After a long day at his successful hotel linen service business, Larry came home and shared with his wife, “They called again.”
“Why are we still thinking about this? Sell. Take the money. We can retire in comfort now,” she said.
Larry built his business with sweat and blood, amassing a huge client base, a fleet of trucks, and enough linens to stock half the hotels in Las Vegas. But Larry listened and called the buyer the next morning telling him they had a deal.
Larry agreed to the mountainous contracts drawn up. The couple soon rode off into the sunset with a huge check, happy to enjoy early retirement.
Private equity money and strategic buyers seek out businesses that add cash flow or market share. With low interest rates acquiring an established businesses can increase the value of an existing business in less time and with less money than growing it organically. However some buyers fail to understand the intricacies of the newly acquired business and become over-leveraged and unproductive.
Unfortunately, this buyer failed to understand the nuances of Larry’s business and in a short period of time drove it into a ditch and could not recover. In a desperate move to stem disaster, the buyer’s lawyer accused Larry of failing to honor his representations and warranties, and expressed concerns over the legitimacy of the business’s financial statements and the accuracy of his customer lists. The buyer demanded Larry unwind the deal or return a healthy portion of the purchase price or he would file a lawsuit alleging misdeeds including fraud.
Most sellers would have been left with limited choices; either cave and return some of the sales proceeds or incur an enormous legal bill fighting it. Defending false claims to eventually settle as a business decision would be the likely outcome for most. But Larry had options.
Fortunately after the close of the sale, Larry’s M&A lawyer advised him to put most of the proceeds into a foreign asset protection trust (FAPT) just in case the buyer failed and developed a case of “Buyer’s Remorse.” When assets are timely transferred to a FAPT they are protected from future lawsuits because the laws of the foreign jurisdiction will not allow the trust to be invaded by a subsequent creditor.
If Larry had transferred his assets into a domestic self-settled trust when the business sold, the buyer would have been able to pierce the trust and grab the assets. Because of fraudulent transfer laws, Larry could not have protected his assets at all once after the buyer notified him of a pending claim.
With this powerful “firewall” trust in hand, Larry’s lawyer explained to the buyer’s lawyer that going after his client for a refund would be a waste of time and money as the funds from the sale were safely held in a FAPT and could not be reached. Without any prospect of recovery the buyer wasn’t interested in investing in an expensive lawsuit. Larry offered the buyer a nominal sum to go away immediately, which the buyer gladly accepted. There really was no other option.
If you are considering selling your business or professional practice or have recently done so, and your “financial seas” are still calm, look into putting the sales proceeds in a FAPT so you too can ride into the sunset knowing your money is safe, just like Larry.