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Why Sage 50 will fall to the information revolution

At the heart of small and medium sized businesses up and down the UK lies Sage 50, the UK’s favourite accounting software. Like the Remington typewriter, it’s a great product, well designed and does what its designers intended very well.

Unfortunately, like the Remington typewriter, it is also designed with a 20th century mindset to fix a 20th century problem. And accountants and bookkeepers all over the country are using Sage 50 to make themselves indispensable to business owners in a way that holds their accounting back in the last century, reduces their effectiveness, reduces competitiveness and ultimately destroys value.

Here’s an example. Google “sage 50 year end” and you will see references to support with Year End, training on Year End, problems with Year End, questions about Year End, accountants asking each other for help with Sage year end processes. It is a process that is irreversible and therefore important to get right. A great deal of effort goes into getting it right. You might even need to get your accountant to do it for you.

But it is an utterly unnecessary process.

In the old days, when revenues and expenses were all kept on handwritten ledgers and added up throughout the year, they had to be written back to zero ready for the start of the financial year. The net total of all the year’s revenues and expenses was then added to retained profit. This was an important accounting procedure, and one that Sage 50 faithfully replicates.

Yet all transactions in an accounting system have a date. If you want to see a report for a date range, your accounting software should simply filter transactions outside that range (or, for a balance sheet or trial balance, treat the transaction appropriately according to the date of the report). More importantly, it should allow this to be done for whatever range is important for the business or period under review – regardless of whether it spans a year end – to identify performance, key trends, anomalies, and potential errors.

Precisely because of the Year End process in Sage 50, data for prior years has to be accessed in a very different way. But year ends are relevant only for statutory reporting and tax purposes. Customers, staff, and suppliers do not behave differently in a new financial year. Trends are no less relevant or important just because they span a financial year end.

So not only is it an unnecessary process – it also reduces accessibility and usefulness of information.

Of course, once the accounts are finalised for a year, it is important that the transactions are not changed thereafter. But for some companies that is important on a quarterly basis (so VAT returns are not out of sync) or even on a monthly basis (so that published monthly accounts are not adjusted). A simple restriction on all but the “Admin” user making changes before a certain date is all that is required. Not an irreversible process that permanently eliminates access to data.

That’s not all. Sage 50 costs £700 for two users, and whilst it is a powerful system it is, to all intents and purposes, closed to all outside the finance team or book-keeper. Business owners, managers, and forward-thinking accountants are waking up to the fact that with today’s cloud technology financial information can be accessed anywhere, instantaneously. Owners and managers want information now, not when the book-keeper is next in or when the accountants have examined the files at the end of the year. They are realising that it is possible to access scanned copies of supplier invoices just by clicking on their management reports and wondering why they are still telephoning their accountant and paying them to look up the information on Sage. They are wondering why they are paying over £700 for a 2-user licence to Sage 50 when solutions like Xero will allow access at different levels to many users within the company for less than half the cost.

It won’t be a quick death. Traditional accountants will resist this change. They will focus on the dangers of allowing too many people to change or view information without proper training; on the dangers of looking at information without the benefit of their annual adjustments or their considered interpretation; and on the risk of fraud without a full visible audit trail of any change made to any transaction anywhere in the system. These are all valid concerns. Accounting systems and good financial information are vital to the successful operation of any business.

Ultimately, however, our job as modern accountants – and as management accountants – is to properly evaluate the risks and benefits of precisely these kind of changes, and to help business owners get the benefits of the new technologies whilst at the same time ensuring that the information stored and produced is meaningful and secure. And the benefits of up to date, accurate information, accessible instantly and on the move, are huge.

Typewriter manufacturers may have correctly pointed out that with a word processor you could lose the entire document with an untrained accidental press of the wrong button. But ultimately the benefits far outweighed the risks. Sage 50 will go the same way.

Buying small businesses: 7 pitfalls to avoid

For large corporates and big banks the process of buying and selling businesses, or “M&A”, is part of daily life. But for small business owners and entrepreneurs this is a major event. It’s vital to get it right. And so easy to get it wrong.

Forgetting the tax implications

A buyer needs to consider the tax position of the company or group after acquisition and its plans for the future. Is there a chance that the new business may be re-sold in the future? Are there tax losses anywhere in the group? Have you considered that having an additional company in the group will reduce the threshold at which you become a large company for corporation tax purposes?

Not considering all the options and potential outcomes fully in advance can lead to painful tax consequences further down the line.

Assumptions around cross-selling

There’s a massive bonus in putting two businesses together. Each business will suddenly have access to the other’s customer base and hence sales in both companies will show a significant boost. Right?

Wrong. Assumptions around cross-selling are often over-egged. Just because a customer buys product A from you does not mean you will be an automatic choice for service B. Products may need tailoring for different markets. Sales staff may need training in both product sets. The sales approach, sales cycle, and the customer contacts, may all be different. Sales staff from the acquired business may be reluctant to let your salespeople talk to “their” key contacts, and vice versa.

Cross-selling can be a major advantage, but it does require an obvious fit between the products and customer base, and careful planning. Don’t just assume it will happen.

Over-promising to investors

It’s an exciting time. Your business is going well and your proposed acquisition has significant potential. You’re both experiencing sales growth and there are obvious synergies from consolidating back-office functions. You need to sell the deal to investors – banks, VCs, EIS business angels. It’s easy to get carried away.

There will be unforeseen changes and unexpected delays. Not everything will go to plan. Investors will understand this, and will give you credit now for identifying these risks and building them into a cautious forecast. They won’t thank you for using them as excuses later when you don’t quite meet your optimistic plans. Even if you’re not far off the forecast.

Give yourself every opportunity to exceed your forecast and under-promise, over deliver.

Poorly conceived earn-out

Earn-outs create natural tension between the buyer and seller. Don’t let a poorly structured earn-out exaggerate this tension. Particularly if the seller is remaining part of your enlarged business going forward.

If profits in the remainder of the current year are important to you, make sure the earn-out targets reflect that. Basing the earn-out on the next full year alone creates an unnecessary conflict of interest.  If the seller’s business is highly dependent on the sellers remaining in the business, make sure the earn-out keeps them locked in for as long as you need to ensure a proper transition of knowledge and relationships.

Insufficient restrictive covenants

In owner managed businesses the seller is often a vital part of the business. It is one thing to persuade them to stay on after the acquisition. What’s to stop them leaving you after a year or so and setting up in competition – or worse, taking staff and customers of the business you bought?

Under normal employment law, the ability to prevent a former employee competing with you is heavily restricted under restraint of trade rules. However restrictive covenants agreed as part of a business sale, can be far stronger. Make sure you take advantage of this.

Poor integration

80% of acquisitions fail to achieve the benefits intended and fail to create value for shareholders. Where they fall down is in the execution.

The right pace and strategy for integration is key. Impose your systems and processes from Day 1 and you lose any potential benefits of the target company systems. Staff have to learn new systems quickly, possibly unnecessarily, and goodwill can be lost. Integrate too slowly and you don’t get the synergies or control that you need, and you lose the all too short window when both your new and existing staff expect things to change.

Communication is vital. Even top performing staff can get paranoid about non-existent plans that affect their role if you don’t communicate your plans. However benevolent your plans, staff will often fear the worst. And what is the seller saying to their former employees – either in the business or down the pub?

Limiting due diligence to the financials

Of course, proper due diligence is needed. You have to assure yourself that there are no hidden liabilities, that the seller’s financials represent a true and fair view and that the projections are realistic. Good legal and financial due diligence is essential for most acquisitions.

But in smaller and medium sized companies, it can be the softer less tangible areas that cause problems for your enlarged company further down the line. How well do you know the management team? Are their values and aims truly aligned with yours? Have they bought in to your strategy or are they just paying lip service? What is the history and culture behind the business? What is the role of and relationship with any non-management shareholders?

Miss something here and your new acquisition could turn out to be an expensive mistake.

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