Explore a real M&A case where a business owner’s post-sale payments were jeopardized due to a buyer’s legal issues and the COVID-19 pandemic. Learn about the complexities of deferred payments and the risks they entail.
M&A Stories
December 10, 2020
Introduction:
At times, business owners receive offers for their businesses that come with higher-than-expected values. However, these offers often involve a significant portion of the payment being made after the sale has concluded. This blog discusses a case where a business owner faced challenges due to delayed payments after selling her eye center. The buyer, a well-known figure with a strong reputation, encountered legal issues and a pandemic, putting the post-closing payments in jeopardy.
The Background:
The business in question was a successful eye center located in Illinois. The center was established by an ophthalmologist who had a notable career history. The founder, a medical graduate from 1986, took over a practice in the 1990s and expanded it into multiple branches. In 2017, negotiations began between the doctor and a multinational corporation led by a prominent businessperson who had invested in various international businesses.
The Deal:
The acquisition involved a complex agreement. The buyer initially paid around $18 million at the closing in December 2017. Additionally, a promissory note of $7.68 million was issued, to be paid in three equal annual installments starting from January 2019. The doctor committed to staying with the practice for three years and was entitled to an extra payment upon her retirement, based on a percentage of the eye center’s value at that time.
The Complications:
Following the initial payments, the situation took a downturn. A news article from February 28, 2019, exposed that the buyer had diverted substantial funds, approximately $2 billion, from life insurance companies into personal investments. This extravagant spending included purchasing multiple companies, properties, jets, and yachts. Subsequently, a federal grand jury indicted the buyer for financial crimes like wire fraud and bribery, leading to a seven-year prison sentence.
Furthermore, the eye center encountered severe financial losses due to the COVID-19 pandemic, starting in March 2020. This combination of legal issues and the pandemic seriously jeopardized the doctor’s remaining payments.
Current Status:
The doctor, now faced with a buyer in prison and COVID-related business challenges, has initiated litigation in Illinois to salvage the remaining deal terms. However, the outcome appears uncertain.
This case is referred to as Yeh v. Prairie E&L Management, LLC, Case No. 20-3124, United States District Court, C.D. Illinois, Springfield Division, (May 22, 2020)
Conclusion:
This case serves as a reminder that deferred payment arrangements carry inherent risks. Unforeseen events like high-profile financial scandals or global pandemics can disrupt even seemingly secure business transactions. While such risks may be worth considering, it’s essential to weigh them against the potential benefits. Business owners contemplating such deals might do well to heed the adage, “A bird in the hand is worth two in the bush.”
By John McCauley: I help people manage M&A risks involving privately held companies.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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