Crime Does Pay When Buyers Don't do Due Diligence

Crime Does Pay When Buyers Don’t Do Due Diligence

Don’t let your business purchase lead you into becoming the victim of white-collar crimes. Find out more from our business buying experts.

Crime Does Pay When Buyers Don’t Do Due Diligence

Since I became a CFE (Certified Fraud Examiner) and started going to National conventions, I have been learning some very interesting facts about white collar crimes.

Financial Cost of White Collar Crimes is 15x Higher than Violent Crime

Violent crimes, including theft, armed robbery, and murder cost the legal and prison system about $20 billion per year. White collar crimes cost a total of $300 billion per year. That is 15 times larger than violent crimes yet we hear little about white-collar crime.

If you commit a violent crime you will probably go to jail. If you commit a white collar crime the odds are the reverse – you will not go to jail.  (Twenty percent of all fires are committed by arsonists. Only 2% of arsonists are convicted of their crime.)

Misrepresenting information in regards to the sale of a business is no small thing. It is a white collar crime. However, district attorneys do not have a high level of interest in prosecuting this kind of crime.  As a business buyer your protection from such crimes is primarily through the court system. If you can prove misrepresentation, and maybe fraud, the judge or jury will award you damages from the other party. If you cannot prove your case, they will not award you anything except to have you pay the legal fees of the other side.

Profitability Analysis of Winning Business Fraud is Painfully Low

To prove your case it is important that you have the financial information that was given to you before the purchase was made. It really helps to have the seller’s signature on them. If you were cautious enough to have had an expert review everything before the sale, he can testify on your behalf at the trial.  It also is necessary to have at least $30,000-$50,000 to pay an attorney to represent you in the litigation.

If you win the case, the next obstacle will be to collect on your judgment. 80% of small claims judgments are never collected. Business sellers are quick to spend the money received from the sale of their business. Many send the proceeds overseas to their home country, in which case it can’t be touched by litigation that occurs in the USA.

A Stitch in Time Saves Nine: Do Due Diligence Upfront

The better approach to take is to do a complete due diligence on the business and the parties involved before buying any business.  If you have an expert on your side beforehand you probably will not need to worry about litigation after the transaction is completed.

Being in the court system can ruin a lot more than your day. It can ruin your year.  Get yourself an expert before you buy that business. Make sure he has experience in reviewing businesses for sale. This will help you avoid a real hassle that rarely ends well for you as the business buyer.

Share your stories, comments and questions below.

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