12 May Beware of Business Buyer Scams
If you’re selling a business and it’s going so smoothly it’s spooky, beware! Some business buyers prey on inexperienced business sellers. Here’s how one particular scam works.
You, the seller, receive a response on a “business for sale” ad you placed, typically on the Internet. The caller says he’s with a private equity group (PEG) or small investment firm. You give him your data and receive a full-price offer. If you have representation, the buyer demands to work directly with you and not your representative. If you resist, the buyer says your rep is in the way, unprofessional, incompetent or unresponsive.
The terms call for purchase of stock rather than assets and payment in full within the first year, wherein many sellers of smaller businesses have to wait five to seven years for full payment. But there’s little cash at closing (a bad sign), maybe 10 percent. Do not fear – the buyer allows you to hold all the stock (i.e., equity shares) as collateral until you’re paid in full. The terms call for the buyer to gain control of all the business assets at closing, including cash and accounts receivable.
The deal closes, you get the down payment and the buyer takes control of the company. The buyer then factors the receivables (i.e., sells them for cash), sells off the inventory, cleans out all the cash, maxes out the credit cards and pays no bills. Within a month or two, the buyer disappears. You’re left with your collateral – the company – robbed of most of its assets and with huge liabilities.
One victim “sold” his company for $1.8 million and the buyer skipped town after pulling out $1 million. Also, the buyer persuaded the seller to let him (the buyer) take over the business with nothing down because “the funding was just a day or two late, but on the way.”
According to various sources, if you get cold feet before closing and try to back out, these cons will try to extort money from you for not completing the transaction.
Think no one falls for this scam? Think again. Unfortunately, many have. At least two teams have been working this con in the United States for years. One team is a mother and two sons from the Midwest. Another is three men working together. The FBI arrested one of the ringleaders of this trio in Texas on March 3, 2006. His accomplices were arrested six days later.
If you encounter a similar situation, call the police or the FBI.
Finally, stick to these recommendations when selling your business:
- Check the background of the buyer(s) extensively. Check references, pull credit reports, tax liens and litigation history, etc. Any litigation attorney will be skilled at this.
- Selling a business is tough. If the process is going spooky-smooth and/or the price and terms seem too good to be true, they probably are. Be cautious.
- If the buyer continually fails to meet deadlines and supply requested data, you have a problem. Don’t accept excuses. Find a new buyer whose word is good.
- Don’t let the buyer “work in the business” before he or she pays the cash.
- Require a substantial percentage of the purchase price up-front in cash before you turn over ownership. Seller financing is a fact of life in selling a private business, but accept no less than 50% in cash at closing.
When in doubt, hire a skilled advisor.
This article was adapted, with permission, from Ron Johnson’s piece “Wanted-Considered Dangerous …”