Explore the intricate world of M&A with our latest blog post, “Unraveling Deceptive Practices in M&A: Lessons from Sharma v. USA International, LLC.” Delve into the cautionary tale that emerged post-acquisition, revealing the legal battle stemming from misrepresented sales figures in the Checkers and Auntie Anne’s franchises acquisition. Learn the importance of due diligence, uncovering deceptive practices, and safeguarding your M&A transactions. A must-read for entrepreneurs, business owners, CFOs, and legal professionals navigating the complexities of mergers and acquisitions.
M&A Stories
July 11, 2018
In the dynamic world of M&A, pitfalls can emerge even after the ink dries on the deal. A cautionary tale unfolds in the case of Sharma v. USA International, LLC, where a buyer’s pursuit of growth through acquiring two restaurant franchises turned into a legal battle.
The narrative begins with a buyer acquiring the assets of Checkers and Auntie Anne’s franchises within a Wal-Mart store in Gainesville, Virginia. Armed with financial statements indicating monthly sales of approximately $67K for the past eight months, the buyer sealed the deal at $600K, anchored in a multiple of the gross sales.
Post-acquisition, a stark reality unfolded – the sales figures were merely 60% of what the seller had presented. The buyer, diligent in uncovering the truth, engaged in meticulous detective work. Conversations with food vendors and scrutiny of supply orders hinted at discrepancies. Red flags escalated as the buyer delved into cash register transactions, revealing suspicious high-dollar sales processed with the direct involvement of the seller’s owner.
Further investigation exposed a pattern of ringing up nonexistent sales and instructing employees to refrain from fulfilling orders. A deep dive into the Bank of America accounts solidified the case, demonstrating a substantial gap between actual deposits and reported sales figures.
This prompted the buyer to take legal action, seeking damages for the difference between the purchase price and the actual value of the restaurants based on verified sales. The seller attempted to dismiss the lawsuit, but the court, acknowledging the compelling evidence, allowed the case to proceed.
Sharma v. USA International, LLC, decided on March 17, 2017, serves as a stark reminder of the critical role due diligence plays in M&A transactions. The case underscores the importance of pre-closing scrutiny, highlighting missed opportunities where the buyer could have detected irregularities by comparing bank statements with financial statements.
In essence, this cautionary tale echoes through boardrooms and offices, emphasizing the need for meticulous due diligence to safeguard against deceptive practices. Aspiring entrepreneurs, business owners eyeing acquisitions, CFOs, legal professionals, and others navigating the complex landscape of M&A should take heed from this real-world lesson.
Case Reference:
This case is referred to as Sharma v. USA International, LLC, No. 15-2188, United States Court of Appeals, Fourth Circuit (Decided: March 17, 2017).
By John McCauley: I help people start, grow, buy and sell their businesses.
Email: jmccauley@mk-law.com
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