Learn how to protect the purchase price in business sales to prevent buyer bankruptcy discharge. Explore a real case example and key takeaways for secure transactions.
April 20, 2020
Introduction:
When a business seller agrees to receive a significant portion of the purchase price at a later date, it comes with the risk of not getting paid. Let’s break down a real case to understand this better.
The Situation:
In this case, a person sold their jewelry store in February 2014. The deal was for $215,000, and the buyer agreed to pay $30,000 upfront, followed by several $1,000 monthly payments. There was also a large payment of $182,000 due a month later. However, the buyer faced financial difficulties and filed for bankruptcy after making some payments.
The Problem:
The seller objected to the buyer’s bankruptcy discharge, meaning they didn’t want the buyer to be relieved from paying their debts as part of the bankruptcy process. The seller’s argument was based on a few reasons:
- Property Transfer: The buyer transferred ownership of their home to their spouse in a way that the seller couldn’t touch it, which made it harder for the seller to collect owed money.
- Poor Financial Records: The buyer didn’t keep good financial records, making it difficult for anyone, including the seller’s financial expert, to understand their financial situation.
- Inconsistent Inventory: The buyer’s reported inventory in their bankruptcy application was significantly less than what they had purchased from the seller, raising suspicions.
- Deceptive Behavior: The buyer misled the seller by promising a payment of $100,000 from their retirement funds but didn’t follow through.
The Outcome:
The court denied the buyer’s request for discharge in bankruptcy because of these reasons. This means the buyer still had to pay the debts owed to the seller.
Key Takeaways:
Sellers who agree to delayed payments run the risk of not being fully paid. It’s important to consider these tips:
- Secure the Deal: Try to secure the payment by involving assets or collateral.
- Caution is Wise: Think twice about handing over your business without receiving full payment upfront.
- Exit Strategy: If it’s not possible to get your money upfront, consider whether the deal is worth pursuing.
Comment:
Remember, protecting your interests is crucial in business transactions, especially when it comes to payment agreements.
Case Reference:
This case is referred to as In Re Jones, Case No. 17-22147-GLT, Adv. Pro. No. 17-02222-GLT, United States Bankruptcy Court, W.D. Pennsylvania (April 1, 2020).
Email: jmccauley@mk-law.com
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Telephone: 714 273-6291 Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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