Buyer Beware: Buying a Business Online
Many Americans dream of owning their own business. In fact, the most recent statistics from the U.S. Small Business Administration show that there are 30.2 million small businesses in America that employ 58.9 million people. Owning a business, of which 99.9% are considered “small”, can be a great way to achieve the American Dream. There are two ways to ownership: start-up or purchase. This article will explore the potential pitfalls that go along with purchasing a small business.
Imagine yourself scrolling, swiping, and navigating your way through social media only to stumble upon a listing for the sale of a business for only $5,000. Out of curiosity, you click on the listing. Then you view the business’s social media presence and see that it has good reviews, lots of products for sale, and its online presence looks great. Suddenly that $5,000 sale price looks like a bargain. At this point, you inquire with the seller who says that he or she would love to meet with you to discuss the business. Lo and behold, your meeting goes well and you decide to purchase the business for $5,000 cash with no paperwork, no lawyers involved, and no guarantees other than a handshake. Shortly thereafter you realize that this was a mistake and you are left holding the bag while the seller has absconded with your $5,000 in cash. This was a scam.
Unfortunately, this hypothetical scenario is all too often a reality. Here at Coastal Legal Counsel, we have had the unfortunate privilege of representing the buyer in this scenario too many times. Thankfully, we’ve been able to secure some large judgments against these sellers for unfair and deceptive trade practices, get people their money back, and even get law enforcement involved to assist in the process. However, we would love to never represent another buyer in this scenario again. In an effort to protect our community’s current and aspiring entrepreneurs, we have put together a list of things that any buyer should be aware of as he or she goes through the process of purchasing a business.
Cash Payments. In almost all of these scenarios, the seller wants you to pay the entire purchase price of the business in cash. This is a huge red flag because paying in cash leaves you with no recourse to recollect your payment or to cancel the payment. With a check, you can stop payment and even track where it was deposited. The paper trail gives us a place to start as we attempt to get your money back. It also gives law enforcement the ability to track the seller.
No Contract, Bill of Sale, or Title. In addition to being asked to pay in cash, the seller usually fails to provide a contract, a bill of sale, the title to personal property, or any other documents for that matter. As a buyer, you’re going to want or need these documents for a variety of business purposes. Do not pay for the business unless you have a signed contract and other appropriate documentation such as a bill of sale or the title to personal property at the closing.
Keyman Business. A keyman is a person primarily responsible for a business’s success. If the business sells farm tables and other woodworking goods, this would be your woodworker. If the keyman is selling the business and is not planning to stay involved, this is a big red flag. Unless you have the necessary skills to replace the keyman’s efforts, you are buying a worthless business. Alternatively, the keyman may attempt to stay involved as an employee or even a business partner. This could simply be a ruse to allow them to siphon off more business and money from you. Be sure to research your seller.
Too Good To Be True. Like your mama told you, if something sounds too good to be true then it very likely is too good to be true. Use your commonsense and think through the whole scenario. If something does not feel right, trust your gut.
Trusted Counsel. If you want to buy a business, spend the money necessary to ensure that you are getting the benefit of your bargain. Consult with an attorney, a commercial lender, and an accountant. Getting a third-party involved who has experience with the sale and purchase of small businesses will protect you and your money, which is worth the cost.
If you are thinking of buying a business or find yourself in the unfortunate role of the buyer in this situation please call us at 910-409-6231. Our attorneys have the knowledge, experience, skill, and training required to protect you in the purchase of a business and the ability to help you if you’ve been scammed by a seller. Now, go build your business empire!