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
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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
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