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We bought a business where, after operating it for a few months,

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we have discovered that the...
We bought a business where, after operating it for a few months, we have discovered that the 2008 through 2010 were unstated by as much as 40%. We have evidence that this was done intentionally. We are negotiating with the seller to compensate us. The loan is SBA guaranteed. The real income is such that we are negative cash flow. We don't know how to structure a fair settlement with the seller. We feel it should be an amount for the difference in the business valuation and compensation for the lost cash flow because that is what is needed to make the mortgage payment. Advice?
Submitted: 6 years ago.Category: Business Law
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Answered in 2 hours by:
8/3/2011
Business Lawyer: MShore Law, Attorney replied 6 years ago
MShore Law
MShore Law, Attorney
Category: Business Law
Satisfied Customers: 25,285
Experience: Drafted Negotiated and/or Reviewed Thousands of Commercial Agreements
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Thank you for the post, I am happy to assist you by answering your questions. How much did you purchase the business for, and by what degree was it overvalued? The answer to the latter question is based on reducing 40% from its valuation (assuming valuation is calculated as a multiple of earnings).
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Customer reply replied 6 years ago
We paid 1,080,000 broken down as follows:
$770,000 real estate
$240,000 good will
$70,000 fixed assets.
The broker re-valued the goodwill + fixed assets based on corrected 2010 financials to be:
$165,000 vs $310,000
Valuation was calculated as a multiple of earnings using 1.8 as the factor.
Business Lawyer: MShore Law, Attorney replied 6 years ago
Thank you, XXXXX XXXXX issue that the real estate is only worth 60% of $770,000 or that the fixed assets are worth 60% of $70,000? If the latter, does this sum include accounts receivable?
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Customer reply replied 6 years ago
the issue is over the the goodwill/cash flow. There were no accounts receivable disclosed at closing but in fact there are significant accounts receivable (internally generated to artificially increase the annual profits). The cash flow is the real issue, the company as actually performing does not generate enough income to pay expenses. The company profits as presented to the bank and SBA using misleading financial statements provided about $80K profit after expenses and debt servicing.
Business Lawyer: MShore Law, Attorney replied 6 years ago
Thank you, XXXXX XXXXX much were the values inflated (in dollars)?
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Customer reply replied 6 years ago
in 2010 the seller claimed income of $344K, that has now been revised to $247K assuming we have identified all of the false invoices.
Business Lawyer: MShore Law, Attorney replied 6 years ago
Thank you, XXXXX XXXXX already presented evidence of the false transactions to the seller and threatened to file a civil claim for fraud should he not resolve the matter and offer restitution in the form of $300,000?
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Customer reply replied 6 years ago
No, we haven't mentioned the evidence we have of the intentional manipulation of the books. But we have had an informal talk with the SBA fraud division since false documents were presented to the bank in order to get SBA approval on the loan. We aren't confident knowing what a fair compensation would be. If he simply paid us the difference in the business valuation that doesn't help our cash flow to meet our debt servicing which of course was based on the inflated income figures.
Business Lawyer: MShore Law, Attorney replied 6 years ago
Exactly, this is why I suggested the sum of $300,000 as the manipulation of the stock price has long lasting effects beyond merely the difference in purchase price.
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MShore Law, Attorney
Category: Business Law
Satisfied Customers: 25,285
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Customer reply replied 6 years ago
thanks
Business Lawyer: MShore Law, Attorney replied 6 years ago
thank you, have a good day.
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