help, legal dispute

[kramer]

Well, I have a call in to a friend of a friend who is a contract attorney, but thought I would turn here for help, too, as I will probably be talking with the business purchaser before I hear back from the attorney.

Kramer

What is the name of your state? California

Hello, My dad sold his tax and accounting business earlier this year. Unfortunately, he recently passed away. The agreement was for a certain amount of the price up front (~75%) and the rest paid out over 12 monthly payments starting 2 months after purchase. Only a couple of payments had been made before my father passed away (around 120 days after the sale). Now, the buyer does not want to pay any more, based on the bolded clause below. The following is from the purchase contract:

. TRANSITION PERIOD: Seller agrees to devote a reasonable amount of time to the details involved in transferring the Business to Buyer for thirty (30) days immediately following the close of escrow, not to exceed sixty (60) days. Seller shall be available (by phone, fax, etc) to answer questions regarding client issues and introductions during the 12 months following close of escrow at no charge.

My dad worked hard to help the buyer up until he died (120 days after purchase), and the transition has been successful. But the buyer said that my dad cannot fulfill the 12 months time frame mentioned in this clause. Mostly the buyer has met the accounting clients, but I think he is worried that he won't have my dad to fall back on for recommendations to returning tax clients in the Jan-Apr time period.

The buyer got a good price on the business, and my dad's bad health was very obvious when the contract was signed and it was the primary reason my dad sold the business. The buyer was even hurrying the training because it was not clear how long my dad would live (if that matters). All my dad's clients were aware of my dad's bad health and they welcomed the transition. The buyer is extremely qualified to run the business.

There is a standard-looking California arbitration clause in the contract to resolve disputes. I am wondering what folks think of this from a legal angle? I do not want my mom to lose out on this money and my dad would roll over in his grave if he had known this would happen. There is nothing in the contract about death. I know that my dad certainly did not intrepret the contract this way when he signed it.

 

[azanon]

The only chance the buyer will have is to be able to give the business back to your dad's estate if the buyer is willing to refund the money already paid. But it'd be out of the question for the buyer to be able to keep the business but not have to pay anymore.

I'm not an attorney, but this is not something i'd have a legal question about. If the buyer didn't pay and i was in charge of his estate, the buyer would be sued. Now if the buyer wanted to give the business back and refund all the money, then that might be a potential legal challenge because he could argue as basis a breech of contract. But i think even on that point, he'd lose as long as you hired a decent attorney that could argue the sale is final, and that your dad's death is a mutually exclusive thing that only changes the fact that he's no longer bound by the thing you bolded.

Azanon

 

[justin]

Wow, this reminds me of a typical law school exam question! I'd guess your father substantially performed the contract and that the buyer will have a claim for damages for lack of complete performance. Just a first guess...

Your father completed 1/3 of the 12 month period. Seems like damages, if any, would be limited.

 

[azanon]

Your father completed 1/3 of the 12 month period. Seems like damages, if any, would be limited.

I agree and if this buyer has any sense, he'll probably come to realize the legal fees will be greater than what he will get for winning on this one specific point. Unfortunately, if the buyer's gonna be bull-headed, you might be the one that has to sue to get the money due.

 

[kramer]

Unfortunately, if the buyer's gonna be bull-headed, you might be the one that has to sue to get the money due.

There is a standard arbitration clause in the contract, so it would go through arbitration. Legal fees are compensated to winner.

The only chance the buyer will have is to be able to give the business back to your dad's estate if the buyer is willing to refund the money already paid. But it'd be out of the question for the buyer to be able to keep the business but not have to pay anymore.

I assume you mean the seller refund the money, not the buyer. Remember, about 75% was paid as a down payment, so my parents have received about 80% of the total purchase price now. There is no way the business is going to change hands now, that wouldn't make sense for anyone.

Wow, this reminds me of a typical law school exam question! I'd guess your father substantially performed the contract and that the buyer will have a claim for damages for lack of complete performance. Just a first guess...

Your father completed 1/3 of the 12 month period. Seems like damages, if any, would be limited.

Yes, I agree. Basically, what the buyer is saying so far is that the damages are around 20% of the purchase price, at least if he pays no more payments. My dad got the buyer fixed up with all of the big clients, who are monthly and quarterly accounts. But the buyer is worried that many of the once-a-year tax clients (Jan-April) do not know about any of this, and I see the buyer's point on that. But the clients knew that my dad was thinking of retiring and would often ask him about it (his poor health was obvious to everyone, he could not get out of a chair or walk without a walker). So the buyer may never experience loss, he is just worried about that happening in the future by not capturing most of the seasonal tax business. Also, the business sale was because of poor health. And the buyer got a good price on the business (implicitly, I think this risk was priced in, in other words).

Kramer

 

[justin]

Maybe take the wait and see approach with this guy? Negotiate with him to wait till after apr 15 to see what kind of business he gets, then figure out what amounts are due.

 

[Martha]

The buyer sure doesn't sound very nice.

At worst a breach of contract may occur if the buyer needs to consult with the seller. However, any damages probably are speculative. The consultation clause doesn't require the seller to ensure that the buyer retained the customers. Plus, it appears that the most valuable customers have been retained. I assume the buyer isn't going to have to call with questions about missing records, etc.

If the buyer refuses to pay then the next step is to see what the remedies are. You mentioned an arbitration clause. Often when I put arbitration clauses in a contract I exclude claims for failure to pay sums when due on the contract. So I would check the contract to make sure there isn't any exclusions. I often exclude these types of claims because it can lead to frivolous withholding of payments by a buyer.

If you have to arbitrate, there is a good chance that the arbitrator will "split the baby." So, to avoid costs of arbitration I would try to settle. I would do my best sales pitch that there is no breach yet (no consultation has been necessary) and any damages would be speculative. I likely would talk about the said situation, the declining health and subsequent death of the seller, and the fact that the buyer was aware of this situation when entering into the contract and the parties addressed it by an intensive consultation period. I would start by offering a small discount. Another option is to setttle up for a lump sum instead of monthly payments with the lump sum discounted.

Of course, you should get advice from your lawyer as to the appropriate strategy.

 

[kramer]

Thanks, Martha.

The buyer sure doesn't sound very nice.

To be honest, I see the buyer's point here. But the damages are, indeed, speculative. There are no missing records or anything at all like that. Also, as far as I know, there is no more need for "technical" consultation, it is strictly an issue of introductions, if necessary. Presumably, doubters would have been told to call my dad and he would tell them about the buyer's quals (which are excellent), etc.

Here is the arbitration clause:

ARBITRATION: Any dispute relating to this agreement by any party or the broker shall be decided by binding arbitration as provided in the California Code of Civil Procedure, beginning at section 1280, and shall include full rights of discovery. In any suit or arbitration on this agreement, the prevailing party shall be entitled to reasonable attorney’s fees and costs.

If you have to arbitrate, there is a good chance that the arbitrator will "split the baby." So, to avoid costs of arbitration I would try to settle. I would do my best sales pitch that there is no breach yet (no consultation has been necessary) and any damages would be speculative. I likely would talk about the said situation, the declining health and subsequent death of the seller, and the fact that the buyer was aware of this situation when entering into the contract and the parties addressed it by an intensive consultation period. I would start by offering a small discount. Another option is to setttle up for a lump sum instead of monthly payments with the lump sum discounted.

That was my strategy, to focus on the known health issue at time of purchase, after I thought about it. Right, I would prefer a lump sum resolution at this point. The problem with the "split the baby" possibility, is that the seller, who already has over 80% of the proceeds, may end up having to refund money (for instance, if the arbitrator decided there was a 75/25 split, tell seller to refund 5%).

I think the buyer is short on funds, too, because he just bought an expensive McMansion. That could make a lump sum difficult. Although we are not talking about a huge amount of money here, something like $15000 remaining.

Of course, you should get advice from your lawyer as to the appropriate strategy.

Yeah, I am still waiting for that call -- so I will probably delay talking to the buyer until Monday.

Kramer

 

[Martha]

Another approach would be to offer your mother's assistance if a reference is necessary. Customers could call your mom and she could expain that her husband died and before his death he sold the business and in fact he spent his last months helping the buyer in the transition.

With $15,000 at issue I sure would hate to spend a lot of money on this.

I do think it would be unlikely that the arbitrator would require the seller to pay back any money, instead the splitting likely would be of the remaining 20% due.

 

[Brat]

Another approach would be the good will of the client base. If the word gets out in the community that he stiffed the widdow of their estemed advisor clients who would be otherwise happy with the new accountant my take their business elsewhere. Reputation is everything in that profession. Even nothing is said all it takes is a question asked by your Father's friends and a shrug to communicate the situation.

Perhaps you could discuss the 'good will' issue with the buyer and suggest that you would accomodate an extended period to pay the balance. If the buyer has kept your Father's former office staff there shouldn't really be a transition issue.

Thinking about your Father's former employees currently employed by the buyer, they surely will learn of the buyer's failure to pay the balance and may seek employment elsewhere at an in-oportunie time.

 

[Martha]

Good one Brat.

 

[kramer]

Another approach would be the good will of the client base. If the word gets out in the community that he stiffed the widdow of their estemed advisor clients who would be otherwise happy with the new accountant my take their business elsewhere. Reputation is everything in that profession. Even nothing is said all it takes is a question asked by your Father's friends and a shrug to communicate the situation.

I didn't really want to pull this, even though my mother immediately suggested it But it is probably the main reason he wants to be nice about it. If I refer to this, it will be very tacitly.

Perhaps you could discuss the 'good will' issue with the buyer and suggest that you would accomodate an extended period to pay the balance. If the buyer has kept your Father's former office staff there shouldn't really be a transition issue.

Thinking about your Father's former employees currently employed by the buyer, they surely will learn of the buyer's failure to pay the balance and may seek employment elsewhere at an in-oportunie time.

There is no staff, it was just my dad. He just hired family help during tax season only. I am worried about extending the period because we may never see the money. But from a Solomnic point of view, that would seem to be best, i.e., let's see if damages happen and then decide. I had thought about having the payments go to an escrow of some sort, but I don't know if that is workable? How would it be decided whether sufficient goodwill transpired, etc?

Another approach would be to offer your mother's assistance if a reference is necessary. Customers could call your mom and she could expain that her husband died and before his death he sold the business and in fact he spent his last months helping the buyer in the transition.

My mom has said she would have absolutely no problem with this -- even to the point of working in the office sometimes during tax season (she was a seasonal employee in the past). But she could probably only work part time, and I don't know if the buyer will want to hire anyone. It is also easy to recommend the buyer because the buyer is so qualified.

Also, what I didn't like is that the buyer did not mention anything, he just stopped paying. When I sent an email asking about it (10 days overdue at that point) he replied that he had been struggling with the issue. My dad died about one month before that last payment was due and the buyer had not paid anything since he died.

With $15,000 at issue I sure would hate to spend a lot of money on this.

Yeah, I agree -- this helps drive a gentleman's settlement approach.

Kramer

 

[Martha]

Not paying really was bad form.

Instead, if he was worried about the effect of the loss of your father on the business he could have called your mom and talked about it. It feels like he wants something for nothing. Nevertheless, I lean toward offering your mother's help in introductions and the like, as a replacement person for him to call in lieu of your father. Hold the bigger guns in reserve if he gets difficult.

But again, these are just talking points to run past your lawyer.

 

[kcowan]

I think offering your mother to help is pretty hollow. Nice positioning but if I were the purchaser, I would ascribe no value to it. As a buyer, I would say that I paid well for the business given that he was a sole proprieter and that I can no longer access his skills and knowledge. This is a strong argument for a man of his stature.

What I would do is propose some allocation of value for the components, viz:
Client list 25%
Reputation 40%
Skills 10%
Client knowledge/files 15%
Office assets 10%
(numbers arbitrary - fill in what is logical/saleable and add missing components)

and then go through how much of each your dad successfully transferred before he died. This should get the emotion out of it and form the basis for a settlement. Try to keep the lawyers out of it until after you have tried this. Any lawyers fees on either side will just reduce the total before splitting.

 

[Martha]

I see your point kcowan, but I am not sure I agree. This is a case where knowing the people involved is important. The business was sold for not much money. The wife used to work in the business. The only provision in the contract that can't be performed is the provision which says the seller will be available by phone/fax for client introductions and issues. Given that the wife used to work there, she may very well be able to answer all the questions and she certainly could do client introductions. There is a good chance that all his issues can be resolved. He hasn't said he has had any unresolved issues yet, so what is there to put a value on. As I said above, I think damages are speculative.

If he doesn't like that idea, then maybe offer to accept cash (maybe starting around $12,500) to settle and say you will agree to a non-dispargement clause. Inotherwords, mom will agree to not go around bad mouthing the guy.

 

[farmerEd]

With $15,000 at issue I sure would hate to spend a lot of money on this.

That would be my feeling too. $15K isn't chump change, but as soon as the lawyers starting racking up hoursyou are going to quickly burn up that money...and I am sure the buyer knows it to. I had to walk away from $25K once from a client that screwed me...I am sure I could have won, but at $200/hr for a lawyer, plus losing my own billable hours to prepare for court etc, I just decided to walk away and use the time to line up another client instead.

$15K isn't a lot of dough, plus the buyer *does* have a valid point, even it isn't the nice thing to do - so assume you end up at best getting 1/2 of what he owes you...how much is it going to cost you to collect $7500? I'd try to negotiate something w/out a lawyer, but if it was me I wouldn't take this one to court.

 

[kramer]

Thanks for all the advice. I was not able to reach the guy on Friday afternoon, so I will call on Monday morning.

Yes, my mom probably knows at least one-fourth of the clients and has at least met most of them. Same with my cousin who also worked in the business. Neither is technical, however, as they just worked in the front office organizing tax returns and files, answering the phone, and accepting checks. But the point is that the buyer didn't just rent out the same building, instead he was chosen and trained by my dad, has the blessing of my dad's family, has all of the tax records, client list, etc.

When I talk with him I am just going to try to find out his concerns and his position, and see if I can address them. But overall, I see our position as follows:

* Damages are entirely speculative at this point
* Bad health was a known issue at time of sale and well known by clients, too, as they have been expecting a transition
* The technical aspect of the consultation is over, there was remaining only possible "introductions" for once-a-year clients who had cold feet about seeing someone new. Defections are priced in.
* Intro to all major clients completed. Importantly, these clients are now a major reference for the buyer, who will have over a 6 month track record with them at start of tax season
* Reputation is everything in this business. He is crazy to withold payment from the seller's widow. Widow is huge source of continuing goodwill for buyer but that could change.

Other: Any lump sum to be accepted in January, not December, as tax rate for my mom is 15% lower next year.

Delayed lump sum: At first I thought about compromising and accepting lump sum in late April, after tax season. We can sue/arbitrate him then just as much as now. However, that removes much of our leverage on the reputation aspect.

Kramer

 

[Buddha44]

Standard disclaimer -- not an attorney and not dispensing legal advice

I assume that you had counsel draft the sale agreement. I recommend having him review the document and advise you as to what he thinks were intended by both parties with respect to the relevant clauses.

In my experience, post-closing payments attributable to the sale of the business may be installment payments which are fixed and therefore not dependent upon future events (similar to a note) or are contingent upon future events. If the contingency is for future revenue generated by the business exceeding a specified benchmark, they are earnouts. Payments may also be attributable to non-compete agreements (which was likely not an issue since the Seller's ill health was known). These payments would typically be paid regardless of whether or not the seller predeceased the payment period.

In addition, the payments may be for services to be rendered after closing. These may be in the form of standard transitional support type of services, which are important for these businesses, since goodwill is likely most of the value. Your counsel should be able to advise you if your father satisfied these requirements (ie, were good faith efforts already provided to transition the bulk of the clients sufficient, making the timing of providing the actual services irrelevant or less relevant).

If the payments were for consulting services for a twelve month period, then it would be similar to an employment agreement. If the person were deceased, he could not provide the services and the buyer would not be obligated to make the payments. These kinds of consulting arrangements are not unusual. The reason is, if actual substantive services needed to be rendered, the payments would be deductible by the buyer as compensation (as opposed to amortized over fifteen years as part of the purchase price). The buyer tries to contractually structure part of the payment as consulting arrangements (for the deduction) and the seller tries to structure them as sales proceeds (not contingent upon actual services being rendered, resulting in capital gains).

Finally, the buyer may be doing this on advice from his advisors. If contractually the payments were intended to be for consulting services rendered over the twelve month period and the buyer paid anyway, the buyer would likely lose his deduction. The dollar amounts may not be significant for his advisors to note this, but on a larger deal, they certainly would be. The seller often looks at the total received as from the sale, whereas, in many cases, contractually they are not.

I would advise caution on calling the existing client base and "badmouthing" the buyer to them. Currently, what is at issue is a portion of the payment (less than 20%). If the buyer feels that you have deliberately attempted to damage the business sold, the buyer may feel that you have not acted in good faith and potentially demand restitution of the amounts previously paid.

My condolences for your father. It must be very tough to finally sell the business and then pass away so soon after.

Best of luck.

 

[Ed_The_Gypsy]

kramer,

If it were me, I wouldn't dicker about when to be paid. I would see what the best final payment could be arranged and take it as soon as I could. (And cash the check before the ink dries!) I don't think there is much chance of winning the whole pot in this game, regardless of merit. I think he is deliberately taking advantage of the situation.

Just my opinion. I hope I am wrong.

Good luck.

Ed

 

[Brat]

In no way did I intend to recommend badmouthing the buyer. However, unless you are in a very very large city the word gets around. The seller's family could say nothing but the buyer's actions will leak out... the buyer may talk around his thoughts regarding the contract or temps working the tax season in the office could learn of the situation. It won't be necessary for the seller to say a thing.

Accounting is a relationship business. The buyer is thinking very short therm. Were I on the other side of the table I might negotiate for a longer payment of the balance to accomodate the transition and take the high road. That would do more for client retention than any services your father could have provided.

 

[samclem]

I agree with others that the buyer seems to be taking a shortsighted, pound-foolish view. Yes, he didn't get everything he had hoped for, and that is probably worth something, but probably not 20% of the business sale price.


The small claims court limit in CA is $5000. If the buyer won't pay a reasonable portion ($10K ?) of the remaining due amont, your Mom should consider filing a case there. Lawyers are specificaly excluded from participating (until after the hearing), so costs would be low. Most importantly, the buyer would know that word would get out to all your Dad's friends and former clients (including the seasonal ones he hasn't met yet) that he is refusing to pay what he owes and that your Mom is having to take him to court. Not good PR. I woud also think that this would not expose her to being accused of bad-mouthing the buyer --she's not making contact with these clients, and the lawsuit isnt frivilous--the buyer owes the money and isn't paying. Any result (the buyer pays up before going to trial, your Mom wins the case, or your Mom loses the case) offer more satisfaction, in my opinon, than just walking away from the issue.

I'm not a lawyer and did not sleep at a Holiday Inn Express last night. It probably shows.

 

[samclem]

PS to above:

Mom should see if she can get a court date of April 13th. Not only is it Friday the 13th, but it is also the last business day before the tax filing deadline. That will be nice icing on the cake for the defendant. What is 3 hours out of the office in early April worth to an accountant?

 

[samclem]

And another thing . . .

If it is at all plausible given your Mom's personalty, a "good cop, bad cop" approach with the buyer might work, with you as good cop.

"Well, I told Mom about our last conversation, and it did not go well. She's probably too close to the situation emotionally--she worked with Dad all those years, knows what they both sacrificed to make the business a success, and, frankly, feels like you are trying to take advantage of her. Sher knows what Dad would say about this. She seems to be angrier the longer she thinks about it.
. . . At first I thought the money wasn't the important thing, that she was only mad about how this has happened. But, then I remembered that she'd put the lump sum from the sale into an annuity after Dad died so she'd be gauranteed an income for as long as she lives. The first payment is in nine months, she'd planned to live on the installment payments from you this year, it all seemed very secure--how could she know that you'd do this? She can get an advance on the annuity, but that will cost her. I think this is another thing that is making her mad.
. . . One thing that has been good is all the support she's gotten since Dad died from all the folks we know fom the business. She talks all the time about the great clients Dad had. More than clients, really, more like family. I'm glad they make it a point to call her. You've got a great bunch of customers.
. . . You know how Mom is, always busy. Anyway, she's worried about the tight money situation now, but won't let me help her. She says she's got a lot of skills that she can use. She told me that, with the contract voided, one silver lining is that the "noncompete provisions" were no longer in efffect and she can talk to Joe Billings (main competitor across town) about doing some seasonal work with him for the next six months. She's sure she can be of use--she's got talent, and Joe is always looking for good clients.
. . . Anyway, I told Mom that I think this is all a big misunderstanding and that you probably just needed to think things over. She likes you and she wants the best for you, and she can't believe that you're thinking about not fulfilling this contract. I know everything will turn out fine in the end. She's such a hellcat, though. I can smooth things over for a while, but I need to hear back from you soon before she does something rash . . .

 

[Patrick]

I agree with others that the buyer seems to be taking a shortsighted, pound-foolish view. Yes, he didn't get everything he had hoped for, and that is probably worth something, but probably not 20% of the business sale price.


The small claims court limit in CA is $5000. If the buyer won't pay a reasonable portion ($10K ?) of the remaining due amont, your Mom should consider filing a case there. Lawyers are specificaly excluded from participating (until after the hearing), so costs would be low. Most importantly, the buyer would know that word would get out to all your Dad's friends and former clients (including the seasonal ones he hasn't met yet) that he is refusing to pay what he owes and that your Mom is having to take him to court. Not good PR. I woud also think that this would not expose her to being accused of bad-mouthing the buyer --she's not making contact with these clients, and the lawsuit isnt frivilous--the buyer owes the money and isn't paying. Any result (the buyer pays up before going to trial, your Mom wins the case, or your Mom loses the case) offer more satisfaction, in my opinon, than just walking away from the issue.

I'm not a lawyer and did not sleep at a Holiday Inn Express last night. It probably shows.

This would probably not work due to the arbitration clause in his contract. The judge would just dismiss it and say go to arbitration.

 

[kramer]

Just a few quick notes, thanks for the replies.

There is no direct tie-in between services provided and payments. However, the time period of payments (12 months) is the same time period that my dad was to be available. But everything is in separate clauses and not necessarily related. Also, the guy had trouble coming up with the initial amount, he is cash-poor (meaning that it was more the idea of installments). I get the sense he is a high income earner spend-it-all type.

My mom has no background in accounting. She was just a paper pusher, phone answerer, etc.

Any legal proceedings have to go through arbitration.

Ed, on the lump sum issue, 15% is a huge difference. Depending on circumstances, I would still rather wait until Jan. 2 to receive it. If there is less than 1 in 6 chance of him flaking after a written agreement, it would be worth it. I presume the minimum time to resolve this is a couple of weeks, anyway, to get something drafted.

I don't know if my dad had a lawyer draft the agreement and neither does my mother. Knowing my dad, I doubt it.

Based on what I know, I think we would be happy with $10K in January. I think this guy's ability to pay lump sum could be an issue, too.

Also, if we say let's stall payments and wait until after tax season and see what happened, then a lot of our leverage has disappeared.

When you think about it, the remaining tax clients probably average about $200 per client. If you figure he paid around 75% of revenue for those clients, then even losing 20 only reduces the business value by 20 x $200 x .75 = $3000. I mean, how many clients was he going to ask to call my dad and then have my dad change their mind?

Kramer