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Thread: Business acquisition - seller breach of contract for retaining undisclosed deposits

  1. #1

    Default Business acquisition - seller breach of contract for retaining undisclosed deposits

    Hi ... I recently closed on the purchase of an existing moving company. The business has a strong reputation in a niche market, and enjoys a steady flow of customers and strategic referral sources, which is a major reason why I purchased the business. The business provides free in-person move estimates to prospective customers, and if the customer decides to secure a move date, the company collects a flat $200 deposit, and the balance is due when moving services are completed. Per the service contract between the company and customer, 50% of the deposit is refundable should the customer cancel a scheduled move. Prior to closing, I had not been informed about the specific process of deposit collections.

    At closing, the conditional bill of sale stated that deposits and prepaids were to be transferred to the buyer. However the seller did not disclose the existence of any deposits. A week into operational training with the sellers we discovered there were $3800 of deposits collected for 19 service contracts to be performed after closing, which I as the new owner would be 100% responsible to complete. I was certainly pleased that the seller had carried on sales, marketing, estimates and contract scheduling per their contractual obligation to carry on all activities and operations up to closing.
    However I realized that the deposits represented a range of 8% to 44% of the gross value of the first 19 services contracts, and so I asked the seller when they would transfer the deposits to us.

    The seller claimed at first that they were entitled to keep the deposits as compensation for having spent the time and resources to originate and schedule the service contracts.
    I explained to the seller that this was not disclosed prior to closing, we did not negotiate commissions or booking fees as part of the terms of the asset purchase contract, the deposits are considered assets of the company and per the bill of sale, should have been transferred. At first upon reviewing the bill of sale, they agreed.

    A week went by, and after they apparently had an attorney review, they claimed that we were entitled to only 50% of the deposits ($1900, which they paid us), because the non-refundable portion of the customer's deposit was earned income to them as compensation for the expense of providing the estimates to customers as a paid service. I contradicted this explanation based on the fact that the company promotes and provides free estimates, and the service contract between the company and the customer does not include the cost of estimates in the scope of services. And therefore the full value of the revenue of each contract is applicable to the actual performance of moving services.

    Furthermore, I argued that the estimates and related activities they performed to schedule the 19 service contracts were part of their obligation to carry on the business activities to ensure a smooth transition through closing. And, therefore the purpose of the non-refundable portion of the deposit is for the customer to compensate the company for the inconvenience of a cancelled contract taking up scheduled time slots in the calendar that could have accommodated other customers.

    Although the seller and I had a couple of mildly heated discussions on the topic, we've kept it cordial for the most part.

    I've sent a demand letter to the seller today. We'll see what happens in the next few days.

    Curious to get any feedback on the legal aspects of this situation, if I am in the "right" or "wrong" on the issue? Either way, interesting experience and set of circumstances to learn from. Thanks in advance for your comments and suggestions.

  2. #2
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    Given what you have told us, it belongs to you. Stick to your guns when dealing with the former owner. Have your lawyer send him a demand letter or use the options for repercussion available within the purchase contract.

    The flip side is, it's $1900. Is it worth going to small claims court over this amount? Sadly, this is not an uncommon thought in the B2B world. Personally, I'd be all over this until I got paid based on principle alone even though it may have been cheaper to let it go.
    Brad Miedema
    Fulcrum Saw & Tool

  3. #3

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    Based on what you describe in the contract and my experience with how deposits are normally handled in business acquisitions, you are 100% correct in your interpretation. Good luck.

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