at 19 per cent, on the full £60,000 transferred goodwill.
Additionally, the individual would be treated as if they were paid a dividend of the £60,000 – generating personal tax on the entire sum.
And any property transferred to a company on incorporation could generate a similar tax penalty of that of goodwill on disincorporation. The situation is less clear with IT equipment and cars given to a company, where the tax treatment will depend on circumstance.
If all this sounds complicated, that’s because it is. Indeed, it is doubtful many businesses would become incorporated if they knew all of the complicated hassle involved should they decide to shut up shop.
This in turn leads to the situation where many one-person companies are likely to opt to quietly ditch the company, unaware of the risks involved. Some may omit to close the company bank account or continue to use company stationery, making it difficult to claim that they are not still trading as a company.
People who are trading on the basis of their own name might be regarded as having, de facto, taken the goodwill out of the company, generating the type of tax bill which I’ve outlined above.
It will be very easy for the Revenue to ask questions about what has happened to the company, aware of the likely tax liability arising from the goodwill treatment. If many small businesses opt to disincorporate, the tax generated for the Revenue could be significant.
There may be a slight glimmer of hope for some businesses recently incorporated, and which now want to disincorporate. Recent asset transfers may not have yet been assessed by the Inland Revenue and there could be scope for negotiation on the goodwill valuation.
Many sole traders who have converted into companies will find their best option is accepting that disincorporation has more penalties than benefits.
But it is important to put the issue of goodwill into perspective. Many companies will have valued goodwill when they incorporated, and will indeed need to be careful if they wish to disincorporate.
Companies which exist to market one person’s services, however, will often own no goodwill, because what goodwill there is attaches to the director personally: so for many of the very small companies that will now wish to return to unincorporated status, there should be no goodwill problem.
For the rest of us, however, less of minefield in this area would be greatly appreciated.
First there is the administration. You have to notify suppliers and customers. Apart from that there are the tax challenges: in short, there are tax reliefs available that ease the way for the self-employed to incorporate, but there are no comparable tax reliefs to assist disincorporation.
Instead, there are additional potential tax liabilities that may be generated as a result of the merry-go-round of setting up and closing down a company.
The most costly of these is the possible treatment of business goodwill. For example, say you have a fairly typical small firm, which might be regarded as having goodwill worth £50,000.
The ‘goodwill value’, which will often need to be agreed with the Inland Revenue, is generally calculated on the basis of a multiple of prior years’ profits (three years in many sectors).
As part of the assistance provided to incorporation, a ‘tax election’ can be made by the sole trader under which no tax is paid on the gift of the transfer of goodwill, which would otherwise be deemed as transferred at market value.
But the situation is horribly different on disincorporation. The business’s goodwill might by now have increased to £60,000, but there is no equivalent tax election available for the company. This means that tax is payable, at 19 per cent, on the full £60,000 transferred goodwill.
Additionally, the individual would be treated as if they were paid a dividend of the £60,000 – generating personal tax on the entire sum.
And any property transferred to a company on incorporation could generate a similar tax penalty of that of goodwill on disincorporation. The situation is less clear with IT equipment and cars given to a company, where the tax treatment will depend on circumstance.
If all this sounds complicated, that’s because it is. Indeed, it is doubtful many businesses would become incorporated if they knew all of the complicated hassle involved should they decide to shut up shop.
This in turn leads to the situation where many one-person companies are likely to opt to quietly ditch the company, unaware of the risks involved. Some may omit to close the company bank account or continue to use company stationery, making it difficult to claim that they are not still trading as a company.
People who are trading on the basis of their own name might be regarded as having, de facto, taken the goodwill out of the company, generating the type of tax bill which I’ve outlined above.
It will be very easy for the Revenue to ask questions about what has happened to the company, aware of the likely tax liability arising from the goodwill treatment. If many small businesses opt to disincorporate, the tax generated for the Revenue could be significant.
There may be a slight glimmer of hope for some businesses recently incorporated, and which now want to disincorporate. Recent asset transfers may not have yet been assessed by the Inland Revenue and there could be scope for negotiation on the goodwill valuation.
Many sole traders who have converted into companies will find their best option is accepting that disincorporation has more penalties than benefits.
But it is important to put the issue of goodwill into perspective. Many companies will have valued goodwill when they incorporated, and will indeed need to be careful if they wish to disincorporate.
Companies which exist to market one person’s services, however, will often own no goodwill, because what goodwill there is attaches to the director personally: so for many of the very small companies that will now wish to return to unincorporated status, there should be no goodwill problem.
For the rest of us, however, less of minefield in this area would be greatly appreciated.
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