Explore a real M&A case where a seller’s risk-laden exit plan crumbled as the buyer defaulted on payments. Gain insights into the legal dispute and learn valuable lessons on safeguarding transactions.
M&A Stories
December 07, 2020
Introduction:
Selling a business involves significant risk when the seller hands over control to the buyer before receiving the full purchase price.
The Deal:
This transaction revolved around the sale of a multi-generational family business to a long-term acquaintance who also owned a business. The company, based in Evanston, Illinois, specialized in creating and distributing promotional items.
The buyer, who owned an athletic apparel business, established a limited liability company (LLC) to acquire the seller’s assets for $1 million. The payment was structured as follows: $5,000 per month for the first five months after closing, followed by $16,250 per month for the subsequent sixty months.
The Legal Dispute:
Regrettably, the buyer failed to make any of the stipulated payments. Consequently, the seller, who was a party to the Asset Purchase Agreement (APA), initiated legal action against both the buyer’s LLC and the LLC’s owner for breaching the agreement. However, the court ruled in favor of the buyer’s owner, dismissing the claim against him. This outcome was based on the principle that members or managers of an LLC are typically not held accountable for the LLC’s obligations.
This case is referred to as Shevin-Sandy v. Athletic Specialties, LLC., No. 20 C 1181, United States District Court, N.D. Illinois, Eastern Division, (August 17, 2020)
Commentary:
It seems the seller, influenced by their long-standing friendship with the buyer, may not have prioritized seeking enhanced legal safeguards – a decision they likely regret now.
When the entirety of the purchase price is deferred until after the closing, cautionary alarms should ring. Such risks demand proactive management. At the very least, the buyer should have provided their assets as collateral; additionally, the buyer’s owner should have personally guaranteed the purchase price. It might have been even wiser for the buyer’s owner to offer further collateral.
Ideally, the seller should have negotiated to secure a portion, if not the entirety, of the purchase price upon closing to avoid the precarious situation they find themselves in now.
Even better, the seller should have gotten some or all of the purchase price at closing.
By John McCauley: I help people manage M&A risks involving privately held companies.
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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