December 10, 2020
Sometimes a business owner gets an offer for his or her business that is higher than expected. The catch is that a significant part of the price is payable after the closing. But the buyer principal is a well-known business person with a good national reputation. What could go wrong?
The business here was a very lucrative Illinois based eye center built up from scratch by an ophthalmologist. The founder received her medical degree in 1986. After completing her internship, she followed with a residency in ophthalmology. She joined a practice and took it over in the 1990’s. Since she has opened several branches.
The doctor entered into negotiations with a multinational corporation based to sell her practice in the summer and fall of 2017. The buyer was owned by a Yale University graduate and well-known businessman who invested in and/or purchased various businesses throughout the world.
This led to a series of acquisition agreements where the buyer would pay the doctor about $18 million at a closing (December of 2017), a $7.68 million promissory note payable in three equal annual installments in January of 2019, 2020 and 2021. The doctor would remain at the practice for 3 years and would be paid an additional amount when she retired in 3 years which would be a percentage of the value of the eye center practice at that time.
The doctor received the closing payment of about $18 million and the first note payment of $2.6 million in January 2019. But that was it.
Then the Wall Street Journal reported on February 28, 2019, that buyer owner had diverted at least $2 billion from a group of life insurance firms “into his private empire.” The report provides that, soon after entering the insurance business, the buyer went on a spending spree by buying nearly 100 companies around the world, an estate in the Florida Keys, an Idaho lakeside retreat, a Gulfstream jet, the most expensive mansion ever sold in Raleigh, N.C., and a 214-foot yacht with room for a dozen overnight guests. Based on the Journal’s extensive investigation, Buyer Principal lent “at least $2 billion from those insurers to scores of entities he controlled, using much of it to expand his private holdings.”
On March 18, 2019, a federal grand jury indicted the buyer owner and others for financial crimes including wire fraud and bribery. The indictment alleged the buyer owner and his associates promised to donate millions of dollars to the North Carolina Republican Party in exchange for favorable treatment of the buyer owner’s insurance companies by North Carolina Commissioner of Insurance.
The Seller Group allege that in the summer of 2019, there were media reports that the FBI had seized $2 million in assets from political action committees controlled by the buyer owner. Moreover, North Carolina’s insurance department took over a group of troubled life insurers owned by the buyer owner and regulators obtained approval to place the insurers into a rehabilitation, which is a type of receivership akin to a bankruptcy reorganization.
This led to the buyer owner now serving a 7-year prison sentence in a federal prison.
And if that was not enough, the eye practice was hit with devastating losses by Covid starting in March of 2020.
The doctor is now in Illinois litigation trying to salvage the remainder of her deal, but it does not look promising.
This case is referred to as Yeh v. Prairie E&L Management, LLC, Case No. 20-3124, United States District Court, C.D. Illinois, Springfield Division, (May 22, 2020)
I don’t think anyone would have foreseen this deal cratering as a result of a celebrity financial scandal or a world pandemic. But it is a reminder that deferred payment obligations are always risky. Maybe the risk is worth taking. But also think about trying to get more up front by remembering the phrase: “A Bird in the hand is worth two in the bush.”
By John McCauley: I help people manage M&A risks involving privately held companies.
Telephone: 714 273-6291
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