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It is a story told and heard often – a small business starts with a single, great idea or product and experiences great success in a very short amount of time. However, problems arise when the business, wishing to grow its success, decides to create more products, open more offices or stores and hire more staff – without having all of the appropriate systems and processes in place to deal with the additional responsibilities and liabilities that are attached to expansion.

The recent (and well-documented) collapse of popular dessert chain, Doughnut Time, is a cautionary tale for employers about the risks associated with a rapidly expanding business.

Starting out in 2015 as a single storefront in Queensland, Doughnut Time found immediate success and over the course of the next two years, opened over 30 more stores across Australia. By the end of 2017, the company had expanded into overseas markets including England and was rumoured to be launching in the USA.

However, in March 2018, Doughnut Time here in Australia announced it was going into liquidation in the face of claims alleging unpaid rent on storefronts and employee wages. In fact, disgruntled employees took to social media in an effort to recover unpaid wages from the company.

It is estimated that there is over $70,000 in unpaid wages owing to employees, and many of those are international workers on visas who are not eligible for the government-funded Fair Entitlements Guarantee scheme. Therefore, those employees may never recover their entitlements.

As the saga continues for Doughnut Time, there are a number of lessons to be taken from its collapse in Australia – particularly for start-ups and small businesses:

• At the outset, know your product and the business structure that will work best for your product. The CEO of Doughnut Time has conceded that the reasons for its collapse in Australia were the “high rents and generally high operational costs for such a simple and small business”. Creating physical stores and offices means additional costs including rent, equipment and employees. If the business is still in a developmental stage then a strong online presence that is able to manage orders as they are made may be the most cost-effective and sensible approach. For businesses operating in the food and hospitality industry, it also reduces the risk of “dead” stock sitting in physical stores.

• Take the time to set up the business’ fundamental systems and processes early on in the life of the business. For example, having standardised payroll systems in place will ensure that employers are meeting their obligations and that this crucial part of running a business does not fall by the wayside landing the employer in hot water with the regulators or disgruntled unpaid employees.

• Engage advisors who are subject matter experts to support and advise the business as it grows and expands. Systems and processes that work well for a small business now will not always continue to work well once the business has expanded into multiple locations and hired more employees. Having appropriate advisors from the beginning to advise the business on specialist areas (such as employment law, payroll, bookkeeping and corporate compliance) will ensure that as the business grows, its systems and processes remain compliant and stable.

In short, take a proactive approach to setting up your small business with the right foundations to avoid bigger, and possibly fatal, problems that are associated with growth and expansion.

Information provided in this blog is not legal advice and should not be relied upon as such. Workplace Law does not accept liability for any loss or damage arising from reliance on the content of this blog, or from links on this website to any external website. Where applicable, liability is limited by a scheme approved under Professional Standards Legislation.