Mitigating M&A Risks: Insights on Navigating Buyer Stock, Foreign Exchanges, and Legal Pitfalls

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Explore the complexities of M&A transactions with a focus on mitigating risks related to buyer stock, foreign exchanges, and legal pitfalls. Gain insights from a real-life case involving a Canadian corporation acquiring a business in Mesa and Scottsdale, and learn valuable lessons for navigating the intricacies of dealing with publicly traded shares.

M&A Stories

December 10, 2023

In the complex world of M&A, the choice to accept buyer stock adds a layer of risk, especially when dealing with publicly traded shares on foreign exchanges. A recent case sheds light on the importance of understanding the intricacies involved.

In this particular scenario, a Canadian corporation, publicly listed on the Canadian Securities Exchange, acquired a business operating in Mesa and Scottsdale. The deal involved a combination of cash and buyer stock, with the latter distributed among the sellers.

However, complications arose post-closure. The buyer stock, subject to U.S. securities laws, had restrictions hindering its transfer. The buyer assured sellers they could sell under a specific federal securities law exemption on the Canadian Securities Exchange.

Following the deal’s completion, one seller owner faced a declining buyer stock price and unforeseen federal securities law restrictions. This prompted legal action in an Arizona state trial court, alleging fraud against the buyer.

Despite the seller’s claims, the trial court, and subsequently the appellate court, found no evidence of fraud. The buyer’s explanation of the federal securities law exemption held up.

The lesson here is clear: when buyer stock forms a substantial part of the purchase price (in this case, 80%), engaging a securities lawyer becomes crucial. A legal professional can guide sellers through the complexities of selling buyer stock under federal securities law exemptions, preventing post-closure surprises.

Case Reference: Whitestar Solutions, LLC v. Medmen Enterprises, Inc., No. 1 CA-CV 22-0738 Court of Appeals of Arizona, Division One (Filed December 5, 2023).

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

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

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M&A Insights: The Challenge of Collecting $10 Million From a Guarantor

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Explore the complexities of collecting a $10 million promissory note from a guarantor in the aftermath of legal troubles. Gain insights from the Eli Global, LLC v. Cieutat case, highlighting the risks and impact on M&A deals.

M&A Stories

December 8, 2023

Navigating the sale of your business involves risks, especially when a substantial portion of the purchase price is secured through a promissory note, even with the assurance of a prominent founder from a major private equity firm.

In 2002, two individuals founded a company focused on healthcare for conditions like hemophilia, later expanding to cover a range of health issues. The majority owners, including the CEO, sold the business to a private equity firm in 2018. The deal involved a $12.2 million 4% promissory note guaranteed by the founder of the private equity firm.

After the initial payment in April 2018, subsequent payments ceased due to legal troubles involving the private equity firm’s founder, who was indicted for bribery. This triggered a series of civil lawsuits.

Legal Proceedings: The seller pursued a lawsuit in an Alabama state court against the founder, seeking the remaining $10 million. Despite the founder’s appeal to the Alabama Supreme Court, the decision favored the seller, affirming a $10 million judgment.

Impact: Originally expected in April 2023, the final note payment remains outstanding. Instead, the seller, embroiled in litigation for over three years, has incurred legal fees exceeding $200,000.

While the seller prudently secured the note with a personal guarantee from a reputable business figure, the financial downturn of the guarantor’s empire now jeopardizes the recovery of the remaining $10 million. This case underscores the importance of securing the purchase price in cash upfront before finalizing the business transfer.

Case Reference: Eli Global, LLC v. Cieutat, No. SC-2023-0058 Supreme Court of Alabama (Rel: December 1, 2023).

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

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

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Navigating M&A Restrictive Covenants: Lessons from a Recent Legal Battle

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Explore the complexities of enforcing restrictive covenants in M&A transactions through a real-life legal battle. Gain insights from the Wilbur-Ellis Company LLC v. Jens case, emphasizing the crucial need for clarity in employment agreements regarding the survival of restrictive covenants.

M&A Stories

December 6, 2023

Introduction: In M&A transactions, restrictive covenants play a vital role in safeguarding goodwill, yet enforcing them can pose challenges.

Background: In 2007, a buyer acquired assets from a South Dakota-based seller specializing in agricultural chemicals. An employment agreement, signed by one of the owners, had a three-year term ending on February 28, 2010. The employment agreement said that after February 28, 2010, either the buyer or the owner could terminate the employment relationship. The employment agreement also had a non-compete clause within a 100-mile radius for three years post-employment termination, along with restrictions on customer and employee solicitation.

Controversy: Upon the owner’s resignation in June 2023, he joined a direct competitor of the buyer.

Legal Actions: The buyer filed a lawsuit in a South Dakota federal district court, seeking a preliminary injunction against the owner’s competitive activities pending litigation.

The owner argued that the restrictive covenants expired on February 38, 2013, three years from the end of the employment agreement. The buyer argued that the three year restrictive covenant ran three years from the owner’s June 2023 resignation.

Key Findings: The court agreed with the owner and held the covenants unenforceable after February 28, 2013. The court said the three-year restriction would have started running when the owner quit in June 2023, if the agreement had expressly said that the restrictive covenants survived the February 28, 2010 end of the employment agreement term.

Implications: This case underscores the importance of explicitly stating in employment agreements that restrictive covenants survive the agreement’s term.

Case Reference: Wilbur-Ellis Company LLC v. Jens, No. 4:23-CV-04104-LLP United States District Court, D. South Dakota, Southern Division (November 28, 2023).

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

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in restrictive post-closing covenants Tagged with: , , , , , , , , , , , , , , ,

Dispute Arises in $70 Million M&A Earnout Deal: A Legal Analysis

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Explore the complexities of M&A legal battles through the lens of a recent case in a Delaware court, where a $70 million earnout deal faced challenges. Gain insights into the key findings, legal actions, and implications for M&A transactions.

M&A Stories

December 4, 2023

Introduction:

In the realm of M&A, legal battles often ensue when anticipated earnouts fail to materialize. A recent case in a Delaware court sheds light on the complexities that can arise in such scenarios.

Background:

Before 2015, a German and UK-based company specializing in supporting Dornier 328 regional aircraft faced financial challenges. The company aimed to resume large-scale production when market conditions improved. In 2013, discussions with a larger Reno-based buyer began, with the buyer insisting on exclusive negotiations. The buyer claimed to have secured funding from the Turkish government for an ambitious aircraft manufacturing program.

On January 30, 2015, a Stock Purchase Agreement (SPA) was executed, with the buyer agreeing to pay $30 million upfront and a $70 million earnout based on post-closing aircraft production. The SPA stipulated that the buyer would manage the business in line with past practices.

Controversy:

Post-SPA, the Turkish government’s funding fell through due to misunderstandings. The buyer’s efforts to sell or license the target’s intellectual property faced setbacks. The seller received no earnout, leading to legal action in a Delaware court.

Legal Actions:

The seller alleged that the buyer breached the SPA by failing to manufacture Dornier aircraft and monetize intellectual property. The buyer’s attempt to dismiss the claim was denied by the court.

Key Findings:

The court acknowledged the buyer’s commitment in the SPA to operate the business in line with past practices. The breach allegations regarding aircraft manufacturing and intellectual property monetization were deemed plausible, allowing the seller’s claim to proceed.

Implications:

This case highlights the significance of explicit commitments in SPAs, as the ordinary course clause played a pivotal role. Studies by the American Bar Association suggest that buyers often avoid such commitments, making this case an exception

Case Reference:

Shakesby v. SNC International, C.A. No. N22C-11-070 MAA CCLD Superior Court of Delaware (November 27, 2023).

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

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in problems with earnouts Tagged with: , , , , , , , , , , , , , ,

M&A Seller’s $17M Earnout Dispute: Lessons from a Healthcare Tech Acquisition

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Explore the intricacies of a healthcare tech acquisition with a $17 million earnout dispute. Gain insights into the importance of due diligence, clear terms, and transparency in M&A transactions. Learn from the legal actions, key findings, and implications for both buyers and sellers. Case reference: Rheault v. Halma Holdings Inc.

M&A Stories

December 3, 2023

Introduction:

Selling your company with a substantial earnout can be a gamble. This case underscores the need for meticulous due diligence and clear terms when entering into such agreements.

Background:

In 2021, a healthcare tech company, offering a range of solutions, underwent a stock acquisition. The buyer, a global consortium of life-saving tech firms, valued the target at $30 million, with a potential $17 million earnout based on specific sales benchmarks within two years.

Controversy:

Issues emerged during the earnout period. The buyer failed to disclose prior obligations from a competing acquisition, impacting the target’s post-sale performance. Allegations include a breach of contract regarding sales representatives and delayed product launches.

Legal Actions:

The seller filed a lawsuit, citing fraud for non-disclosure and breach of contract for failing to promote post-sale products. The buyer countered with a motion to dismiss, arguing no duty to disclose and insufficient allegations.

Key Findings:

The court found the fraud allegations valid, emphasizing the buyer’s duty to disclose conflicting agreements. The absence of an anti-reliance clause allowed the seller’s fraud claim to proceed. The breach of contract claim stood, supported by specific instances of unfulfilled promises.

Implications:

Transparency is crucial for buyers proposing earnout provisions. Sellers should be wary of anti-reliance clauses, enhancing their ability to address buyer commitments based on fraud during negotiations.

Case Reference:

Rheault v. Halma Holdings Inc., Civil Action No. 23-700-WCB United States District Court, D. Delaware (November 7, 2023).

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

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

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Navigating Auto Dealership Sales: Lessons from Foundation Auto Holdings, LLC v. Weber Motors, Fresno, Inc.

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Explore the complexities of auto dealership transactions, using the case of Foundation Auto Holdings, LLC v. Weber Motors, Fresno, Inc. Learn valuable lessons from this M&A story involving BMW, Audi, and Porsche brands. Uncover the legal actions, key findings, and implications for navigating similar situations.

M&A Stories

November 13, 2023

Introduction: Auto dealership transactions, especially those involving brands like BMW, Audi, and Porsche, often face complexities, necessitating approval from automakers and state entities. The closing process, typically months after signing the purchase agreement, allows time for necessary approvals. However, what happens when approvals don’t materialize?

Background: In a recent case involving the sale of a Fresno-based BMW, Audi, and Porsche dealership, parties signed an asset purchase agreement (APA) on November 30, 2020. The agreement included a termination right if the closing didn’t occur by June 29, 2021, through no fault of the terminating party.

Controversy: The buyer claimed the seller obstructed the transaction by being uncooperative, causing delays. Allegedly, the seller expressed unwillingness to proceed, citing concerns about the buyer’s ability to close due to existing financial issues. Despite getting close to obtaining all three manufacturer approvals, the buyer faced resistance in finalizing crucial documents. And the seller notified the buyer on June 11, 2021, that the seller had terminated the APA.

Legal Actions: In response, the buyer sued the seller for breaching the APA by attempting premature termination. The seller’s motion to dismiss was denied by the Bakersfield federal district court, rejecting technical arguments.

Key Findings: The court emphasized that the seller couldn’t terminate the APA before the June 29, 2021, closing deadline. The attempted termination on June 11, 2021, was deemed premature.

Implications: Waiting until after the deadline wouldn’t shield the seller, as the buyer could argue that the failure to close resulted from the seller’s lack of cooperation in obtaining automaker approvals.

Foundation Auto Holdings, LLC v. Weber Motors, Fresno, Inc., Case No. 1:21-cv-00970 JLT EPG United States District Court, E.D. California (October 24, 2023).

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

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in termination of M&A agreement Tagged with: , , , , , , , , , , , , , , , , ,

Resolving M&A Working Capital Disputes: Arbitration vs. Expert Determination

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Explore a real case from 2021 involving the sale of a Phoenix-based commercial building remodels and maintenance business for $3.8 million. Delve into the controversy, legal actions, key findings, and implications of the case, providing insights into the dynamic world of M&A.

M&A Stories

November 12, 2023

Introduction:

In the dynamic world of M&A, buyers and sellers often adjust the purchase price based on actual working capital at closing. This is particularly true in industries where working capital can fluctuate significantly. Let’s delve into a real case from 2021 involving the sale of a Phoenix-based commercial building remodels and maintenance business for $3.8 million.

Background:

The asset purchase agreement allowed for a purchase price adjustment based on closing working capital.

Controversy:

Post-closing, the seller submitted its working capital calculation, but the buyer contested it, citing non-compliance with generally accepted accounting principles (GAAP), a requirement of the purchase agreement. Attempts to engage Grant Thornton, tasked with choosing the prevailing statement, fell through.

Legal Actions:

The buyer filed a lawsuit accusing the seller of various breaches, including failure to provide software, a $90k deposit, and books, failure to pay obligations, failure to terminate employees, and failure to disclose liabilities. The seller sought arbitration, but the appellate court ruled against it.

Key Findings:

The appellate court clarified that the purchase agreement did not mandate arbitration. Grant Thornton was designated as an expert accounting firm to resolve factual disputes about working capital, not as an arbitrator. The court emphasized the absence of terms like arbitration, adjudication, or dispute resolution.

Implications:

The seller’s push for arbitration likely aimed to secure Grant Thornton’s decision as final. Notably, in Arizona, unlike most states, the prevailing party in an M&A dispute can recover legal fees, as mandated by statute (A.R.S. § 12-341.01).

Case Reference:

DMS Companies, Inc. v. Hernandez, No. 1 CA-CV 23-0028 Court of Appeals of Arizona, Division One (Filed October 12, 2023).

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

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in book value adjustment, dispute resolution procedure, purchase price, working capital adjustment Tagged with: , , , , , , , , , , , , , , ,

Enforcing Oral M&A Promises: A Cautionary Tale

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Explore the legal implications of verbal commitments in M&A negotiations through a real-life case study. Learn from the Management Registry, Inc. v. AW Companies, Inc. case and understand the importance of documenting promises in formal agreements to avoid potential legal disputes.

M&A Stories

November 9, 2023

Introduction:

In the realm of M&A negotiations, promises are often exchanged outside the written agreements, and surprisingly, some of these verbal commitments may hold legal weight.

Background:

A noteworthy case from 2017 involved two major industrial staffing firms in a stock deal. During negotiations, the buyer assured Allan, the company president and part owner of the company, that the buyer would sell certain non-industrial divisions in Minnesota to Allan’s wife, Wendy. However, due to logistical reasons, the paperwork for this commitment couldn’t be completed by the main transaction’s closing.

Controversy:

Following the main transaction’s closure, an agreement couldn’t be reached between Wendy and the buyer.

Legal Actions:

This dispute led to a lawsuit in a Minneapolis federal district court. Allan alleged fraudulent inducement by the buyer, claiming that the false promise regarding the sale of non-industrial divisions had led him to sell the company’s stock.

Key Findings:

The buyer sought to dismiss the claim, citing an integration clause in the stock purchase agreement, which stated that the agreement was the final and complete understanding between the parties. However, the court rejected this motion, emphasizing that, under Minnesota law, fraud cannot be waived by contractual disclaimers. Importantly, the court noted that Allan could only legally rely on the buyer’s oral representation if it did not contradict a fact stated in the stock purchase agreement. Since the integration clause made no mention of the non-industrial divisions, Allan was granted a trial on his claim.

Implications:

This case underscores the importance of not relying solely on oral promises in M&A dealings. The lesson is clear: commit everything to writing. In instances like this, it is advisable to include such promises in the formal agreement or insist on closing both transactions simultaneously.

Case Reference:

Management Registry, Inc. v. AW Companies, Inc, Civil No. 17-5009 (JRT/DTS) United States District Court, D. Minnesota (October 3, 2023).

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

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in problems with oral M&A promises Tagged with: , , , , , , , , , , , , , ,

Navigating Earnout Disputes: Expert Determination vs. Arbitration

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Explore a real M&A case (Sapp v. Indus. Action Services, LLC) involving earnout disputes and the legal battle between expert determination and arbitration. Learn the key findings, implications, and the court’s role in resolving EBITDA threshold disagreements.

M&A Stories

November 8, 2023

Introduction:

Earnouts are a common feature in M&A deals, often triggering legal disagreements, particularly around EBITDA thresholds. Parties typically opt for an accounting firm to resolve these disputes, but the wording in the agreement can impact court intervention.

Background:

In a 2016 asset sale of a company specializing in industrial services, the $12 million closing payment, $1.5 million buyer owner stock, $3 million deferred compensation, and potential $15 million Earn Out Consideration were at the center of the dispute. The latter was contingent on the buyer meeting EBITDA benchmarks over three years.

Controversy:

Issues arose when the buyer claimed it fell short of EBITDA targets for all three Earn Out Periods, with the seller alleging intentional undermining. This disagreement prompted a seller lawsuit in a Delaware federal district court.

Legal Actions:

The seller sought court intervention for earnout entitlement, while the buyer insisted on arbitration as per the purchase agreement. The district court mandated binding arbitration by the selected accounting firm. The seller, however, argued for nonbinding expert determination, leading to an appeal.

Key Findings:

The appellate court determined that the procedure outlined in the purchase agreement resembled expert determination more than arbitration. The accounting firm had limited authority, a specific duty scope, a short deadline, and lacked discovery procedures or legal argument acceptance.

Implications:

The case returns to the district court, where the accounting firm reviews the buyer’s EBITDA calculations. Unlike arbitration, the seller can contest the accounting firm’s decision in court if dissatisfied.

Case Reference:

Sapp v. Indus. Action Services, LLC, No. 22-2181 United States Court of Appeals, Third Circuit (Argued April 13, 2023. Opinion filed July 20, 2023).

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

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in arbitration vs expert determination, problems with earnouts Tagged with: , , , , , , , , , , , , ,

M&A Post-Closing Business Failures: Navigating Legal Challenges

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Explore a real-life case of post-M&A business difficulties and legal actions. Learn how the court determined the dischargeability of debt in the face of a struggling business.

M&A Stories

November 7, 2023

Introduction:

In small M&A transactions, deferred purchase prices often hinge on the buyer owner’s guarantee. But what transpires when the business falters post-closure?

Background:

In 2017, a company sold assets of a franchised cleaning business, backed by a $200K promissory note payable over 120 months. The note was secured by business assets and the buyer owner’s personal guarantee. The seller later assigned the note, guarantee, and security agreement to its owner.

The Controversy:

The buyer struggled with payments, prompting a re-amortization in August 2018. The 2020 pandemic further strained finances. By 2021, the buyer decided to wind down the business through asset sales and non-replacement.

Legal Actions:

The buyer’s owner filed Chapter 7 bankruptcy in April 2022, listing a $180,000 claim. The seller’s owner contested the dischargeability of the debt.

Key Findings:

The seller’s owner alleged fraudulent inducement, but the court found no evidence of non-compliance intent. Payments were made, a new amortization schedule was followed, and even during the pandemic, payments continued. The court deemed the buyer owner’s claim nondischargeable.

Implications:

M&A buyers can face post-closure business challenges. Relief in bankruptcy is possible when obligations are performed reasonably and in good faith.

 

Case Reference:

In Re Crawford, Case No. 22-52999-WLH, Adversary Proceeding No. 22-5112 United States Bankruptcy Court, N.D. Georgia, Atlanta Division (September 27, 2023).

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

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

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