In Bankruptcy Because of Seller Fraud in a Purchased Business
All too often we meet clients who moved down to Florida with hopes of being in business for themselves. The story is the same each time.
Meet “Bob” from Michigan. Bob worked in the corporate world for 35 years, accumulating a nice 401(k) Upon retirement he and his wife move to Wesley Chapel and buy a retail store from Shady Pete. Bob thought he was smart in asking for financial documents before he agreed to the purchase in the amount of $950,000. Shady Pete agreed to finance $700,000 of the price and Bob’s 401(k) was used for the rest. In the due diligence period, Bob ensured that there were no lawsuits against the store. He also verified the profit and loss statements by looking at Shady Pete’s paychecks to confirm the owner benefits were accurate.
Shortly after the purchase, all kinds of problems emerged. Turns out that much of the perishable inventory was due to expire. Vendors had not been paid in weeks, and Bob started receiving notices from the Florida Department of Revenue about unpaid payroll and sales tax. A former employee filed a lawsuit against the store. On another day, the Bob learned that much of the valuable inventory was actually on a co-signment basis.
Upon further investigation, Bob learned from the employees that Shady Pete was a fraud and falsified the numbers to induce Bob to buy the store. The paychecks that he showed to Bob were never actually cashed. The store was probably only worth $200,000…and Bob’s hard earned 401(k) was gone. To add insult to injury, when Bob stopped paying Shady Pete on the seller financing promissory note, he was served with a lawsuit.
Does this scenario sound familiar? Fortunately, there are legal options for Bob. That’s what we are here for. We cannot go backwards and undo past decisions, but moving forward, Bob need not lose sleep over something that can be resolved through the courts.