Explore a case study involving a Texas-based insurance-claims-adjusting firm’s acquisition gone awry due to legal misrepresentation. Learn about the impact on revenues, the role of due diligence, and the lessons for sellers in M&A transactions. Delve into the details of IAS Services Group, LLC v. Jim Buckley & Associates, Incorporated.
M&A Stories
August 23, 2018
In 2010, a Texas-based insurance-claims-adjusting firm, Buyer, sought expansion opportunities. With the assistance of an investment banking firm, Buyer identified California-based Seller, also in the insurance-claims-adjusting sector, as a potential acquisition. Seller was owned by James.
After negotiations, the parties settled on a $3.6 million purchase price, with $2.4 million due at closing and a $1.2 million note payable in five equal annual installments.
Buyer conducted due diligence, examining Seller’s financial statements and customer performance reports. Notably, Seller’s largest customer, contributing 45% of its revenues, was the insurance company QBE.
Despite attempts to meet key clients, Buyer was denied access, with James assuring that he could handle client interactions better. However, the truth was different. James misled Buyer about Seller’s standing with QBE, claiming it was the top adjusting firm, while internal documents revealed it ranked eighth among QBE’s nine adjusting firms.
The acquisition finalized on October 11, 2011. Within a week, QBE terminated its relationship with Seller, causing significant financial losses for Buyer.
By 2013, Buyer faced a 50% drop in revenue compared to projections, with an additional 27% decrease in 2013. Between acquisition and early 2014, Buyer incurred approximately $1 million in losses from Seller’s business.
Buyer filed a fraud lawsuit in early 2014, alleging that it wouldn’t have purchased Seller had it known the truth about Seller’s problematic relationship with QBE.
The trial court initially dismissed the fraud claims, but the appellate court disagreed, allowing Buyer to pursue its fraud claim. The court emphasized James’ false representation that Seller was QBE’s ‘number one’ adjusting firm, a crucial factor affecting the value of Seller’s assets.
Buyer also claimed fraudulent inducement based on James’ assurance that Seller’s business with QBE would grow, intertwined with the misrepresentation of Seller’s rank among QBE’s adjusting firms.
The court’s ruling underscores the importance of honesty in business transactions. Sellers are advised to be truthful about relationships with major clients to avoid costly and stressful litigation post-closure.
Case Reference:
IAS Services Group, LLC v. Jim Buckley & Associates, Incorporated, No. 17-50105, United States Court of Appeals, Fifth Circuit, (Filed August 17, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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