No fraud: business seller’s rosy projects were just “puffery” and the buyer failed to perform due diligence.
M&A Stories
April 12, 2022
Introduction:
In the world of business acquisitions, legal disputes may arise when a purchased business fails to perform as expected post-closing. One such case is Ironwoods Troy, LLC v. Optigolf, LLC, where a buyer’s fraud claim against the seller was unsuccessful.
The Deal:
In this particular deal, the buyer acquired the seller’s golf simulation business for $290,000. The buyer paid $30,000 upfront, with the remaining balance due within four months.
The Unsuccessful Purchase:
Unfortunately, things didn’t go well for the buyer after the acquisition. Within just six months of closing the deal, the purchased business had to be shut down.
The Lawsuit:
In response to the business’s poor performance, the buyer sued the seller for fraud, claiming that the seller had falsely represented the business’s potential earnings to be $450,000. However, the court dismissed the buyer’s claim for two primary reasons.
Reasons for Dismissal:
Firstly, the buyer’s claim lacked credibility because they had not conducted due diligence on the business before making the purchase. Due diligence is the process of thoroughly investigating a business’s financial and operational aspects to ensure that the buyer is fully aware of its risks and potential.
Secondly, the court deemed the seller’s statement about the business’s potential earnings to be “mere puffery” rather than a fraudulent misrepresentation of value. Puffery refers to exaggerated or optimistic statements that are not meant to be taken as factual guarantees.
This case is referred to as Ironwoods Troy, LLC v. Optigolf, LLC, 532949, Appellate Division of the Supreme Court of New York, Third Department, (Decided April 7, 2022.)
Takeaway:
This case highlights an essential aspect of fraud claims in business acquisitions. To succeed in a fraud claim, a buyer must show reasonable reliance on a seller’s fraudulent statement. Neglecting to conduct due diligence can weaken the buyer’s position in such cases.
By understanding the outcome of Ironwoods Troy v. Optigolf, business buyers can better protect their interests and make informed decisions during the acquisition process.
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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