Legal Question in Business Law in Washington

First, I'll state my conclusion and next explain how I get to this point. You need to hire an attorney because I can almost guarantee that either you or the seller are about to sue each other. I'll explain why below. Please understand, that I do not seek to sugar coat this, and understand that I do not mean to offend you. This is just how I see the situation. Last, know that I think if the documents and any other evidence supports your version, I think you stand an excellent chance of prevailing in any legal suit. I just hope the seller has assets to cover your claims. Now my explanation:

If you're in real estate, I'd guess you've heard the expression that "the person who represents themselves in a legal matter has a fool for a client." In your case, the reason is not because you are unintelligent. On the contrary, I'd venture that you are exceptionally smart, which is the irony here. People with less smarts tend to say, "Heck, I don't know how to make this purchase legal, I hate to do it, but I'll hire a lawyer and pay the lawyer to figure it out." Smart people tend to say, "I'm smart, I've seen a contract before, why waste money on a lawyer when I can do it myself?"

Most of the time, if this were any other situation, that kind of thinking serves both the smart and not-so-smart person well. In law, it only helps the not-so-smart person since they either never make the deal or do it with protections built in, just in case; and sometimes this thinking leaves the smart person uninjured, and other times, can hurt them badly.

A man once called me to ask about buying a business and what would I charge to do it, and what what did it entail. I explained what I thought, what my hourly rate was, and what I thought it would come to, and at the end, he asked me, "Why do I need you to do this for me? I can buy a how-to-guide on buying a business, and all I need to do is fill in the blanks. That's easy enough. Why should I hire you?"

I said, "Let me answer that by asking you a question. Suppose your child, wife, or mother were ill, and needed their appendix out. Suppose you call me, a fully trained medical doctor, and I said I charge $5,000 for this operation. If I explained to you how I would perform the operation, and if you knew where to buy the 'Idiot's Guide to Removing an Appendix' for $50, complete with the instruments and medication and anesthetics, would you pay me $5,000 or spend $50 and operate on your loved one yourself, knowing it's possible to run into a complication that you did not anticipate and which the 'Idiot's Guide to Removing an Appendix' did not cover because it's covered in another book, such as the 'Idiot's Guide to Treating an Allergic Reaction to Penicillin' which you had not read yet?"

O.K., I'm off my soapbox, now let me give you some specifics about your case. First, I'd like to read your purchase and sale agreement, the security agreement, etc. Since I can't do so, relying on what you've written here, there appears to be no out-clause in the contract for you, meaning, you get out of your obligation to continue paying payments if you learn the seller gave you a cooked set of books.

You had a major red flag that I as an attorney would have recognized: You are buying a business from a criminal tax cheat. Although I'd advise you to not go through with the purchase and to instead find another legitimately run operation, if you insisted on going forward, I would draft a provision in the contract that explains how you are released from your obligation if after a period of time, the seller's representation that the business earns $98K net turns out to be false. In other words, if someone tells me they lie to the IRS, I assume just about everything else out of their mouths is a lie too. After all, if the IRS catches you in a lie, you may wind up in prison or at least paying hefty penalties. If I catch them in a lie, at best I can force them to pay me money. So, if they're not scared of lying to the IRS, why would they be scared to lie to me?

Second, I think you need counsel to represent you because you need to immediately have an attorney review the documents, figure out what laws or provisions of your contract have been violated, and then write the seller a demand letter, reciting what's happened, reciting that you relied on the seller's representation that the business nets $98,000 (I hope you got this in writing somewhere) and that you have learned this was an outright lie. Whether it is misrepresentation or fraud or both is irrelevant, so long as at least one of those basis' exists and can be proven. From there, I'd demand that the seller refund you the $10,000 down payment and in return, you'd agree to waive any lawsuit against the seller for fraud and misrepresentation, etc.

Next�in the unlikely event that the seller is reasonable and wise, and agrees to accept those terms, lick her wounds and go away�either she will sue you or you will sue her. This will be expensive for you, and depending on what your contract says about attorney fees in the event of a dispute, you may be eligible to recoup them, but then again, you may not.

My guess is that this will cost you more than if you'd hired an attorney in the first place, but I don't say that to rub it in or anything of the like. Instead, I want you to take this as a very expensive but important lesson in why you should have hired an attorney in the first place. It's just like an insurance policy for your car. You buy it, complain about the price, but know that you've got some protection if something goes wrong. Same with an attorney writing your contract. They are there to help ensure your damage is minimized if something goes wrong.

The reason you are your own worst enemy on a deal like this is because I would bet that you really wanted to buy the business, yet you knew certain things need to be done, i.e., your due diligence. The problem is that your urge to buy and to do so as quickly as possible, overwhelms your urge to be cautious. Thus, you probably skipped hiring a private inspector to provide a report indicating that there were no noticeable health department violations present, and you probably did not hire a forensic accountant to look into the purchases of coffee or milk or whatever foods are cooked and prepared for sale, to determine if the seller could possibly generate the $98K in sales based upon her purchase orders. (I've personally seen forensic accountants sniff out many a bad deal in the making. To me, they're the blood hounds of tracking down bad businesses, because numbers just don't lie.)

So, your next steps ought to be to consult with an attorney. Have them review your paperwork and written communications (e-mails, letters, inspection reports, memorandums of understanding, etc.) From there, that lawyer will figure out all the possible causes of action you have against the seller, and figure out what your defense to the seller's claim of breach of contract will be (that should be a no brainer from the scenario you describe above). Next, your lawyer writes the seller, and like I said, I would expect one of you to sue the other shortly thereafter.

Frankly, your case sounds interesting, and I'd be more than willing to at least consult with you on this matter. If that interests you, please feel free to contact me.

Very Truly Yours,

The other attorney is right on point here. I can only add if the seller is allowing you to use a brand name and providing any training, assistance or controls, then you may have bought an illegal franchise. Consult with a franchise attorney for specific advice.

Kevin B. Murphy, B.S., M.B.A., J.D. - Mr. Franchise

Franchise Attorney