Business Buying Horror Story: Floral Wholesale – The Seller Misrepresented Everything
Florist Business Due Diligence
Floral Wholesale – Riverside, California: Some months ago a San Diego Police Officer in the process of purchasing a business (for his wife) retained Due Diligence expert Willard Michlin of Southern, California to assist him in determining if the seller of Floral Wholesale was accurately representing the profitability of the business. The asking price for the business was $350,000. The Listing Agent and the Seller represented that the business was clearing a $130,000 profit.
Mr. Michlin, within three hours of visiting the business determined that the business was making no more than $15,000 per year and even that number was based on documents being incorrectly reported to taxing agencies.
Unknown to the Police Officer or Willard Michlin, a Riverside County Fireman, four months earlier, had refinanced his home in order to purchase the same business for $250,000. The Seller even carried back $150,000 note as a sign of good faith.
The purchase price was based on the misrepresented $130,000 annual net profit. When the new owner met with Willard Michlin, he confided in Mr. Michlin that the business was not generating any profit. The Fire Fighter had quit his job to run the business and now he finds himself working for no compensation and a much increased house payment. The Fireman may loose his home because of this misrepresentation.
It is not uncommon for sellers to think that since they lie to the IRS on their tax returns that it is also alright to lie to potential business buyers about what the real situation is. Because financial records are altered so drastically by some unscrupulous business owners it is difficult even for CPA’s to be able to figure out what is really going on, behind the scene.
No one should ever buy any business without having a competent professional review all of the business. A quick review of records, taking a couple of hours, in most cases can discover if the books and records are doctored. Unscrupulous business owners do not declare sales tax that customers have paid them, do not report employee payroll taxes, do not pay the required workman compensation insurance premiums and do not pay their fair share of state and federal income taxes.
Doing simple due diligence saved this Police Officer a whole lot of headache.
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