30 Nov 2015

Selling one business for another: to live the dream


3 min

But, creditors fund the dream!

One of the cases we had this year involved a director who had lost enthusiasm in his transport business and he wanted a new way to earn a living.

During one of his lonely trips on the highway and feeling thirsty for a beer, he thought to himself if he owned a pub instead of a transport business—I could have a beer whenever I want one.

Congratulating himself on this splendid idea, he put a plan into action to make it a reality.

Selling the old business
The plan involved selling off the transport business and its assets, which were mainly trucks. He used the sale money to pay out the company's creditors, but not all creditors. Unpaid creditors totalled over $1 million.

The business was sold with certain guarantees, one being—the trucks were in good working order—and this was a problem, because they were not.

In fact, not long after acquiring the vehicles, the lack of maintenance soon became apparent as the vehicles started breaking down. Understandably the unhappy purchaser called on the guarantee and wanted some of his money back.

With all this pressure on the director, he appointed a liquidator.

Liquidator appointed
We investigated what happened to the money from the sale of the business, this is what we found:

  • The director spent some $800,000 on buying and renovating a nice country pub. Interestingly, this expenditure was recorded in the company's accounts as being for repairs and maintenance. The fact that the company incurred all these repairs and maintenance expenses, after the business had been sold, was what led us to investigate the flow of the funds.

  • We also found the director’s 21-year old son was paid some $500,000, apparently on the claim that his wages were underpaid (although unqualified) in the preceding two years.

  • The director also paid some $200,000 to his self-managed superannuation fund (SMSF).

Given what we found, we advised these payments needed to be repaid, failing which, we would commence recovery action.

After some deliberation, the director saw sense and agreed to sell his pub and pay the proceeds to us including repayment of the funds used to pay his SMSF.

He also convinced his son to pay back the $500,000, less a small amount he had spent.

The correct approach
The ridiculous position was, that if the director had acted appropriately regarding the sale proceeds, there would have been sufficient funds to pay out all creditors and be able to do a deal with the purchaser of the business; and possibly still have had some funds left to lease a pub.

So why did the director not take this approach? Well the answer he gave was, he wanted a pub and deserved it after all his years of hard work. Leasing a pub was not the same as owning one.

Yes, even after all the distress he caused his creditors and the purchaser of his transport business—he still thought it was his entitlement.

Business can be tough

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