Buying a business is not like purchasing a tangible item. You can look for termites in the basment of a house or have your mechanic check out the engine of a used car, but how do you find out before you buy a business whether it’s really as profitable as the seller has represented? Even the most sophisticated businesspersons can be defrauded when the financial statements of a business have been doctored. The following is an actual case from our files that went all the way to the Alabama Supreme Court.
Our client was a very successful businessman who had bought and sold numerous businesses. But after he paid $1 million cash and signed a $4 million note to buy a garden tiller manufacturing company, he learned that the company’s former owner had “cooked the books” by creating fictitious receivables and inflating inventory figures. We were successful in recovering most of the $1 million of cash and in obtaining an order canceling the $4 million debt. Below is the full text of the Alabama Supreme Court’s decision, in Banton v. Hackney, a landmark decision interpreting the scope of Alabama’s Securities Act.