False accounts

[Jules291]

I bought a sandwich shop/lease on the strength of 3years accounts via the previous owners. The bank manager gave me the thumbs up and I borrowed a substantial amount of money. It was clear from the beginning the business was certainly not turning over as much as they said it was. I traded for 16 months but I was struggling, the outgoings were far more than the incomings, I tried to sell the business but no luck, I therefore walked away and took my debts with me. Is there any way I can sue the previous owners for false accounting?

 

[cjd]

Nope. Not unless you can prove the accounts were bent. You not being able to generate the same revenue as the previous owner is not proof.

 

[Paul_Rosser]

Did you perform any due diligence? Which would normally include getting the accounts audited to ensure they were correct and not just made up?

You would normally also have clauses in the sale documentation covering if the documents provided turned out to be false.

Past performance though is no guarantee of the future so the accounts may be correct and you simply didn't do as well as they did for some reason or other.

 

[myfairworld]

Have to say that I don't think you have any sort of case unless blatant and major fraud was involved. In small business everything can change in a moment or at least in a few days or weeks.

Good accounts even if completely valid only tell you that the business is doing well or okay up to that particular point in time. After that it is up to you but you may also be pulled down by factors beyond your immediate control. Road works, other outlets opening, changed parking fees, changed parking regulations, closure or cut-backs at local businesses whose employees used to spend a lot at the business and so on.

Then as well as the obvious things for a sandwich shop such as 5 star cleanliness and an interesting menu and speedy friendly service there are more subtle things. Sometimes a lot of the 'goodwill' attached to a business relies on very personal things, maybe an owner who is good at repartee or a bit of a local character or known to many people for reasons which may have little or nothing to do with the business itself but which nevertheless bring the customers in.

My own retail business is within a couple of minutes walk of an office complex which used to house in one section VAT officers. They've moved. Now most businesses might prefer to see as little as possible of VAT officers but HMRC employees eat snacks and chocolate and buy gifts and cards just as much as the rest of the population. Some undoubtedly still go to the trouble of shopping with us but we've lost the 'nipping out at lunch time to buy a card and gift for x and a bar of chocolate for me' type of trade from that particular set of employees. In time the offices will be taken by another organisation and eventually, hopefully, their employees will learn to nip along to our shop at lunchtime but you are looking at a gap of months even as the very best scenario. This is what small shops, cafes, sandwich shops, etc are up against all the time, so often you are trying to run up the down escalator

 

[RayLevy]

Hi Jules

In your sale & purchase agreement, there should be warranties in there. Usually, the seller has to warrant that his accounts are true and fair and not misleading.

Now, if so, there are two possibilities here.

Either, they are true and fair, and he was a great salesman/business man, in which case you have no claim. Or, they are not true and fair (either they are a complete lie - this means fraud) or they don't show the whole picture, in which case the seller may be in breach of warranty and you could make a claim - again depending on the wording of your sale & purchase agreement.

How do you know if he was lying or not being completely honest in his accounts? Well, you would probably need some expert evidence (such as a forensic accountant) but if the figures are obviously exaggerated then the threat of a claim (and a potential fraud action) may itself be enough to bring the seller to the table to negotiate a deal.

Ray