The 7 key warning signs that your client’s business is imploding and what an accountant can (and can’t) do about it

Do you have a client who only calls to whinge about how their business partner just doesn’t get it? Have you seen good employees leave and good opportunities lost because the business owners can’t agree and end up doing too little too late. Do you sometimes wish you could just knock their heads together?

As the accountant, you are often the first person that business owners turn to when things aren’t going well in the business. When there is more than one owner, whether it is a company, partnership or unit trust structure, when the business owners aren’t getting on it can be hard to know how to help without “taking sides”.

A survey by CCH found that a majority (82%) of SMEs agreed that their accountant is their most trusted advisor for advice on continued success and growth of their business. The reliance upon an accountant for business advice (beyond preparing financial reports and tax returns) increased as turnover grew.

The findings are consistent with our experience of what prompts a business owners to seek legal help. In the past year we have helped 15 professional practices with a business dispute or shareholder disputes. Of the disputes which went to mediation, 100% were resolved. In most cases, it was the practice’s accountant who led to our being asked to help.

In one case two owners of a prominent rural real estate business were no longer speaking to each other. They were both speaking to the accountant, for the moment, but listening to their complaints was taking up hours of his time with no end to the deadlock in sight. We attempted a negotiated separation but when it quickly became clear that wasn’t possible we commenced court proceedings and had the Court make the necessary orders to break up the real estate business.

If you see danger signs that conflict between the business owners is escalating it makes a lot of sense to advise the business owners to get independent advice from an experienced business dispute lawyer so that the business can be dismantled in a way that preserves as much value as possible. A messy, drawn out and hard fought business break up is likely to be financially destructive and emotionally draining for all involved: not only the business owners themselves, but also the employees, clients and creditors of the business.

If you are an accountant who acts for professional service providers who rely upon strong personal client relationships, such as doctors, lawyers, real estate agents and accountants, there are particular signs of trouble to look out for.

Key warning signs a professional service practice is headed for a break up

Over the years we have seen the same warning signs of trouble crop up over and over. They include:

1. co- owners who disagree on where to spend money on the business and which strategic path to take
2. co-owners who disagree on how much money should be invested in the business
3. if you find you are speaking primarily to only one co-owner, who tells you that the other agrees (but you really have no way of knowing)
4. lots of complaints about the other co-owner not pulling their weight (whether from one or both)
5. recurrent problems with the way one co-owner is dealing with staff or ethical issues – revealing fundamentally different values
6. disagreement over the involvement of family members in the business
7. different time frames for continuation of the business – usually where one owner is looking to wind down, exit or retire.

Each case is different but we often see that where one co-owner has a stronger client base (or deeper pockets) they will insist on breaking up the business, whether it is presented as a fait accompli or there is an attempt to come to an amicable separation. Once a break up is on the cards, even if it seems straightforward at the start, as the business accountant you need to advise both sides to get independent legal advice.

Why you can’t help a business break up

1. You are not an independent valuer

Both co-owners will have their own version of their contribution to the value, and their entitlements. This leaves you as the accountant, stuck in the middle of what can become a very hostile situation. For an owner who is approaching retirement, determination of the value of the business may be the difference between a comfortable retirement or financial disaster.

Even if there is an amicable agreement, people can change their minds once financial reality kicks in. If you have ensured that the business owner has been independently advised you will be less vulnerable to later defending an allegation that you erred in valuing the business.

2. You are not an expert in conflict resolution

If you try to help the business resolve the conflict you will spend way too much time presenting and analysing financials only to be met with criticism from both sides.

Sometimes to resolve a conflict it is necessary to involve a Court or Tribunal who has the necessary power to intervene. A good business dispute lawyer can judge when talking has become futile.

3. You can’t remain trusted by both sides of the dispute

When the conflict escalates, if you attempt to give advice which might engineer a resolution the most likely outcome is that both sides lose their trust in you and stop speaking to you. You will then be left trying to collect your fees for all the time that got swallowed up in the endless phone calls, meetings and going over the numbers one more time.

 If you see the warning signs that conflict between the business owners is putting their business at risk, you should advise them to consider breaking up the business. Sometimes an external event, an incendiary comment, an accident or a financial blow, will be the last straw. Once the business owners are headed to breaking up their business relationship you need to advise them to each get independent legal advice from an experience business dispute lawyer.

Consider this article as an overview and checklist to help you navigate your way to a solution. If you'd rather talk to someone confidentially about a particular situation, give me a call on +61 2 9023 9114 or email at [email protected].

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Are there other common warning signs you have seen? Please add your thoughts below.