Caveat Emptor — the Latin phrase for “Let the Buyer Beware” – has been the orientation of laws governing trade in English-speaking Western countries for centuries. That is, buyers of goods bear the bulk of the burden to protect themselves from harm that could befall them in a purchase transaction. Maybe our forefathers were unable to imagine how the creative mind of men could find a way for buyers to scam sellers.
I received a call from a Chicago business owner (let’s call him “Chicago”) a few months ago. His little home health company was just a couple years old and doing less than $1 million in annual revenue and not yet earning a profit. He wanted some assistance with the transaction.
Chicago explained that his buyer, out of Washington, D.C., was interested in acquiring his company for $2 million, which is a VERY large price considering the facts of the seller’s business.
The letter of intent (LOI) terms were confusing to him. Sure enough, the deal called for $2 million in cash to be paid to the seller. All good so far. But then the terms went on to say the seller would immediately return the entire amount to the buyer in exchange for a promise to pay said funds back to the seller over a five-year term. No cash at closing! Not a cent until 365 days from closing! According to the buyer, this structure was necessary to comply with some new tax laws that would be very advantageous for the seller.
“Smelling a fish, I asked my new client, “Have you paid them any money?”
“Seventy-five hundred dollars for due diligence,” replied Chicago.
“What?” I asked.
“They came and did due diligence and said I needed to pay them for my part of it,” said Chicago.”
“______________ and ____________. But don’t worry – the terms of their LOI say if they don’t follow through and purchase they’ll return the seventy-five hundred.”
“Okay. Chicago, what I’m hearing you say sounds concerning to me, to say the least. I’m not sure about these guys.”
Still, there was a purported $2 million at stake so he asked me to withhold my judgment, talk to the buyer, and attempt to negotiate better terms. Surprisingly, the “buyer” agreed to a conference call with me. The call was something to behold, but – in short — they would not agree to any other terms (any that required any payment of cash at closing). Chicago, of course, could not agree to that so he asked for his money back. Naturally, the buyer said they were under no obligation to refund as they offered the $2 million. The seller is the one that backed out.
- If it’s too good to be true …
- If there’s a sizeable up-front fee required …
- If the buyer or broker uses the need for confidentiality to restrict whom you can talk to …
- If the terms are confusing or convoluted …
These are all reasons to be skeptical of the deal you’re being offered. And if you’re unsure about a business transaction, ask a successful and experienced business or legal professional for help. The best way to avoid scams is to exercise your own due diligence.
Caveat Venditor! Let the seller beware!