My Business Is A Disaster!
Who Can I Blame?

So your bank balance is sinking faster than the last moments of the Titanic!  When income expectations are not met in the acquisition of a business, the buyer frequently wonders who is to blame.

Most buyers instinctively believe that it is not themselves, but rather, the seller, or the seller’s broker, or both, who are responsible for the economic disaster being confronted. As Sporting Life sang in the musical, “Porgy and Bess”, “it ain’t necessarily so!”

A buyer should first ask whether the same quality level of service, advertising and cleanliness has been maintained as that provided by the seller.  A buyer should also consider whether any pricing changes have caused the decrease in business.

Buyers are occasionally confronted with early warning signs of danger during negotiations, but, because of their emotional eagerness to acquire the business, they elect to put their concerns aside.  I call these early warning signs “pink flags”.  After the closing, these “pink flags” frequently turn out to be colored “fire engine red”!   If the seller can point to correspondence or documents reflecting the information about which there is concern, it becomes difficult for the buyer to later claim that the buyer would not have acquired the laundromat if the buyer had known the true facts.

There is simply no substitute for a thorough review of all financial information and documents pertaining to the transaction by an accountant and an attorney prior to undertaking any serious negotiations.  Such documents should include the lease, any equipment purchase agreement, and utility statements, income records and Schedule C’s for the past three years.  Consultation with professionals prior to undertaking negotiations will allow the buyer to make the best use of their services and recommendations.

Many buyers, however, unfortunately negotiate and conclude the acquisition of a laundromat, a major transaction for most people, without professional advice.  Later, if the buyer is confronted with economic difficulty, a buyer will finally consult with an attorney who will invariably wish that he could turn back the clock and participate in the negotiations to best serve his client’s interest.

One provision a buyer should insist upon in the purchase agreement is a representation on the part of the seller regarding monthly gross income for the previous 12-month period.

Although it is fairly common for a purchase agreement to include such a warranty, the period of the warranty is usually limited to the previous six-month period.  A buyer should always insist upon such a representation for the previous twelve-month period.  Since coin laundry business traditionally increases during the winter months and decreases during the summer months, an income representation for a six-month period may provide an inaccurate picture of annual income.  The seller may be entirely accurate in representing income from the previous six months, and the coin laundry may produce the same level of income during subsequent similar six-month periods; however, if the period for which the representation is made includes primarily winter months, a buyer may unwittingly find himself on bended knee with his banker to stay the course during summer months!

A buyer may believe that the seller, or seller’s broker, enticed him into purchasing the coin laundry by fraudulent representations.  Although a seller or seller’s broker may make statements during the course of negotiations which ultimately deserve close scrutiny, one must ask whether such statements rise to the level of intentional misrepresentation of a material fact, or whether they are merely “puffing.”

In a 1983 case, a court held that “the description of a business as a ‘success’ was . . . highly subjective and did not amount to an actionable representation of fact.”

It has been held, however, that “when a positive statement of the value of property is made by the owner, coupled with other asserted facts . . . like a false representation of past income therefrom, it may constitute competent evidence . . . of the alleged fraudulent representations upon which a judgment for damages may be supported.” (Emphasis added)

In another action, the defendants represented that “the store in question was a first-class structure equal to the best building of that type in Long Beach, and that it would stand shocks of earthquake.  . . .”  The walls of the building were subsequently cracked and shattered by an earthquake.  The court noted that “Fraud may not ordinarily be predicated on mere statements of opinion regarding the value, general character of stability of a building, even though such assertions are realty exaggerated.”

The court stated further, confirming what we all know that “it is difficult to distinguish between expressions of honest convictions respecting the stability, value or adaptability of property, and the false representations of an owner regarding those matters.  . . .”

The court further observed that “Usually a purchaser is charged with knowledge of such excess enthusiasm and human frailty on the part of a vendor for which he must make due allowance, and he is deemed to accept as true such representations, amounting to mere judgment or opinion, at his own peril.”  The court continued to note that “the mere statement that the building in question was constructed earthquake proof is a matter of pure speculation or prophecy.  Every person of common understanding knows it is impossible to estimate the destructive forces of nature accompanying earthquakes . . . . No human being could have prophesied the serious damages which resulted to first-class buildings in San Francisco . . . from the earthquake of 1906.”

The court held, however, that since the defendants were also alleged to have specifically and falsely represented that the building was constructed in accordance with city ordinance specifications, the plaintiffs were entitled to proceed to trial upon their claim of fraud.

The moral of the story?  Retain competent professionals at the outset of your negotiations to minimize your risk of having a jury determine whether your seller was merely “puffing” or committing fraud!

[This column is intended to provide general information only  and
is  not intended to provide specific legal advice; if you have  a
specific  question  regarding the  law,  you  should  contact  an
attorney  of your choice.  Suggestions for topics to be discussed
in this column are welcome.]


Reprinted from The Journal 
 Myles M. Mattenson © 2004