This article are provided for information purposes only, and are not intended as legal advice.


Buying a business or buying an asset for cheap – is it too good to believe?

January 27th, 2010

Ever wonder why a business is so cheap?  Ever bought something that you thought was under priced and you were getting a phenomenal deal – it was cheap for a reason.  This can range from buying an asset to buying a business.  A person decided to buy a helicopter from a bankrupt company.  Did all the due diligence himself, thought that were buying it for $.40 on the dollar, well below market value.  Paid the receiver only to find out that he had to pay duties he was not aware of to import it into his home country, found out that there were all sorts of other hidden costs.  He thought that was it.  Problem, in order to fly the helicopter, you need a flight log and that was not included in the purchase price, no one did the homework.  Now the bankrupt person wants a payment otherwise they are not releasing the documents.  The trustee who sold the helicopter is saying that is not his problem.  What does that mean, it means that the asset it useless unless he pays the ransom. 

 

If something appears too good to be true, it probably is.  In the end, the helicopter cost 20% below market so it still was a good price but not the deal that he thought.  

 

What happens if you are buying an asset which is owned by a bare trustee?  Have you done your research?  What happens if you close in escrow because a mortgage cannot be discharged for a period of time.  As a result, the legal documents said that you have an effective close but not an actual close.  What happens if you are dealing with a dishonest vendor who then puts a second mortgage on the property even though it does not legally belong to him?  Don’t believe that this is possible?  This is a true story.  A mortgage was placed on all the vendors properties including the one which was already sold.  Since it closed in escrow, the old owners name still appeared on title.  The vendor’s creditor was not aware of the sale but the vendor’s lawyer was aware.  Many issues are involved including the vendor’s lawyer and the vendor.    This actually happened a few months ago.  Again in this scenario, the deal sounded too good to be true.  Closing this took for ever and the legal fees were huge because of the complications caused by the vendor. 

 

If the price of a business for sale or an asset sounds too good to be true, it probably is, and there may be hidden costs that will only come out after you have purchased the asset when it is too late to turn away from the transaction.  Should you do those deals, definitely worth looking at but buyer beware.


Filed under: Buying a business — Gary Landa @ 1:56 pm


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