My Business Is A Disaster!
Who Can I Blame?
So your bank balance is sinking faster than the last
moments of the Titanic! When income expectations are not met in the
acquisition of a business, the buyer frequently wonders who is to blame.
Most buyers instinctively believe that it is not
themselves, but rather, the seller, or the seller’s broker, or both, who are
responsible for the economic disaster being confronted.
As Sporting Life sang in the musical, “Porgy
and Bess”, “it ain’t necessarily so!”
A buyer should first ask whether the same quality level of
service, advertising and cleanliness has been maintained as that provided by
the seller. A buyer should also
consider whether any pricing changes have caused the decrease in business.
Buyers are occasionally confronted with early warning signs
of danger during negotiations, but, because of their emotional eagerness to
acquire the business, they elect to put their concerns aside. I call these early warning signs “pink
flags”. After the closing, these “pink
flags” frequently turn out to be colored “fire engine red”! If the seller can point to correspondence
or documents reflecting the information about which there is concern, it
becomes difficult for the buyer to later claim that the buyer would not have
acquired the laundromat if the buyer had known the true facts.
There is simply no substitute for a thorough review of all
financial information and documents pertaining to the transaction by an
accountant and an attorney prior to undertaking any serious negotiations. Such documents should include the lease, any
equipment purchase agreement, and utility statements, income records and
Schedule C’s for the past three years.
Consultation with professionals prior to undertaking negotiations will
allow the buyer to make the best use of their services and recommendations.
Many buyers, however, unfortunately negotiate and conclude
the acquisition of a laundromat, a major transaction for most people, without
professional advice. Later, if the
buyer is confronted with economic difficulty, a buyer will finally consult with
an attorney who will invariably wish that he could turn back the clock and
participate in the negotiations to best serve his client’s interest.
One provision a buyer should insist upon in the purchase
agreement is a representation on the part of the seller regarding monthly gross
income for the previous 12-month period.
Although it is fairly common for a purchase agreement to
include such a warranty, the period of the warranty is usually limited to the
previous six-month period. A buyer
should always insist upon such a representation for the previous twelve-month
period. Since coin laundry business
traditionally increases during the winter months and decreases during the
summer months, an income representation for a six-month period may provide an
inaccurate picture of annual income.
The seller may be entirely accurate in representing income from the
previous six months, and the coin laundry may produce the same level of income
during subsequent similar six-month periods; however, if the period for which
the representation is made includes primarily winter months, a buyer may
unwittingly find himself on bended knee with his banker to stay the course
during summer months!
A buyer may believe that the seller, or seller’s broker,
enticed him into purchasing the coin laundry by fraudulent
representations. Although a seller or
seller’s broker may make statements during the course of negotiations which
ultimately deserve close scrutiny, one must ask whether such statements rise to
the level of intentional misrepresentation of a material fact, or whether they
are merely “puffing.”
In a 1983 case, a court held that “the description of a
business as a ‘success’ was . . . highly subjective and did not amount to an
actionable representation of fact.”
It has been held, however, that “when a positive statement
of the value of property is made by the owner, coupled with other asserted
facts . . . like a false representation of past income therefrom, it may
constitute competent evidence . . . of the alleged fraudulent representations
upon which a judgment for damages may be supported.”
In another action, the defendants represented that “the
store in question was a first-class structure equal to the best building of
that type in Long Beach, and that it would stand shocks of earthquake. . . .”
The walls of the building were subsequently cracked and shattered by an
earthquake. The court noted that “Fraud
may not ordinarily be predicated on mere statements of opinion regarding the
value, general character of stability of a building, even though such
assertions are realty exaggerated.”
The court stated further, confirming what we all know that
“it is difficult to distinguish between expressions of honest convictions
respecting the stability, value or adaptability of property, and the false
representations of an owner regarding those
matters. . . .”
The court further observed that “Usually a purchaser is
charged with knowledge of such excess enthusiasm and human frailty on the part
of a vendor for which he must make due allowance, and he is deemed to accept as
true such representations, amounting to mere judgment or opinion, at his own
peril.” The court continued to note
that “the mere statement that the building in question was constructed
earthquake proof is a matter of pure speculation or prophecy. Every person of common understanding knows
it is impossible to estimate the destructive forces of nature accompanying
earthquakes . . . . No human being could have prophesied the serious damages
which resulted to first-class buildings in San Francisco . . . from the
earthquake of 1906.”
The court held, however, that since the defendants were
also alleged to have specifically and falsely represented that the building was
constructed in accordance with city ordinance specifications, the plaintiffs
were entitled to proceed to trial upon their claim of fraud.
The moral of the story?
Retain competent professionals at the outset of your negotiations to
minimize your risk of having a jury determine whether your seller was merely
“puffing” or committing fraud!
[This column is intended to provide general information only and
is not intended to provide specific legal advice; if you have a
specific question regarding the law, you should contact an
attorney of your choice. Suggestions for topics to be discussed
in this column are welcome.]
Reprinted from The Journal
Myles M. Mattenson © 2004