Buy when its low...

January 23, 2007 3:24 PM

i know of a small business that is doing well profit-wise, but it's owner is a flake and the Feds are threatening to lock the doors and impound the inventory. Help me buy it.

Long and short: i installed a server, a workstation and some business software for a small business where a close female friend works part time. its a little niche business, but it does well enough with cash deposits around $4k a month. thats only about 20% percent of its business. the owner is on an 'extended vacation' in New Zealand. Her store seems to be in serious tax trouble. she's been open 15 years and never paid anyone on the books, not even her managers. she sells her wares, but apparently hasnt been paying sales tax. She's missed 3 court dates this year, actually showing up stateside the day AFTER the appearance date.

i did my work in September. The software handled all of her business. it would have taken taxes for her employees, paid her taxes (state and federal) and printed tax checks to be mailed to the Feds. I set up something similar to Quicken to handle her rent, lights, telephone, and broadband bills. had she followed my instructions, she would have been fine. Seeing how she ran her shop, tho, i talked my friend into preparing a Form 1099 to protect herself.

In November checks started bouncing like lottery balls. rent checks, phone bills, etc. the store called me, i went out and the software is working fine. the problem is that the money is disappearing from her accounts. The employees have spoken to her on the telephone and sent her emails. she responds back and puts in just enough to cover the most important bill. then she disappears into the bush for weeks until another debacle happens.

Yesterday the Feds (IRS) showed up. They threatened to chain the doors shut and impound everything in the building. The Agent's exact words were "make sure she contacts us within 30-60 days. please dont make me come back out here and count all of this."

when once previously i inquired about buying into the store and handling her issues for her, she rebuffed me. But shit is hitting the fan right now. The Feds took everyone's name and their hire dates. she's been told via email that the Feds have been to the store and she doesnt seem concerned at all. and i've always had the feeling that she was about to cut and run.

is there any way for me to wait for this to implode - and it looks like it will - then pick up the pieces on the cheap?

posted by Davaal to work & money (13 comments total)

15 years of back employee taxes + 15 years of sales tax doesnt sound 'cheap' to me.
posted by SirStan at 3:32 PM on January 23, 2007

When you buy a business, you take on its assets (count on those being mostly gone for good already, including its biggest asset -- goodwill) AS WELL AS its obligations (including ones it hasn't met...).

If I were you, I'd focus on starting a business without this one's massive baggage and meanwhile check in with the lawyer and liability insurer about what can be done now to prevent too much of this lady's fallout from landing *splat* on me you. She's will be looking for any way to transfer blame away from herself for some pretty serious criminal and civil transgressions. You and your system are the logical first place for her to try to point the finger. You may know the system is perfect and that you advised her to do business honorably, but that doesn't mean she can't sully your reputation with false accusations and keep you busy trying to disprove them. Get your ducks in a row now to head off a major distraction from your core business activities.
posted by nakedcodemonkey at 4:03 PM on January 23, 2007

I'm just thinking out loud here.

The business has assets (name, location/mailing list, inventory) and liabilities (all the tax it owes).

If you're right and there's many years of liability circling over this business like a buzzard, I personally wouldn't want to assume any liability for it.

One fairly standard dodge that people use is to liquidate a limited-liability company (lets called it "m squared") leaving its creditors behind, and shift its assets to a brand new company (lets call it "m two").

I see two possible variations that might help you.

First, with the owner's help, you can buy her assets (inventory etc.), she dissolves the old company, and you set up a new company with a near-identical name.

Second, without the owner's help, you wait for the government to take her inventory, find out where it will be auctioned, buy it in, and start up a new company with a near-identical name.
posted by Leon at 4:05 PM on January 23, 2007

If you buy the business, you very likely have also purchased the liability for all of those back taxes. It certainly depends on the sort of business it is; if she's a sole proprietor, she as an individual might be liable for the taxes. If it's an LLC or a corporation, the business itself likely owes the taxes, and buying it simply means that you're buying a business that will be liquidated out from under you in 30 to 60 days.

The IRS might be ammenable to a buyout if she takes the cash and gives it all to them. That is, you, she, and Uncle Sam sit down around a table and work out a liquidation deal with you as the buyer. I have no idea, but I'd at least pitch it and see how it goes.
posted by Netzapper at 4:05 PM on January 23, 2007

I would be surprised, from your description, if she shows up to handle the liquidation. I also would be extremely wary of any business dealings with her. You have 1 -2 months to set up a business that mirrors hers. When she goes under you start up. Have good advertising aimed at the demographic she currently serves and things should go reasonable well. Hell, if she was the ONLY problem I'd think about hiring her staff when they are laid off, they would know how things should operate.

Incidentally, are you sure this company's normal "profits" wouldn't be consumed by paying the ongoing appropriate taxes/fees? Is this business really as profitable as it seems?
posted by edgeways at 4:26 PM on January 23, 2007

I agree with edgeways: buy the company, and you get lots of free liabilities thrown in! You have a pretty good knowledge of the business, as well as (presumably) rights on the software (you didn't sell them exclusivity, did you?)--so just set up shop and siphon off customers. Far, far better.

Do it right, and you can get the employees, too. You don't want to get involved with the business; the more you stay away, the better as far as fed avoidance is concerned.
posted by RikiTikiTavi at 4:54 PM on January 23, 2007

is there any way for me to wait for this to implode - and it looks like it will - then pick up the pieces on the cheap?


Copy the business model and re-start it on your own. Run, don't walk, away from the existing debt and liability laiden business. Offer discounts to the existing customers if they come over to your new company.
posted by b1tr0t at 4:55 PM on January 23, 2007

Under no circumstances buy this business before it's been run through bankruptcy. Then you can be rid of all the pesky liabilities everyone's warning you about above (but not really; keep reading).

The easy way for that to work would be for the owner to file Chapter 11, but it sounds like she can't be bothered; also, it sounds like she's been quite the bad actor and so a number of discharges would probably be denied.

You might be able to get the existing creditors to force the business into bankruptcy, but it's quite a bit tougher to get an involuntary petition through as opposed to a voluntary one. Anyway, if you wanted to try that, you would first have to know who all the creditors were, and then you'd have to get several of them together to make the involuntary petition. Even then, you might have a problem with incentives; the existing creditors would probably just want to take their money and run via liquidation. They might be willing to let you have the residual equity in the (non-operating) business, but you would have no physical assets so you'd basically be rebuilding it from the ground up with "good will" alone. Have fun with that.

Furthermore, certain debts don't discharge in bankruptcy. Unfortunately for you, federal taxes fall in this category; if the owner is way behind on her taxes, the business is basically not recoverable depending on the magnitude of the tax debt vs. the combined assets.

Honestly at this point it seems like a better strategy might be to start a new business as bitrot suggests, then hire all the employees of that former company who're willing to sign up. Then notify all the former customers who you can get in touch with and say "If you liked XYZ corp, you'll love the new ABC corp - new management!" and then rock n' roll.
posted by rkent at 5:19 PM on January 23, 2007

First, with the owner's help, you can buy her assets (inventory etc.), she dissolves the old company, and you set up a new company with a near-identical name.

By the way, that would probably amount to a fraudulent transfer and could be reversed by the creditors who would putatively get screwed. Just in case you were thinking of trying it.

Really interesting question BTW; I hope someone comes up with better ideas than mine as to how to acquire this business. But with all that outstanding tax liability, it just doesn't seem feasible.
posted by rkent at 5:25 PM on January 23, 2007

You can't do anything until the business implodes. It's a hot potato; you can't touch it.

The Feds will come in, close everything down, take all the money they can find in any accounts, and they'll hire someone - a professional liquidator - to sell off the physical assets of the business. Be friendly with the IRS agents; find out who they hired as a liquidator; call him. Buy the stuff from him. Start a new business with the old stuff. Contact the landlord! Make a lease offer! Start a new business in the old location with the old stuff.

If you can't befriend the IRS agents, read your local newspapers and find the auctions section (Saturday or Sunday in a big local newspaper, look around). Read that section closely until you see the auction notice. Then call the liquidator as above.

The liquidator is interested in getting the best price for the stuff at the least effort. If you can make a decent offer (in his mind) for all the stuff, he'll probably sell it to you as a package - saves him the hassle of holding an auction. If you don't make a decent offer, he'll auction it off piecemeal and you can buy the individual lots that you want.
posted by jellicle at 7:34 PM on January 23, 2007

The back taxes are probably insurmountable, but don't forget the "bad will" that all the creditors that aren't being paid have developed. Unless this business is making pottery from clay dug in the back lot using trees cut on the property to fire the kiln, creditors are going to fight a bankruptcy until it is obvious that there is no chance of recovery from the current owner. Creditors claims will be secondary to the tax man's chain, but the creditors are going to hang on through the tax collection process, since the squeeze of federal prison is a lever they can't otherwise apply themselves. If the current owner starts dragging back bail money from anywhere, except in steamer trunks full of cash that float in to U.S. beaches like bales of marijuna on a fresh tide, she'll create a trail that the IRS and the creditors will follow to foriegn accounts.

Screwed creditors = negative good will = no way to replenish inventory or heat or light the place.

If the current owner had real plans to abscond, and any smarts, you've heard the last of her, and she's permanently relocated to warm sunny shores, and sold her U.S. passport to scammers.
posted by paulsc at 7:46 PM on January 23, 2007

rknet: not, I would argue, if he paid a fair price for the goods and the money went to paying the largest creditor (the tax man). But I'm in the UK, so take my "advice" with an even larger pinch of salt than you normally would, and run any plan past a real, paid-for expert.
posted by Leon at 9:30 PM on January 23, 2007

not, I would argue, if he paid a fair price for the goods and the money went to paying the largest creditor (the tax man).

Hm... you may be right. Especially paying a fair market price would help vitiate a fraudulent transfer claim, though it wouldn't end the inquiry. I think the other creditors could still complain that the transfer was made "with intent to hinder or delay (the other) creditors."

At any rate, your scenario does raise the issue of a voidable preference, which the other creditors could raise in the case of a bankruptcy filing.
posted by rkent at 7:18 AM on January 24, 2007