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Are there any penalties to a seller if numbers are not correct?

if I purchase a buiseness claiming 60k cash flow and I run the buiseness for some time and the numbers are not even close are there legal actions that could be taken

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Answers (6)
Entrust Associates
Entrust Associates
Premium Broker

Jeff -There are almost never any clear cut answers when dealing with this type of legal question.

This is something you should discuss with your attorney when (s)he is drafting the Asset Purchase Agreement. The way representations are worded, the way indemnities are stated, including thresholds, caps and time frames can affect your rights. Clauses relating to financial representations often include the words "fairly reflect" the financial condition, and may include terms like "material difference." Whether financial statements fairly reflect the performance of a business, or whether there are material misstatements is a question for the judge/jury/arbitrator.

To step outside of the contract and bring a common law fraud claim can be difficult and again you should discuss what rights you may have with a lawyer in your jurisdiction. Even if you are able to do so, there are several essential elements you'd need to prove in a fraud claim (or even a negligent misrepresentation claim) including materiality which again is not a precise term.

And, even if you win on the liability claim, you'd still have to tie your damages to the misrepresentation.

The clearest thing that can be said about your question is that all lawyers, including litigators cost money. Often, a lot of money. It may in fact be too much money to even make a claim worthwhile.

As others have said, do your due diligence as carefully as you can upfront. Maybe you'll be able to recover, maybe not -- but as they say -- an ounce of prevention is worth a pound of cure.

Jul 1, 2009
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Hello Jeff: It depends on what contingencies were stated via the purchase agreement. Usually, an acquisition can be structured and tied to financial performance the previous owners claimed.
However, previous tax returns are used to project future sales. Many factors could cause the sales to be lower than expected.

Jun 27, 2009
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It sounds like you have not yet purchased this business... Is this correct? Obviously their are penalties in situations where the Company completely misrepresents what they are selling you. But you shouldn't just rely on the seller! You need to validate the business income shortly after the offer is negociated. Your offer should be contingent on your having access to the Company's records for you to perform due dilligence (review their records, bankstatments, tax returns, etc). I am a CPA who audits Company's for a living and you can validate much of the information that is provided to you on your own (going to bank statements/agreements etc). You might want to go to a CPA to have them help (not for an audit, just advice helping your to plan your due dilligence etc).

If the Company does not have sufficient information as to where you can support some of the key figures, then you shouldn't really be buying the business because they probably don't really know what they make either. The information that Michelle Orr posted below should be ignored. Often brokers only worry about "getting the deal done" and financing the deal is often the main obstical. For your concern of removing some of the risk that the numbers may not correct (by error or fraud), you should understand that the fact that an SBA lender will accept the a tax return is not really relevant here. The SBA is government backed, and the government has recourse for the filing of fraudulent tax returns... YOU DO NOT! So that fact that this government entity (SBA) will accept a representation to the US Treasury (also government) makes sense from a government standpoint (they are covered). If the seller lies, the government could pursue action for the faulty return as well as toward you for payment. They will get their money.

You should have detailed seller representations as to what they are selling you. And you should obtain support for key information and ensure that the whole deal makes sense.

Jun 26, 2009
Michelle Orr
Wells Fargo SBA Lending
Business Development Officer
Fairfield County, CT

My first question is how was the $60K in cash flow proven to you? Was it from a seller's tax return, or their "internal books"? As a former SBA lender, I can tell you that lenders only care about the cash flow as documented from the seller's tax returns, and they verify the tax returns provided are what were filed with the IRS via a form 4506-T. I have to imagine that if a business reports false numbers on a Federal Tax return there will be legal implications. Be careful as to what "numbers" you are evaluating a company's cash flow on.

Jun 16, 2009
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Small Business Underwriters

It depends on what information was provided, and to what extent the numbers were guaranteed accurate. If the seller signed a sale agreement that states that to their knowledge, the financials provided accurately represent the results of the business, and it turns out that revenues were half of what was reported, then I could see that being an issue. Ask the previous poster mentioned, proving something like that can be hard...

Jun 16, 2009
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The BAF Group LLC

That is a question for an Attorney, but certainly fraud is something that could be an issue in both criminal and civil proceedings. One key is whether the claims were made in writing. We were asked to take a listing not too long ago, where the Owner had sued and collected for such a situation. But we represented a bank on a foreclosure sale where the Owner claimed the person from whom he bought the business had fraudulently represented the profits. Frankly, I thought he had a powerful case. But the court did not agree, and he ended up losing the business and the property that went with it. So, what I am saying is that there are cases where this is possible, but your proof has to be pretty convincing.

May 7, 2009

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