The buyers purchased the seller’s direct marketing coupon refrigerator magnet business for $1.5 million. The buyers defaulted on making payments to the seller after losing two major customers in the first six months after the closing and sued the seller for misrepresentation and omission of material facts about the business. The court found no supportable allegations that seller misrepresented or omitted material facts to the buyer about the business.
M&A Stories
June 28, 2022
Introduction:
In June 2019, a Minneapolis-based buyer purchased a direct marketing coupon refrigerator magnet business from the seller for $1.5 million. However, after losing two major customers within the first six months, the buyers defaulted on their payments and sued the seller, alleging misrepresentation and omission of material facts about the business. Ultimately, the court found no evidence to support the buyer’s claims against the seller.
The Deal:
The seller’s business involved creating refrigerator magnets with periodically released coupons, which were used to advertise client merchandise to potential consumers. Clients paid for their coupons to be included on the seller’s business magnets on a project-to-project basis, with no contractual obligation for future projects.
The seller, wanting to retire, engaged a broker to market and sell the business. The broker prepared a business profile, highlighting the patented and trademarked refrigerator magnet product and providing the seller’s financial information.
The buyer’s owners conducted due diligence before proposing to purchase the business for $1.7 million. They obtained information about active customers, interviewed the seller’s owner, and reviewed financial data, including 2019 customer sales, pending sales, and scheduled projects. Relying on their lender’s appraisal, which valued the business at $1.51 million, the buyer’s owners negotiated the purchase price down to $1.5 million and finalized the deal in a purchase agreement.
The Lawsuit:
After taking over the business, the buyer lost two major clients and defaulted on their loan obligation to the seller. In response, the buyer sued the seller, alleging that the seller had breached representations and warranties in the purchase agreement.
However, both the trial court and the appellate court dismissed the buyer’s claims, finding no evidence to support their allegations. The courts were unimpressed with the buyer’s arguments, including one related to outdated coupon redemption statistics in the business profile. The courts also rejected claims that the seller failed to disclose problems with customers, profit margins, shipping, or marketing costs.
This case is referred to as NSE, Inc. v. CGH, Corp., No. A21-1389, Court of Appeals of Minnesota, (Filed May 23, 2022).
Comment:
It appears that the buyer had little ground for their lawsuit. Including a provision in the purchase agreement that obligates the losing party to cover the winner’s legal fees and costs could have potentially discouraged the buyer from suing. Such provisions are common in purchase agreements, but it’s unclear whether it was present in this case.
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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