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Case study: Undisclosed Liabilities
A client had made an offer on a business (Bus1) and was anxious to close the sale. The company being purchased was reasonably successful and had opportunity for growth. In our due diligence assessment we discovered the owner was involved in another business (Bus2) which was taking his time and energy away from the business for sale. While these companies were not closely associated it was discovered that the bus2 was in serious trouble. Furthermore, Bus1 had guaranteed the loans of Bus2 and the loans had been called due to default which would have obligated Bus1 to pay off the loans even after the sale of the business. Fortunately the buyer avoided disaster and collapsed the purchase.
Liabilities are normally found through corporate searches etc. However, contingent liabilities such as corporate guarantees do not show up in searches especially in small corporations. There are many off balance sheet items that can challenge your deal. Everything from forward contracts, termination clauses to recourse obligations.
The only way to manage the risk of buying an existing business is to do your homework and seek professional assistance where your expertise is limited.
