Protecting Your Kitchen Investment

What investment would that be? I am not investing in a kitchen maker.

Oh but you will be!

When you sign up to for your new kitchen you will be asked for a deposit. This will be a considerable sum of money, typically 50% of the cost of the kitchen. Many companies also expect a progress payment before the kitchen is installed, which might amount to another 40%. This means that you will have paid 90% even before the kitchen cabinets arrive at your house.

From the time you sign up you have a considerable investment in the company that, if you are on progress payments quickly grows.

So why do kitchen makers expect so much cash in advance?

They would have you believe that it is a matter of good faith. They are making a kitchen for you that they will not be able to sell to anybody else. If you reneged on the deal they would be high and dry. There is some truth to this, though in reality there is so much standardisation now within the industry that most of the white boxes and doors could be easily diverted elsewhere, especially by the larger companies.

In reality the truth is more sinister from your point of view.

All businesses depend on cash flow. This is the stream of cash that flows in to cover the debts, wages, rent etc. that the company is liable for. Credit is very expensive in New Zealand so it makes sense to borrow as little as possible from the lending institutions, though many small businesses are heavily indebted for historical reasons. What better credit than the free cash deposits from customers. Many companies rely on this to keep trading.

Companies that are running on a shoestring are vulnerable to the vagaries of the market place. When business slows down, so does cash flow and the ability of the company to meet its liabilities is threatened. A bank overdraft might be the short-term solution to keep going until business picks up again but in the mean time the company will have become more indebted and therefore its costs will have increased, its profitability reduced and the shoestring stretched tighter.

There can come a time when an indebted company is what is called trading insolvent. That is when it would be unable to pay off its creditors, should they all ask at once for their money. The company is in practice bankrupt. The only thing preventing its fall into liquidation is the fact that its creditors, unaware of the situation, are not clamouring to be paid. Most companies are not in this position of course; they are sound and are trading profitably. However, there are many, many companies that are in just this unfortunate position. Would you like to be one of their creditors?

But my chosen company is a big name with branches across the country. Surely a company of that size is not a risk?

It is probably a franchise operation. There will be a local franchisee with a limited liability company who operates under the brand name. The franchisor (the brand owner) will not bail them out if they get into difficulty. Your deposit is held by the franchisee who will be trading as a limited company and be contractually distanced from the franchisor.

So what about protection from the kitchen and joinery trades associations? next>

How much does a new kitchen cost?