Business Buying Horror Story: Auto Parts – She Failed to Do Due Diligence

  • Automotive Business Due Diligence

Wholesale Auto Parts Distributor: L.C. decided she wanted to own a business that would pay her at least $10,000 per month profit. She looked around and found an auto parts distributor that sold auto repair parts to mechanics. The business was located in an industrial neighborhood where many Auto Mechanics were located but not where there might be any retail customers. She was told the business was doing $70,000 per month in sales and producing a $15,000 per month profit. She was also told there was $300,000 in inventory that no one had verified. She paid $600,000 cash for this business and then paid the seller $25,000 for the $30,000 accounts receivable, outside of escrow, which she is told is current and collectable.

So what was the truth?

The accounts receivable was for one large and two smaller balances; not one of them have paid her a dime in the year since she bought the business. The collection agency she hired said we tried to collect but they have no money, so there is nothing we can do.  They didn’t even spend any money to file a lawsuit to collect.  The monthly sales turned out to actually be $50,000 and the profit less than $10,000.  When she called the office she was interested in knowing what she could get if she decided to sell. It took a while before I pulled it out of her that she had been cheated.  She felt so stupid. She also figured there was nothing she could do about it. Of course she never consulted an attorney to see if she had grounds to sue.

Doing due diligence could have prevented all this. Now, what is the biggest mistake buyers make when buying a business?  It is, unfortunately, believing what the seller tells them about the business and therefore not doing a complete enough job of due diligence!

Due Diligence is the most important thing you can do to protect yourself from being ripped off.  Let me know  if you have been and perhaps there is a recourse.

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