Bad advice for business owners can prove costly
Lavina Bonar, founder of Sizers, which provides foam inserts to make loose shoes fit better, hired an accountant in London to help her company grow. He “was supposed to add value to our business but instead did no work and gave us incorrect advice”, she says. He missed tax deadlines and gave the wrong instructions on what allowances could be claimed, and Ms Bonar is now seeking a refund.
“You can’t go in with your eyes closed and just hand everything to your accountant,” she says.
Ms Bonar’s experience raises an important question for entrepreneurs who need professional advice: how can they be sure that the seeming wisdom offered by accountants, lawyers, marketing consultants and others is sound?
A 2015 survey of 125 small businesses by UK insurer Direct Line found that one in six thought they had suffered from poor professional advice over the previous 12 months, with an average cost to the business of almost £21,000.
Forty-four per cent of companies surveyed blamed information technology consultants, followed by specialists in management (34 per cent), marketing (32 per cent), property (23 per cent) and communications (16 per cent). Accountants came sixth at 9 per cent, ahead of advertising consultants (8 per cent) and lawyers (6 per cent).
Many problems are avoidable. Maulik Sailor, co-founder of Innovify, a London-based technology start-up incubator, says his company hired an accountancy firm that marketed itself online as specialising in tech start-ups, but he was gravely disappointed.
Innovify raised £220,000 on crowdfunding platform Seedrs, based on the accountants’ advice that the fundraising would qualify for generous tax breaks under the UK government’s Enterprise Investment Scheme. But then notification came from HM Revenue & Customs that Innovify had not provided enough information to qualify.
“Our accountants never managed to do all the paperwork properly in time. We had to cancel our fundraising and redo it as a non-EIS funding round. We only managed to raise £173,000 and that after putting in money from our own pocket,” Mr Sailor says.
Innovify is negotiating over compensation and has taken great care choosing a replacement. It appealed to start-up networks for recommendations, asked 10 to 15 accountancy firms detailed questions on what they could do and the fees they would charge, and interviewed three before choosing one.
A danger in the UK has been advice that ensnares entrepreneurs in schemes that fall foul of HMRC’s clampdown on tax avoidance. Karen Millen, a prominent fashion designer, was made bankrupt recently after failing to pay £6m to HMRC in connection with a tax avoidance scheme.
“Businesses are more wary of these [tax avoidance] schemes and I think accountants are more wary of advising clients to go for them,” says Clive Lewis, head of enterprise at the Institute of Chartered Accountants in England and Wales. His advice to entrepreneurs is to seek an accountancy firm of a similar size to his or her own business, unless the entrepreneur has ambitious plans for growth, in which case it might be necessary to find a larger firm with experience of raising equity finance.
Entrepreneurs should also seek referrals and recommendations from other business owners with similar experiences. Phillip Kim, associate professor of entrepreneurship at Babson College in Massachusetts, says entrepreneurs benefit from networking and being part of local business associations, where they can get to know advisers before they need them. They should also seek referrals from their personal and professional networks.
“It might be an idea to start with something small, a small project or a small task that doesn’t require a whole lot of investment on both sides to see how the relationship starts off,” he says. “You have to know with a little more certainty what exactly you need. Alignment of expectations is a crucial piece of any collaboration so that both sides know exactly what they want and are able to deliver.”
Accountants can help “in every way possible”, Mr Lewis says. That help ranges from preparation of accounts to management information — “and then simply to hold their hand as they grow”.