In a conference setting this client was once asked how best to describe Banks Consultancy and me. His answer was - “he solves my accounting and taxation problems”.
I couldn't fix this one
WHAT THE ACCOUNTANT SAW
Chapter 6 – Never Buy Other People’s Problems
There is a particular moment in every working life where employment begins to feel less like security and more like constraint. The routine that once provided comfort starts to resemble repetition. The predictability that once felt safe begins to feel limiting. It is often at that point the idea of “doing something for yourself” takes hold, not as a passing thought, but as something far more persistent. It lingers in the background of conversations, it appears in quiet moments at the end of the day, and eventually it begins to shape decisions.
For many, that path into business does not start with invention or some grand entrepreneurial breakthrough. It starts with acquisition. Buying something that already exists feels, on the surface, like a sensible compromise. The systems are in place. The customers are there. The revenue is proven, at least in theory. The risk, or so it appears, has already been navigated by someone else.
It is a compelling narrative. Step in, take over, improve what is already working, and enjoy the rewards that follow. On paper, it makes perfect sense. And that is precisely where the danger lies.
Because paper is a remarkably forgiving medium. It accepts assumptions without question. It presents projections as though they are facts. It smooths over inconsistencies and gives equal weight to numbers that are verified and numbers that are merely suggested. A set of accounts, particularly when prepared for the purpose of sale, can tell a story that is technically accurate while being fundamentally misleading. It is not necessarily dishonest. In many cases, it is simply incomplete.
The problem is not that buyers fail to ask questions. Most do. The problem is that they often ask the wrong ones, or perhaps more accurately, they accept the answers too readily because those answers align with what they want to believe. There is a subtle shift that occurs during the process. The objective assessment that should underpin the decision becomes gradually influenced by the desire to make the decision work.
In that environment, verification becomes secondary to validation.
I have watched this unfold more times than I care to count. Intelligent, capable people, individuals who in their own field would never accept information without scrutiny, find themselves relying on representations that should have been tested. Not because they lack the ability, but because the momentum of the opportunity carries them forward. The excitement of change, the promise of control, the belief that they are stepping into something better, all combine to dull the instinct that would otherwise prompt caution.
It is in those moments that a simple principle, one that sounds almost dismissively obvious, becomes critically important. Do not believe what you are told. Double check.
It is a rule popularised through fiction, attributed to Leroy Jethro Gibbs, but its relevance in the world of business is anything but fictional. If anything, it is understated. Because in the context of acquiring a business, what you are being told is rarely a lie in the traditional sense. It is a version of the truth, shaped by perspective, framed by incentive, and presented in a way that highlights strengths while quietly minimising weaknesses. And weaknesses, particularly those that have been managed, deferred, or simply ignored by the previous owner, have a habit of remaining dormant until new ownership removes whatever balance had previously kept them contained.
What appears stable can in fact be fragile. What appears profitable can in fact be dependent on factors that are not immediately visible. What appears simple can in fact be layered with obligations, relationships, or expectations that do not transfer neatly with the change of ownership.
This chapter is built around one such story.
A client who did what many aspire to do. He stepped away from employment, committed to the idea of owning his own business, and found what appeared to be a suitable vehicle to achieve that goal. It was not overly technical. It did not require specialist qualifications. It was, at least in the material presented, a sales-based operation capable of generating sufficient income to service its debts and provide a reasonable return.
There was even, as is often the case, the suggestion of upside. Opportunities to expand. Efficiencies to be gained. Potential waiting to be realised by someone willing to take it on.
It ticked all the boxes. Except for the ones that were never properly examined.
What followed was not immediate failure. In many respects, that would have been easier to deal with. Instead, what emerged over time was something far more insidious. Issues that had been present before the purchase, but not fully understood, began to surface. Relationships that had been managed through familiarity did not respond the same way under new ownership. Assumptions that had been relied upon proved to be conditional rather than absolute. And somewhere in the background, something that had been dormant began to stir. A problem that had not been resolved, merely contained. A sleeping giant.
It did not announce itself immediately. It rarely does. Instead, it revealed itself gradually, in ways that could initially be explained away. A disagreement here. A shortfall there. An unexpected complication that, in isolation, did not seem catastrophic. But over time, those fragments began to connect. And once they did, the true nature of what had been acquired became impossible to ignore.
This is not a story about failure in the simplistic sense. It is a story about assumption. About the gap between what is presented and what is real. About the cost of accepting information without sufficient challenge. And perhaps most importantly, it is a story about the enduring consequences of problems that are inherited rather than created.
Because when you buy a business, you are not just buying its assets. You are buying its history. And sometimes, whether you realise it or not, you are buying its problems as well.
In this case, the problem did not arrive loudly or dramatically. It sat quietly within the documentation, embedded in the balance sheet as a line item that appeared, at first glance, to be of little consequence. Redeemable Preference Shares. It was disclosed, properly recorded, and therefore easy to accept without deeper interrogation. Like many things in financial statements, its presence alone did not trigger alarm. What mattered was not that it existed, but what it represented, and more importantly, what it allowed.
Those shares were held by the head distributor, the very entity upon which the business depended for its primary source of income. That fact alone should have prompted a more detailed examination, not simply of the shares themselves, but of the relationship that sat behind them. Instead, when queried, the explanation was delivered with a confidence that often accompanies these situations. There was nothing to worry about. Everything was covered within the distribution agreement. That agreement, the client was told, formed part of what he was purchasing, and therefore whatever sat behind those shares was already accounted for in the deal.
It was a reassuring answer, and like many reassuring answers, it aligned neatly with what the client wanted to believe.
With the transaction completed, attention shifted to building the business. The client approached it with energy and intent, determined to make the move away from employment worthwhile. In those early stages, the numbers appeared to support that decision. Revenue flowed, costs were managed, and there was enough margin to both service the debt associated with the purchase and generate a return. The narrative held together, and as it did, the questions that might have been asked earlier became less urgent.
Part of that structure involved ongoing payments to the preference shareholder. These were referred to as dividends, although in practice they bore little resemblance to what most would recognise under corporate law. There was no formal declaration process tied to traditional shareholding rights. Instead, there was an annual calculation of profit, and from that, a portion was allocated and paid across. Even the mechanics of those payments carried inconsistencies, with funds being transferred not to the entity listed as the shareholder, but to a separate account entirely. At the time, it was accepted as part of the commercial reality of the arrangement, something that worked in practice even if it lacked structural purity.
The client understood his obligation in simple terms. The distributor facilitated the revenue, and therefore shared in the outcome. It was treated as a cost of doing business, albeit one dressed in language that suggested a level of formality that did not truly exist. As long as the business performed, the arrangement remained intact, and there was little incentive to challenge it.
Growth, however, has a way of exposing the limitations of informal structures.
As the business developed, the next logical step presented itself. Moving beyond simple distribution into something more substantial, something that allowed for greater control over stock, logistics, and ultimately margin. The acquisition of a warehouse was not a speculative decision, but a strategic one. It aligned with the broader vision of building something more than a sales conduit. It was about creating infrastructure that supported expansion.
That decision brought with it the involvement of the banking system, and with it, a different set of expectations. Lending for commercial property required security, and in most cases, that security extended beyond the asset itself to include personal guarantees from directors. The distinction between business risk and personal exposure became blurred, as it so often does in small business.
In that context, the client approached the preference shareholder. If this party was sharing in the profits, if they held a position within the capital structure, then it seemed reasonable to seek some level of participation in supporting the next phase of growth. The request was not extravagant, merely a reflection of what many would consider a shared interest in the success of the enterprise.
The response was direct and unambiguous. There would be no support, no guarantees, no involvement beyond the existing arrangement. The preference shareholder would continue to benefit from the upside but would not participate in the risk required to achieve it.
That decision, while perhaps disappointing, did not stop the client from proceeding. The warehouse was acquired, the guarantees were provided, and the business continued to operate. At the time, it was seen as a necessary compromise rather than a warning sign. The focus remained on growth, on performance, and on the belief that the structure, imperfect as it may have been, was sufficient to carry the business forward.
It is only with the benefit of hindsight that these moments take on greater significance, especially given the Australian property market and the site of the warehouse on the northern beaches of Sydney
As time passed, the client’s focus began to shift. The urgency of building gave way to the reality of planning for what came next. Approaching retirement age introduces a different set of considerations, particularly in the context of small business ownership. The emphasis moves from expansion to extraction, from growth to preservation, and from risk-taking to risk management.
Within that framework, the opportunity arose to transfer the warehouse into a superannuation environment. From a technical perspective, it was a legitimate and sensible strategy, supported by the provisions of the Tax Act. It allowed for the crystallisation of value in a concessionally taxed structure and formed part of a broader plan to secure the client’s financial position in retirement.
As a matter of process, the preference shareholder was informed.
What followed marked a clear shift in the dynamic that had existed until that point. The response was no longer passive or indifferent. It was immediate, forceful, and, in many respects, unexpected. Claims were made suggesting an interest in the property, an entitlement that had never previously been asserted. The basis for those claims was unclear, at least from a legal standpoint, but their existence alone was enough to change the nature of the situation.
This was not a discussion grounded in mutual understanding or commercial pragmatism. It escalated quickly into a legal confrontation. Highly apid lawyers became involved, and with them came interpretations that stretched well beyond what the original documentation appeared to support. Injunctions were sought, actions were initiated, and each step added a layer of complexity and cost that the client had neither anticipated nor budgeted for.
The objective was not difficult to discern. Apply pressure. Create uncertainty. Increase the financial and emotional burden to a point where a commercial settlement, regardless of its fairness, became the path of least resistance.
At the same time, the distribution agreement, once presented as a stable and reliable foundation, was repositioned as leverage. It became an implicit bargaining tool, a mechanism through which compliance could be encouraged and resistance discouraged. The underlying message, whether stated explicitly or not, was that the continuation of the business’s income stream was not guaranteed if the dispute was not resolved in a manner acceptable to the other party.
This was the point at which the true nature of what had been acquired became clear.
The business was not simply an asset generating income. It was part of a relationship, one that had not been fully understood at the time of purchase. That relationship carried with it dependencies, expectations, and, as it turned out, points of control that could be exercised when circumstances changed.
The Redeemable Preference Shares, once seen as a minor line item, were in fact a foothold. They provided a basis, however loosely defined, for influence. When combined with the reliance on the distribution agreement, they created a position from which pressure could be applied with considerable effect.
What had been dormant was now active. And the cost of not having fully understood it at the beginning was being realised in the most confronting way possible.
What sits underneath a story like this is not just the detail of what went wrong, but the uncomfortable question of what could have been done differently. It is a question that carries a certain cruelty with it, because the answers almost always arrive after the fact, when the cost of the lesson has already been paid.
Hindsight, as they say, is perfect. In practice, it is also largely unhelpful to the person standing in the middle of the problem.
That said, there are patterns in these situations that are worth examining, not because they provide guaranteed protection, but because they at least offer a framework for reducing exposure. Buying a business is rarely a single decision. It is a collection of decisions, often made under time pressure, often influenced by emotion, and frequently shaped by incomplete information. The structure adopted at the outset can either contain risk or quietly amplify it over time.
One of the more consistent themes in transactions like this is the blending of everything into a single entity. The goodwill, the trading activity, the contracts, the property, the risk, all sitting together as though simplicity equates to safety. It rarely does. More often, it simply means that when something goes wrong, everything is exposed at once.
A different approach, one that is not always adopted but is often worth considering, is the separation of those elements from the beginning. The acquisition of goodwill, for example, can be isolated into a specific entity, distinct from the day-to-day trading operations. That entity then licenses or leases that goodwill to a trading company, creating a layer between the value of what has been purchased and the operational risks that inevitably arise.
It is not a perfect solution. It does not eliminate risk. But it changes the way risk moves.
Similarly, the ownership of property introduces another dimension entirely. Commercial premises, particularly those funded with borrowings and supported by personal guarantees, carry a level of exposure that can sit uncomfortably alongside trading volatility. Holding that property in a separate structure and leasing it back to the operating entity is not a new concept, nor is it particularly complex. What it does, however, is create a degree of separation between the asset and the activity.
In a scenario like the one described, that separation may not have prevented the dispute. The underlying issue was relational as much as it was structural. The preference shareholder’s position, combined with the dependency on the distribution agreement, meant that pressure could be applied in ways that extended beyond simple ownership. But having the warehouse held outside the trading entity, and potentially outside the immediate reach of that relationship, may have altered the dynamics. It may have provided a different set of options when the situation began to deteriorate.
The same can be said for the initial acquisition itself. Purchasing assets, rather than shares or an entire entity, allows for a more controlled assumption of what is being taken on. It creates an opportunity to leave behind elements that are uncertain, undefined, or simply not fully understood. That process, however, requires time. It requires diligence. It requires a willingness to ask questions that may slow the transaction or, in some cases, jeopardise it altogether.
And that is where theory and reality begin to diverge.
Because in the real world, deals are rarely done in ideal conditions. There are competing buyers. There are deadlines imposed, either explicitly or implicitly. There is a natural tendency to trust what is presented, particularly when it aligns with the outcome that is being sought. The entrepreneur, by nature, is inclined toward action. Opportunities are not just evaluated, they are pursued, often with a sense of urgency that leaves little room for prolonged hesitation.
Time, in that environment, becomes both a constraint and an excuse. But layered over the top of all of that is something far less comfortable to acknowledge, and that is the assumption that if something does go wrong, there is always a system in place to resolve it fairly. That disputes can be taken to lawyers, to courts, to some form of independent process where facts are examined, rights are determined, and an outcome is reached that reflects what is “correct”.
In theory, that is exactly how it is meant to work. In reality, the law is not always a level playing field.
It is a structured system, governed by rules and precedent, but it is also a process that is influenced, sometimes heavily, by the resources available to the parties involved. Access to good legal advice, the ability to sustain prolonged litigation, the willingness to pursue multiple avenues simultaneously, all of these factors shape the experience long before any final determination is made.
If you have enough cash, the law becomes not just a framework for resolution, but a tool that can be actively used. Not necessarily to win on merit, but to apply pressure.
The mechanics of it are not complicated. Engage lawyers who are prepared to explore every possible interpretation, no matter how remote. Initiate proceedings that require a response, knowing that each response carries a cost. Seek injunctions, even on arguable grounds, because the immediate effect is disruption. Introduce urgency where none may truly exist, forcing the other party to react quickly, often without the luxury of measured consideration.
Each step, in isolation, may be justifiable within the bounds of the system. Collectively, they create an environment where the financial and emotional burden becomes part of the strategy.
For the party on the receiving end, particularly in a small business context, the impact is immediate and confronting. Cash flow, which should be directed toward operating the business, is diverted toward legal fees. Time, which should be spent managing clients, staff, and growth, is consumed by meetings, documents, and responses. The focus shifts from building something to defending it. And unlike the party applying the pressure, there is often a natural limit to how long that can be sustained.
This is where the concept of “being right” begins to lose its practical significance. A position can be legally sound, supported by documentation and consistent with the intent of the original arrangement, and still be extraordinarily difficult to defend if the cost of doing so outweighs the perceived benefit. The system does not always reward efficiency or fairness in the short term. It rewards persistence, and persistence, more often than not, is a function of resources.
It is an uncomfortable reality, particularly for those who enter into business transactions with an underlying belief that the rules, once established, will be upheld in a straightforward manner.
What is often overlooked is that the rules are only as effective as the ability to enforce them, and enforcement is rarely a passive exercise.
In the context of this story, once the “sleeping giant” was awakened, the discussion moved quickly beyond the original commercial arrangement and into a space where legal positioning became the primary battleground. The arguments advanced were not always grounded in clear entitlement, but they did not need to be. They only needed to be arguable enough to justify action, and costly enough to make resistance difficult.
The distribution agreement, the preference shares, the historical payments, all of these elements were drawn into that process, not necessarily as definitive proof of entitlement, but as pieces in a broader strategy designed to create leverage. And leverage, in that environment, is often more powerful than correctness.
For the entrepreneur, this is rarely front of mind at the point of acquisition. The focus is on opportunity, on growth, on the mechanics of making the business work. Legal structures are considered, documents are reviewed, but the assumption remains that if something sits within the bounds of what has been agreed, then it will be respected.
The reality is more nuanced.
Agreements can be tested. Interpretations can be challenged. Positions can be asserted that were never contemplated at the outset. And if one party has both the inclination and the resources to pursue those positions aggressively, the balance shifts, regardless of the underlying merits.
This is not to suggest that the system is broken, nor that outcomes are ultimately unjust. Over time, many disputes do find their way to a resolution that reflects the substance of the matter.
But time, again, becomes the critical factor. Because for a small business owner, time is not an abstract concept. It is cash flow. It is energy. It is focus. It is the difference between continuing to operate and being forced into decisions that would never have been contemplated under less pressure. And that is the part of the equation that rarely appears in the initial evaluation of a business purchase.
The documents may be sound. The numbers may stack up. The opportunity may be genuine.
But if the underlying relationships carry the potential for conflict, and if that conflict can be prosecuted by a party with deeper pockets and a greater appetite for dispute, then the playing field is never truly level.
It only appears that way at the beginning.
The commercial reality is that slowing down to fully interrogate every aspect of a transaction is not always seen as practical. There is a fear that the opportunity will be lost, that someone else will step in, that over-analysis will lead to inaction. It is a delicate balance, and one that is rarely managed perfectly.
In this particular case, it is also important to acknowledge that the advice being discussed now was not provided at the time. I was not involved in the original acquisition. I was not part of the decision to purchase the business, nor the structure that was adopted in doing so. The observations that can be made now are informed by what followed, by the unfolding of events that revealed where the vulnerabilities sat.
That distinction matters.
It is easy, standing at a distance, to point to alternative approaches, to suggest structures that may have offered greater protection, to identify questions that should have been asked. It is much harder to do so when you are in the middle of the decision, working with the information available, navigating the pressures that come with it, and trying to move forward.
None of this is to suggest that structure alone is the answer. It is not. Structure can mitigate, it can contain, it can create options, but it cannot compensate for a fundamental misunderstanding of the relationships that underpin a business. In this story, the real issue was not just the presence of Redeemable Preference Shares or the way in which profits were distributed. It was the dependency on a party whose interests were not fully aligned, and whose capacity to exert influence was not properly appreciated.
No amount of structural planning completely removes that risk.
But good structure can at least ensure that when the unexpected occurs, the consequences are not absolute. It can provide room to move, room to negotiate, and in some cases, room to walk away from parts of the problem without losing everything.
For anyone considering the purchase of a business, the lesson is not that you should avoid doing so. It is that you should understand, as clearly as possible, what it is you are actually buying. Not just the revenue and the profit, but the relationships, the dependencies, the obligations, both documented and implied. It requires a level of scepticism that can feel uncomfortable, particularly when you are dealing with people who appear reasonable and situations that appear straightforward.
But appearances, as this story demonstrates, can be deceiving. And the cost of accepting them at face value is rarely paid upfront.
In a conference setting this client was once asked how best to describe Banks Consultancy and me. His answer was – “he solves my accounting and taxation problems”.
I couldn’t fix this one
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