How can I protect myself from a dishonest seller?

June 06, 2024
by a searcher from Yeshiva University - Sy Syms School of Business in Boca Raton, FL, USA
So I bought a small business. O snap! That's kinda how I feel.
Here's the short version of the story - I bought a Budget Blinds territory resale. It didn't cost a lot and there is so much potential in this territory. So although the business itself is not at all what I envisioned acquiring (in just about all aspects), I went ahead with it. I'm not specifically asking for constructive criticism on this part, but I'm more than happy to hear.
During due diligence, the seller and the franchisor rep basically told me I can get the p&l and tax returns from the seller, but they "can't" give me anything from within the proprietary software of the business bc it's all franchisor related stuff. I accepted it bc I didn't know any better.
The whole time, it bothered me just a bit, but I figured they probably do this for all their resales. Additionally, I have a lot of confidence in the franchise system since it's so big and old.
Anyhow, now the good stuff. The seller took money from customers for products but never paid vendors/ordered the products. So these customers are calling the business phone now upset that they've waited for so long, and it's the first time I'm hearing about it.
Also, the day before closing, the seller told me there was 2 customers they did this to. The day of closing, post closing, they said there's another 3 they forgot to tell me about. But in reality, it's 13 and counting.
My path forward is clear - I want to keep my name/brand good, so I'll handle it. Corporate is hanging me out to dry. (If you have any advice on how to gain leverage over a behemoth, that'd also be appreciated)
But looking backward - what type of due diligence could I have done to prevent this situation? Is escrow the only solution for this type of thing (we did have a small escrow account, which has already been paid out to me)?
Thanks!
from University of Southern California in North Palm Beach, FL, USA
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA