The seller stayed on under a temporary consulting arrangement. At buyer’s request the seller helped pick a president for the buyer to manage the business. It did not work out and the business failed.
M&A Stories
April 15, 2022
Introduction:
In business acquisitions, buyers often prefer not to manage the acquired company themselves, and sellers usually seek to end their involvement with the buyer after the sale. However, when the buyer struggles to find a suitable manager, the business may face challenges in the long run.
The Deal:
In a specific case involving the sale of an auto parts sorting business, the buyer purchased it for $750,000, with $150,000 paid at closing and the rest through a promissory note. The buyer’s owner personally guaranteed a balloon payment of $130,000 due on January 1, 2017. The seller agreed to consult with the buyer for 18 months after the sale and helped in selecting a new president to manage the business. However, the chosen president proved unfit for the role due to personal issues and was terminated after 10 months. Subsequently, the business failed, leading the buyer to stop payments and eventually close down.
The Lawsuit:
The seller’s owner sued the buyer’s owner to collect the $130,000 balloon payment in a Kentucky state court and won. The buyer appealed to an intermediate Kentucky appellate court but lost. Both courts ruled that the seller’s owner was not accountable for the business’s viability, as per the terms of the consulting agreement and the buyer’s owner’s personal guaranty.
This case is referred to as Poston v. Welch, No. 2021-CA-0362-MR, Court of Appeals of Kentucky, (Rendered: March 11, 2022.)
Comment:
This case exemplifies the risks faced by buyers without prior experience in running a specific business. It also highlights the potential dangers for sellers when selling a business on deferred payments, especially to buyers lacking industry management experience.
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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