Seller Beware

Take steps to protect yourself against buyer scams.

Business sellers frequently sell their businesses under less than perfect circumstances. These less than perfect circumstances can be the result of contingencies that arise during negotiations and/or at the last minute in a business sale. Imperfect circumstances can also be caused by a multitude of other factors, such as bank loans falling through, buyers becoming disinterested, and the like.

Sellers, without a doubt, face peril when selling their business even under circumstances when the buyer is a good faith buyer. Recently, certain groups of individuals have been masquerading as good faith business buyers only to swindle business sellers out of their cash, business, livelihood and good name.

How the Scam Works
The scam varies by each individual scammer, but the scammers tend to have common earmarks that make them identifiable as scammers. Initially, an individual contacts a business (which is held for sale) representing him- or herself to be a representative of a private equity group (PEG) or an investor. Upon gaining initial contact information, the individual then makes a full price offer for the business. If a business broker or other professional starts asking questions in an attempt to aid the seller and fulfill his or her professional obligation, the scammer quickly gets the professional out of the transaction, telling the seller that the professional is unnecessarily complicating the purchase.

Once the seller is without the representation of a professional, the seller and his or her business become easy prey for the scammer. The scammer, acting on behalf of a buyer, then makes a full price offer for the stock, not the assets of the company. Offering to purchase a company’s stock instead of its assets (1) makes the transaction infinitely less complicated, and (2) makes the taxes due from the seller considerably less than if it were an asset sale. Buyers almost never voluntarily purchase stock. Since the price and tax contingencies are eliminated by a full price/stock purchase offer, the offer also prevents CPAs and attorneys from entering or scrutinizing the transaction.

Once this happens, the seller and company are essentially in the jaws of the scammer. Frequently, from this point, the buyer’s financing will not come through on time, yet the buyer/scammer will convince the business owner to relinquish control of the business. The buyer then gains control of the business. Typically, the buyer will run up the accounts payable, factor the accounts receivable, spend all of the cash and leverage all of the credit. Once the buyer/scammer is finished, they leave town, often with millions of dollars in their pockets, while leaving the owner with no cash and a ruined business.

How to Protect Yourself
One of the scammer’s priorities is to eliminate the seller’s professionals from the transaction. The first and best defense from being scammed is to be well-represented by professionals and allow them to do their jobs. Preferably, your professionals should have extensive experience in dealing with business transactions, including buying and selling a business. A good professional will not blindly allow a scammer to walk off with your business and will require any buyer to display good financial ability.

Additionally, sellers need to be advocates for themselves. If what a buyer seems to say is too good to be true, it likely is too good to be true. Again, because of tax angles, liability and a host of other problems, buyers are reluctant to purchase stock, and they are especially reluctant to buy a company at full offering price. If the buyer is making claims that are untrue or seem to be untrue, it is often best for the seller to proceed with precaution or refuse the deal entirely.

Selling your business while abandoning or going without professional guidance is a very dangerous thing to do. While it is rare to encounter scams as described above, even good faith deals need representation to make sure all of the contingencies are covered. If you are buying or selling a business, be sure to consult professionals who are experienced in buying and selling businesses, in order to avoid a buyer scam.

Gases and Welding Distributors Association
Bart A. Basi Meet the Author
Bart A. Basi, Ph.D. is a CPA and attorney at The Center for Financial, Legal & Tax Planning Inc., based in Marion, Illinois, and on the Web at www.taxplanning.com.