August 2008

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Business for sale? Watch out for scams

August, 2008

You've spent years developing your business, building its value, enhancing its reputation. Now you're ready to move on. You place a "Business for Sale" advertisement in the Internet classifieds, and the next day an eager — overly eager — buyer approaches you with a deal that seems too good to be true. The buyer offers full price and wants to structure the deal as a stock sale. A stock sale means the buyer will get the entire business, including all its assets (cash, checking accounts, receivables, inventory and so on) at closing. The buyer doesn't ask tough questions about the firm and seems in a hurry to close the sale. He or she offers a 10% down payment and says the full balance will be paid off within a year.

Seller beware! Business owners and regulators have found that scam artists use these types of transactions to strip value from companies, pulling out cash, and leaving the seller with a fistful of worthless stock. Within days of closing the sale, the buyer factors (sells) the receivables for cash, runs up company credit cards, sells off inventory, and empties cash accounts. The firm's creditors don't get paid. Your formerly prosperous business becomes an empty shell.

How can you avoid these types of scams when selling your business? Here are a few suggestions.

  • Perform an extensive background check on any potential buyer, including a review of the person's credit reports, litigation history, tax liens, and so forth. A skilled attorney can often help with this research.
  • Beware of sales that go too smoothly. Legitimate buyers will perform due diligence, asking tough questions, inspecting financial records, and calling customers and vendors. If the buyer wants to close the sale in a hurry and doesn't seem interested in the firm's ongoing prospects, beware!
  • The buyer must meet deadlines and supply all requested data in a reasonable time. If he or she is always late, move on. Find a buyer who's serious about the transaction.
  • Before turning over ownership, require a substantial percentage of the purchase price up front. Some advisors suggest 50% in cash at closing. Serious buyers, who want to continue growing the firm, will put their money on the line.

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