Consequences of buying a business without Due Diligence 3

Situation

The client decided to buy a meat plant worth €6 million from a friend. It was a meat processing and meat product manufacturing workshop with bulky and expensive equipment. A stable business with well-established production and marketing processes seemed like a good investment.

The owners knew each other, so the buyer decided not to order additional legal and financial due diligence of the business (Due Diligence*). The transaction went quickly and the client’s team, together with the meat processing plant staff, set to work and achieve new business goals.

After 5 months, a payment came on a debt obligation in the amount of €10,000. No one paid attention to this account, and the work continued. After 2 weeks, several more invoices arrived, for €40,000. The client had already noticed these disturbing invoices and contacted the previous owner.

The seller made it clear that more than 5 months have passed since the acquisition, the company and all obligations are on the side of the new owner.

The client realized the situation and began to pay off debts. Since the amount was significant, I decided to seek advice.

In the course of my work, it turned out that the company, according to the documents, has guarantee obligations in the amount of €3 million. The deal went through officially, and the new owner received the meat processing plant along with the debt and is obliged to pay it. If the letters of guarantee came in a few days, then one could object, but since almost half a year has passed, everything is in vain.

Bottom line – my client was competently beaten. The goal of the former owner was to turn into a good plus: set claims, start the bankruptcy process, force the company to go bankrupt and buy it out at residual value.

Decision

I, the company’s lawyer and the business owner, worked on the development of the “rescue plan”. The best option was to create a new company and transfer all assets and liabilities to it. At the same time, the operating company went bankrupt.

Result

The factory building was transferred to another company. The old company went bankrupt and debt obligations became impossible to meet. The new company continued elsewhere and was eventually sold to new owners.

As a result of these actions, the client managed to keep the business worth €6 million by paying only €50,000 on the accounts of the previous owner. You can even say that the client saved under $9 million, given the fact that he could lose money, business and remain in a terrible loss.

Morality

Before buying or selling a business, be sure to go through the Due Diligence procedure for an objective understanding of the situation. This can save business money in the future.