Selling a Business - Don't forget to Notify all Vendors and Account Holders

John called me for a free consultation regarding numerous collection lawsuits filed against him individually and against a company that he had sold about two years earlier.  The total combined amount of damages sought in the seven lawsuits approached $200,000.00.

John developed a very successful home remodeling company that did business throughout the Metro Atlanta area.  He had decided to venture out into different areas of construction related business and decided that he would sell his ongoing business to a regional competitor.  The sale of the business appeared to go smoothly with a formal closing at an attorney's office and the like.  However, there were mistakes made in the process.  There were numerous vendors that provided lumber and other supplies to the company that had been established when John ran the company, and which were personally guaranteed by John.  After the sale of the business the new business owners continued to use the same vendors, and in several instances continued using the same accounts established by John years before.

Subsequently the new business owners ran the company into the ground and stopped paying the vendors.  After some time of not being paid the vendors brought collection lawsuits against the account holder, which turned out to be John and his predecessor company.

John is a successful business man and initially he wanted to negotiate favorable terms with the vendors and pay them off, just to get rid of the dispute and carry on with his new, successful business.  With that in mind I began contacting the various attorneys in the various lawsuits to try an negotiate settlements of the claims.  But the vendors wanted all of their money immediately.  Thereafter we answered the lawsuits and began the process of discovery.

The attorney that represented John in the sale of the business was a friend of John's, and as we discovered  this attorney dropped the ball on John and had failed to follow up with the various vendors regarding the accounts and the new company.  That was very likely an act of malpractice, but John was not interested in pursing such a claim.

Through the process of discovery in the various cases we were able to show that upon the sale date of the company all of John's accounts were paid in full.  In two of the cases we were able to recover emails sent by John to the vendor explaining the sale and the new owners.  In all but one of the cases we were able to show that the people interacting with the vendors had changed and there were associated emails and notes in the files of the vendors that reflected the new ownership of the company.  In three of the cases we discovered that the vendors had entered forbearance agreements and settlement agreements with the new owners and regarding the unpaid balances.  With all of these discovered facts, and facing claims by John for bad faith and frivolous litigation against these vendors (particularly the three that had entered forbearance agreements with the new company), all but one vendor dismissed their lawsuits against John.  The one remaining vendor's claim was likely a valid claim as all of the before mentioned discoveries did not apply to them.  However, that one remaining claim was for a balance of only a few thousand dollars and we successfully negotiated with that vendor to waive the over due balance penalties and accumulated interest and John paid them off with a single payment.

When you sell a business, of course you need to ensure that you are paid the purchase price, but there are many things that need to be wrapped up to ensure that your obligations to vendors and other providers are properly concluded.