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Buying a Business? Don’t buy it with a handshake! |
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I find it amazing that in a transaction where the most important asset being transferred is goodwill, and thus proof is imperative, Buyers and Sellers adopt a “shake hands” procedure for doing business. The following true story highlights the problems inherent in such a procedure.
The owner of a small coffee and sandwich shop in an arcade was servicing local clientele of stores and nearby offices. He decided to expand his business by renting extra space close to the arcades exit, this space being on a pedestrian area. So far so good.
However, the expansion did not meet the owner’s expectations. The pedestrian area was crowded with cars, it was dirty and driving customers away, or so the owner claimed in negotiating a rent reduction.
Enter the Buyer. Accepting the Seller’s claims for unreported cash he decides to buy the business, the pedestrian area shop only, for € 80.000.
It turns out that unreported cash does not exist! (Surprise, surprise) But there is more to the story. Having received € 80.000 what does the Seller do? He continues to operate his original business, keeping the goodwill he supposedly transferred, and he is directly competing with the buyer. No surprise the next act will be played in court.
What is the moral of this story? First, do not believe the Seller. Ask for proof! Second, if it is not in the books, it does not exist! Third, if you wish to sell your business be prepared to provide evidence. Hard evidence.
A small or medium-sized business transaction is too complicated to be handled with a handshake. Hire a professional advisor-intermediary to help you.
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