Mark Pestronk
Q: Last summer, I bought a travel agency that was in financial trouble. It owed money to the owner's mother, the bank, airlines and even some clients for refunds. So, at the closing on the acquisition, instead of paying all the purchase price to the seller, I paid the seller a small amount of money, and I separately paid off all the debts. The purchase agreement stated that these were all the debts and liabilities and that there were no others. It turns out that this was a lie, as there were other refunds due, and the seller had spent client deposits instead of forwarding them to suppliers as required. I felt I had to make good on all these obligations, totaling tens of thousands of dollars. What are my legal rights in this situation, and what should I have done differently?
A: The seller breached the agreement by misrepresenting the amount of debts, so you have a claim for breach of contract.
Whether that claim is worth anything is certainly doubtful.
In typical travel agency acquisitions, there are monthly, quarterly or annual installment payments due to the seller, and the agreement would typically allow the buyer to deduct these debts from the installments. Here, however, assuming that you don't owe the seller any money under the agreement, the only thing to do is to demand reimbursement and sue if you need to.
Of course, if the seller did not pay the debts you mentioned, the chances are that he does not have enough assets to make a suit worthwhile.
Still, if you can find a good, inexpensive, local collections attorney, you could file suit because eventually the seller may be able to reimburse you for at least some of the debts you paid.
What you could have done differently depends on how fast you needed to close on the acquisition. There are cases were the seller contacts the buyer with an urgent financial problem one afternoon, and the deal closes the next morning.
I call these deals "fire sales" because the seller is in dire straits and needs to close a deal at any cost. If you want to buy in a fire sale, the smartest thing you can do is to hold back at least a portion of the purchase price so you can later deduct claims that pop up after closing.
In your case, however, since you paid just "a small amount of money," I assume that holding back a portion of that amount would be insignificant. So, in a fire sale with no meaningful installments, there is really no way to guard against these problems.
By now, sharp readers are wondering why, if a buyer buys assets and does not assume any liabilities (except those set forth in the agreement), the buyer might be responsible for these debts at all. The answer is that, when it comes to debts to clients and suppliers, you may well need to pay these off in order to preserve the agency's goodwill in the community or the trade.
Other than in a fire sale, you need to do two things: first, make sure the agreement allows you to deduct the seller's liabilities from any payments due to the seller; and second, conduct a due diligence investigation of the seller's financials before closing.