So you bought a laundromat and you're unhappy! You thought you
would be dining nightly at the finest restaurants in town, but
instead, you've become more knowledgeable than most about the
fast food outlets in your neighborhood. Your bank balance is
sinking faster than the last moments of the Titanic!
When economic expectations are not met in the acquisition of a
business, one frequently wonders who is to blame. Many buyers
instinctively believe that it is not themselves, but rather, the
seller, or the seller's broker, or both, who are responsible for
the economic disaster being confronted. As Sporting Life sang in
the musical, "Porgy and Bess", "it ain't necessarily so!"
A buyer should first ask whether the same quality level of
service, advertising and cleanliness has been maintained as that
provided by the seller. A buyer should also consider whether any
pricing changes have caused the decrease in business.
Buyers, however, are occasionally confronted with early warning
signs of danger during negotiations, but, because of their
emotional eagerness to acquire the business, they elect to put
their concerns aside. I call these early warning signs "pink
flags". After the closing, these "pink flags" frequently turn
out to be colored "fire engine red"! If the seller can point to
correspondence or documents reflecting the information about
which there is concern, it becomes difficult for the buyer to
later claim that the buyer would not have acquired the laundromat
if the buyer had known the true facts.
There is simply no substitute for a thorough review of all
financial information and documents pertaining to the transaction
(premises lease, equipment purchase agreement, etc.), by an
accountant and an attorney, preferably selected by the buyer
prior to undertaking any negotiations. Such advance consultation
will allow the buyer to make best use of the accountant and the
attorney during the course of negotiations. Many buyers
unfortunately negotiate and conclude the acquisition of a
laundromat, a major transaction for most people, without
professional advice. Later, if the buyer is confronted with
economic difficulty, a buyer will finally consult with an
attorney who will invariably wish that he could turn back the
clock and participate in the negotiations to best serve his
client's interest.
On the other hand, the seller, or the seller's broker, may have
made statements during the course of negotiations which deserve
close scrutiny and may be actionable. One must ask, however,
whether such statements rose to the level of actionable negligent
or intentional misrepresentation of a material fact, or whether
they were merely "puffing"?
As noted in an early California case, "the law [recognizes] that
sellers of property in their zeal to consummate sales [are] prone
to 'puff their wares' and exaggerated statements as to the value
of property offered for sale [are] held to be mere expressions of
opinion rather than material representations as to existing facts
where the parties dealt at arm's length." How does one draw the
line between "expressions of opinion" and "material
representations as to existing facts"? A prediction as to a
future event is frequently deemed to be an opinion, whereas an
actionable representation ordinarily pertains to past or existing
facts.
The determination of what type of statement constitutes
actionable misrepresentation or concealment is difficult and
subject to a variety of considerations not covered in this
article. Illustrations, however, will help to understand some of
the issues involved.
In a Los Angeles County Superior Court action, plaintiffs
exchanged 160 acres of land in Tulare County for certain Long
Beach property and some money. The defendants represented that
"the store in question was a first-class structure equal to the
best building of that type in Long Beach, and that it would stand
shocks of earthquake . . . ." The walls of the building were
subsequently cracked and shattered by an earthquake. The court
noted that "Fraud may not ordinarily be predicated on mere
statements of opinion regarding the value, general character or
stability of a building, even though such assertions are greatly
exaggerated."
The court stated further, confirming what we all know, that "it
is difficult to distinguish between expressions of honest
convictions respecting the stability, value or adaptability of
property, and the false representations of an owner regarding
those matters . . . ."
The court further observed that "Usually a purchaser is charged
with knowledge of such excess enthusiasm and human frailty on the
part of a vendor for which he must make due allowance, and he is
deemed to accept as true such representations, amounting to mere
judgment or opinion, at his own peril." The court continued to
note that "The mere statement that the building in question was
constructed earthquake proof is a matter of pure speculation or
prophecy. Every person of common understanding knows it is
impossible to estimate the destructive forces of nature
accompanying earthquakes . . . . No human being could have
prophesied the serious damages which resulted to first-class
buildings in San Francisco . . . from the earthquake of 1906."
The court held, however, that since the defendants were also
alleged to have specifically and falsely represented that the
building was constructed in accordance with city ordinance
specifications, the plaintiffs were entitled to proceed to trial
upon their claim of fraud.
In a 1983 Alameda case, the court held that "the description of a
business as a 'success' or a 'failure' was highly subjective and
did not amount to an actionable representation of fact."
It has been held, however, that "when a positive statement of the
value of property is made by the owner, coupled with other
asserted facts . . . like a false representation of past income
therefrom, it may constitute competent evidence . . . of the
alleged fraudulent representations upon which a judgment for
damages may be supported." (Emphasis added)
If you would like to minimize the risk of having a judge or jury
determine whether your seller engaged in a fraudulent
misrepresentation or concealment or was merely puffing, retain a
competent accountant and attorney at the outset of your
negotiations to help you.
