For most people, a $5 million debt – already slashed by $15 million by selling assets – would be an insurmountable challenge. But Dominique Grubisa did just that, and she now uses those insights to teach other SMEs how to avoid a similar financial black hole.
In the mid 2000s, Ms Grubisa and her husband Kevin were property investors through a shared business, while she also worked as a barrister. They would acquire properties and sell them again once they had achieved the desired level of capital growth.
“At that time, credit was very easy to obtain, and thanks to low-doc and no-doc loans, we just were able to borrow as much as we wanted,” Ms Grubisa told My Business.
“The problem was, we didn’t think about cash flow. We thought that as long as the capital growth was greater than the interest that we were paying out over time, we were building wealth.”
The couple’s business had amassed a portfolio of around 20 properties.
“We had about $20 million in debt backed up by about $25 million in equity,” she said.
Banking on this equity, the couple then launched into property development.
But then the unexpected happened – the global financial crisis (GFC) hit in 2008. And as Ms Grubisa admits, “everything went pear-shaped”.
Their equity took a massive hit as property prices fell and lending conditions tightened. The couple sold all of the properties in a bid to clear their debts, but it wasn’t enough.
“We ended up about $5 million in debt once all the properties were sold. That was the shortfall.”
‘It broke us’
“The development was, at that stage, just a hole in the ground, and due to the GFC, we couldn’t get the money to build anything on it,” Ms Grubisa explained.
“That had a domino effect on everything else and it broke us.
“To paraphrase Warren Buffett, when the tide goes out, you can see who’s been skinny-dipping. We had been living off debt and we didn’t realize it, because we had all these paper assets that we thought were going up in value.”
Ms Grubisa admitted that, at first, she succumbed to denial about the reality of her financial situation.
“I thought, ‘I’ll just get another credit card and as long as I keep paying my mortgage, the values of the properties will come back up and I’ll be fine’. I actually made things worse.”
‘Bankruptcy was never an option’
According to Ms Grubisa, “going bankrupt was never really an option”, as it would have harmed her career prospects as a barrister, on which she would likely need to rely to continue deriving an income.
“It would have made it difficult for me to renew my practising certificate as a barrister,” Ms Grubisa said.
“You lose your passport, your freedom, and you get a black mark on your credit score. It also wasn’t aligned with my values.
She instead sought inspiration by reading, with one book in particular giving her the confidence to turn things around, written by none other than the current American president.
“I drew inspiration from one of Donald Trump’s books, The Art of the Comeback, where he talks about businesspeople with massive debts falling on their swords in the US savings and loan crisis,” said Ms Grubisa.
“Trump had a different philosophy, which was, ‘Let them come and get me. They might succeed and they might not’. So that’s how I started thinking.”
Find your negotiating position
Armed with this new mindset, the barrister then set about trying to negotiate a way out of her predicament. According to Ms Grubisa, the size of their debt was actually an advantage in some ways.
“It’s like J Paul Getty explained, ‘If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem’.”
“I said to our creditors, ‘We simply don’t have the money. You can wind up our companies, but no one is going to win because there’s nothing to get.”
The negotiations took various forms, depending on who they were with. Payment plans were devised to cover some debts, while others were negotiated as the repayments of “cents in the dollar on what was owed”.
“I would say to debtors, ‘I owe you $100,000, but I’ve got nothing. I can potentially give you $5,000 to discharge the debt. If you don’t accept this, I’ll offer it to someone else’. This often worked, but some creditors were more persistent.
“In many cases, I was able to buy myself more time on hardship grounds. I would get a six-month reprieve, and then another. Often, the debts were eventually sold to collection agencies.”
However, Ms Grubisa said that, in other cases, she was able to dispute the loans based on compliance concerns around the way in which they had been issued.
“Under the Credit Code, for a debt to be collected, all the paperwork needs to be completely in order. I would say, ‘Show me your notice of assignment,’ or ‘Show me my disclaimer document,’ and if they didn’t have their compliance right, they couldn’t chase the debt,” she said.
It was a slow, painstaking process that took “about three years”.
“I remember a time in 2011 when I had started my current business and I realised, ‘Oh gosh, I’ve actually got some money in my bank account that I can spend’,” said Ms Grubisa.
“To celebrate, I went to Kmart and I bought the kids some clothes in a retail-therapy shopping spree.”
Safe harbour provisions for struggling businesses
Ms Grubisa now operates DG Institute, which aims to support property investors and businesses to grow their wealth, as well as protect the assets they already have, alongside succession planning and accounting assistance.
She shared her own experience with debt in a bid to highlight to other business owners Australia’s safe harbour provisions.
She said these rules were part of a major shake-up of Australia’s insolvency laws in 2017.
“The changes recognised the fact that companies going bust and being wound up isn’t good for the economy, and they were aimed at making it easier for companies to trade their way out of trouble, even when facing insolvency,” Ms Grubisa said.
“Contained in section 588GA of the act, the provisions allow directors who suspect their company is becoming insolvent to develop trade-out strategies that are likely to have a better outcome for the company than administration or liquidation.
“Importantly, the provisions provide directors with protection from personal liability for debts incurred while executing the strategy.”
She continued: “If you suspect you may trading insolvent or close to it, the safe harbour provisions potentially allow you to trade your way out of trouble – something that previously would have left you liable for prosecution.”
Business owners should, however, be mindful of these key points, which Ms Grubisa said may require proof that laws have not been breached:
- Ensure the action you take to trade your way out of debt is sound and well considered.
- Take appropriate steps to prevent misconduct by officers and employees.
- Keep financial records that are appropriate for the size and scale of the business.
- Seek professional advice on determining how to correct the business’s financial trajectory.
- Have evidence that you actually implemented your rescue plan rather than sticking to the status quo.
“I’ve seen businesses that are really profitable fail from lack of cash flow.”
Cash flow key to avoiding strife
If there is one factor that gets SMEs into financial trouble again and again, it is a lack of cash flow, Ms Grubisa said.
“Time and time again, I’ve seen businesses that are really profitable fail from lack of cash flow,” she said.
“They don’t appreciate the time value of money – that cash in your pocket right now is far more valuable than income that you will theoretically get when your debtors get around to paying you.”
She urged all business owners and operators to keep a close and continual eye on their cash flow, because “businesses that fail typically aren’t watching their receivables closely enough”.
“They let bad debt pile up and don’t insist on getting that money through the door. They might crack open the champagne when they sign a big deal but forget that half the work lies in getting customers to pay their debts on time.”
Adam Zuchetti is the editor of My Business, and has steered the publication’s editorial direction since early 2016.