Avoiding Fraud when Buying or Selling a Business

Owning a business is a highly personal endeavor. It is something to be proud of because you’ve worked long and hard for it. When it comes to starting your own business, selling your business, or buying a new business, there may be people trying to take advantage of you. Make sure you’re on guard to avoid these swindlers at all costs.


Avoiding Fraud when Starting your Business

You’ve finally figured it out! You thought of that perfect business venture that will bring you joy, freedom, and profit. After getting your idea and creating your LLC, many start-ups will look for investors to get their business off the ground. Unfortunately, this is an opportunity that scam artists take advantage of. Don’t let the excitement of your new business blind you to potential fraud–be sure to hire a business attorney for your protection.

Don’t Take Shortcuts

Starting your own business will take time and hard work. The best advice we can give you is to embrace that hard work and not look to cut corners. Too often, we see excited entrepreneurs wanting to get their businesses going as fast as possible, which ends up hurting them. As a general rule, take your time and do it right. Do your research and due diligence to ensure that your investors are legitimate and have your best interest at heart. Here are some things we recommend.

Write your own business plan

This tip isn’t just to avoid fraud but is generally good practice. Investors are looking to fund business ventures that are personal, passion-filled, and will be profitable. Writing your own business plan will allow your vision and dedication to shine through. If you hire an outside person or company to write your business plan, you’re taking a shortcut that may ultimately backfire. Plus, they may charge a significant amount of money, setting you back.

Do your own research

If you are able to do a web search, you will be able to find your own list of potential investors, lenders, and venture capital firms. This information is free, so take the time to create your own list. Spending money buying a list of angel investors or capital firms is a waste of money and could be a scam. When you pay money upfront for these lists, they may never be sent to you, or they may be bogus contacts.

Further, there will be opportunities where you can pitch your idea to a group of investors. Be careful spending money upfront to buy a seat at the table. These events may cost money, but be smart and use common sense with how much you shell out.

Choose your investors carefully

When you have a potential investor for your new business, it’s a huge milestone. Unfortunately, there will be illegitimate investors looking to capitalize on your eagerness. Keep in mind that real investors are straightforward and will write checks. They won’t write invoices or orchestrate a convoluted offshore deal. If an investor asks you for money upfront, this is a major red flag. Also, if your investor only has an online presence, put your guard up. If you have not met the person face-to-face or they don’t have a physical address, this is a clue that your investor may be looking to take advantage of you.

Avoiding Fraud when Selling your Business

You’ve worked hard for years to run your business. You’ve put in long hours, you’ve struggled, and you’ve sacrificed. Now, the time has come for your next endeavor. Whether you are retiring, moving on to a different business venture, or you are just ready for a change, the time will eventually come for you to sell your business. After years of hard work, you deserve to get a reliable and profitable deal. Make sure you contact a trusted business attorney to help you through the sale so you don’t become the victim of a fraudulent buyer.

Identity Theft

Your potential buyer asks to see your financial records, tax forms, etc. It makes sense, right? If they’re buying your business, they’ll want to be sure the finances are in order and know exactly what your business is worth. In reality, this could be a person attempting to steal your identity. If you disclose confidential information with your social security number and bank account numbers, you are at risk for identity fraud.

Requesting financial records upfront is not how business sales occur. Financial records are disclosed after an offer has been made and accepted. Generally, with a business sale, interested buyers will sign a confidentiality agreement and submit a buyer profile. General financial information may be provided, but no sensitive information will be available to them. Then, due diligence can commence. Due diligence is when a buyer requests information that will identify any liabilities in the company or obstacles to completing the purchase.

An experienced business attorney will be able to help you through this process, so it is important to work with one. They can spot fraudulent buyers from a mile away and help you protect your sensitive, personal information while selling your business.

Stock Sale Scams

A stock sale is when the buyer directly purchases stock from the seller, therefore obtaining ownership of the business. Generally, a stock sale will benefit the seller of the business because proceeds are taxed at a lower capital gains rate, while an asset sale will benefit the buyer. Be on the lookout if a buyer is coming to you offering a stock sale. This could be a red flag that they are trying to take advantage of you.

A stock sale scam will allow the buyer to steal your business out from under you. They will buy your stocks from you, offer a down payment, and want to close quickly. Beware! What they’re actually wanting to do is sell off the receivables and assets for cash, max out your company credit cards that are still in your name, not pay your creditors, and disappear. You will be left with worthless stock and creditors after you for payment. A legitimate buyer will ask you the tough questions and take time to ensure your business will be a good investment for them. If someone is too eager, makes big promises, or wants to move too quickly, put your guard up. To be safe, protect yourself by hiring a business attorney to look over any business sales you’re planning.

Business Seminar Scams

If a person or company approaches you and offers to sell your company for you, it sounds like a dream come true! They believe in your business and that it’s more valuable than even you thought it was! Unfortunately, this is probably a scam.

Over the years, there have been fraudulent “companies” with impressive and convincing opportunities. You fork up $30,000 of your hard-earned money to purchase their marketing package that comes with a list of potential buyers. Predictably, the list of buyers never appears. Most likely, the “company” you worked with will disappear, and you’ll never hear from them again. On the off-chance you can contact them; they may provide you with a list of bogus buyer names and numbers. Before you know it, you’re out $30,000.

Generally, a company that helps you sell your business will not ask for any money upfront. Their commission will come after an offer is accepted, and the sale is closed. We highly recommend working with a business attorney to help protect you and ensure the legitimate sale of your company.

Avoiding Fraud when Buying a Business

Oftentimes, buying a business can be more overwhelming than buying your first home. It is a tremendous investment that comes with great responsibility. When making that purchase, you must ensure that the finances are in order and the deal is legitimate. Hiring a trusted attorney is the best way to ensure that you won’t be the victim of fraud when buying a business.

Be Thorough in Due Diligence

Due diligence is the comprehensive appraisal of a business. This process allows you, as the buyer, to have the full financial picture of the business you’re looking to buy. It takes into account information about finances, taxes, HR, IT, etc. It also examines the company’s strengths, weaknesses, opportunities, and threats. The best thing you can do to get the most accurate and unbiased information is to work with an external auditor or business attorney to perform due diligence.

Ask the Tough Questions

A seller is going to want to get the most money they can. This desire may lead them to conceal or skew information. While it is illegal for them to intentionally misrepresent their financials, and they are legally required to disclose risk factors, it’s important for you to ask the right questions and read between the lines. Some subtle things to be on the lookout for are:

  • If the seller had the audit done:
    • Who performed the audit? Is it a neutral third party?
    • When did they do the audit? If it was a 2022 audit done in February, and you want to buy it in November, is that still accurate?
  • What expenses and debts am I taking on? Will the profits cover them?
  • Was there a one-time event this year that skewed the financials? Does the report accurately represent a typical year?
  • What tax liabilities am I accepting if we do a stock acquisition?
  • Are there any holes or gaps in the information I was provided? Is there any chance the seller is not disclosing an important piece of information?
  • What competitors will I be working against? Does this have any influence on the current owner’s decision to sell?
  • Who are my customers, and what current contracts do we have with them? Will I be able to keep up and fulfill these contracts?
  • What type of licensing, insurance, and permits will I need to run this business?

The list of questions goes on. In short, be sure that you have every piece of information you need to make an informed decision and reach a fair agreement. It is absolutely vital that you work with an experienced business attorney to help you through due diligence. They know the right questions to ask, they know red flags to look out for, and they will help you see past your own confirmation bias.

Hire a Business Attorney

Whether you are looking to start your own business, sell your business, or buy a business, the best thing you can do is hire a business attorney. There are many different scams, and the attorneys at Johnson May Law are experts at identifying and avoiding fraud. Contact Johnson May Law today for your protection and peace of mind.