Common Business Dangers

Common Business Dangers

Typical Scams and Schemes to Watch For...

The 1$ Buyout.

Watch out for this common but heartbreaking tactic in business. One of your best customers is interested in buying your company! What a lucky day! You have worked hard for decades and now you may finally realize your ultimate payday. Being smart, you require them to sign a non-disclosure and confidentiality agreement before sharing any information with them. They explain that they want to save costs by vertical integration, making an upstream acquisition. It seems reasonable, after all, they will be able to shave their margins a bit, save on accounting and other duplicate functions. There are economies of scale. Sounds right. And these people buy 35% of your total sales. They have been a good loyal customer for years. Can you see the train wreck coming? Can you smell the disaster before it strikes?

They sign the non-disclosure and begin their due diligence, inspecting your financials and tax returns, all the usual. Then they announce their offer. They will buy your business for--that's right--ONE DOLLAR! And you know what? You will sell it to them for one dollar. Here's why. If you refuse, they will divert all their orders away from you and to your competitor. Without their 35% of gross sales coming to you, you will post huge net losses of money for years, throwing your loans into default, forcing you to fire employees, and eventually close the business. Through the due diligence, they have noticed that you only bring 5% of sales to the bottom line as net profit. They know you have significant cash flow needs and things are tight. They also know that you cannot easily find another customer to replace them. You are dead and they have got you. Did you know the non-disclosure can contain special clauses to protect you from this? But only if your business lawyer is paying attention. We do. Before entertaining a buyout offer from a large customer, call us. You'll be glad you did.

The Double Promissory Note.

This one happens all the time. You borrow money and the loan shark says, I should have an extra original of this, just in case, and you should have one too. Sounds very wise. So, you sign three promissory notes, two for him, one for you to keep, each has the identical date and language...For value received, I hereby borrow from lender $250,000 dollars, to be repaid as follows...He gives you your check for the $250,000. Congratulations, you have just put yourself on the hook for $750,000! (three times 250k). He takes his two copies and sells them ("negotiates" them...they are a negotiable instrument) to some third parties for say, 200k each. He takes his $400,000 total and after deducting the 250k he lent to you, walks away with his 150k of profits. The new owners of the notes come to you for payment of the two notes, 250 k each. You refuse, saying one of them is just a copy. Only, unluckily for you, it isn't. Both are signed originals. Neither says copy or anything which might indicate to an innocent third party that the promissory note is not a valid negotiable instrument, like a check. You have to pay on both of them. You may have a case against the trickster, but remember, he is up $150k, and you are already down $250,000 and probably facing lawsuits from all of your creditors. Likely you'll be filing for bankruptcy. Add your lawyer fees to that and you'll be done for long before you ever win, if you win. Lesson learned? Never execute multiple promissory notes. Of all the documents in your deal, many of which may be double originals or have multiple originals, You NEVER execute multiple promissory notes. If you do, you'll have to pay on all of them. This happens all the time, so beware.

The Wrap-around Scam

In trouble on a mortgage or car loan? How wonderful, somebody is willing to take over the payments if you just convey the house or car to them. No need for a new loan, they'll just pay your payments for you. They may be willing to throw in a little extra cash too, just to tide you over. Is it a dream? More like a nightmare. You sign the house over to them. They now own it. They make some payments for a few months, then default. The bank comes looking for you. You point to the new owners. The bank points to the clause which says you can't sell the house without their consent and threatens to sue you for breach of contract. The bank may still try to go seize the house and sell it, but you are nevertheless on the hook and the bank can, and probably will, sue you for the balance due. If you have multiple accounts with them, they will seize the monies in those accounts right away to pay off part of the loan. Oh, and meanwhile, did we point out that you are homeless? People bring deals like this to us all the time, asking for our advice. The advice is simple. You don't do it.

Letter Of Credit Loan Collateral Scam

This scam is becoming popular recently. A loan broker explains that you can borrow 10 million very easily, because their 'firm' arranges these 'facilities' using special 'platforms' and 'connections' with 'credit groups' and offshore 'sources' etc. This mumbo jumbo is exactly that. The loan broker himself may not even understand it. They explain that if you give a third party bank 1 million, of which they take a 10% cut as their fee, the bank has a client which will issue you a 10 million dollar letter of credit, which you can use as collateral at a U.S. bank to borrow money. There are several variations, but all boil down to a company willing to hook you up with someone willing to 'rent' you collateral, usually in the form of a letter of credit. The money goes through the agent, who deducts his 10% and then on to the collateral 'renter', who ostensibly will be creating the Letter of Credit in your favor. If you are LUCKY, the United States Secret Service will seize the money. They are wise to this scam and often are investigating one or more people participating in it. It may take a few years, but eventually, if you are innocent, you will get your million dollars back. Normally, however, it will vanish. You may try to sue the broker if you can find them, but very often, they are part of the scam and have disappeared, or they are victims as well, and have no money left. Their funds may be impounded by the Secret Service too, and unavailable to you. This scam should sound very easy to detect. No bank would lend you money on a letter of credit like this. Still, be on the lookout, as we have had several clients who were caught up in this type of operation.

Call a Denver business lawyer at The Vasilco Law Group, P.C. today for your free telephone consultation.