This Place is a Gold Mine

by Richard Shank | September 2008

The following story is a composite of several situations. Names, locations, and other facts have been changed to illustrate and simplify the case.

Sam had received a visit from his cousin Bill. Bill told Sam about the business he had for sale, which he described as a regular gold mine. It produced at least $30,000 profit every year. But alas, he had promised to help his ailing uncle in Wyoming, and he couldn’t stay in Pennsylvania to run it.

Sam excitedly told his wife Susie about the great opportunity. The income was $6,000 greater than the $24,000 they were presently earning. Bill had given him first chance at the deal. Sam quickly did some checking where to get $200,000. Between his grandmother, his widowed mother and a well-to-do aunt he could borrow the total.

They closed Monday evening. Sam gave Bill the $200,000. Bill in turn handed over the keys to the business. He said he was leaving for Wyoming at 5 A.M. the next day, but if Sam needed any assistance, he could contact him by email. Sam forgot to ask for a mailing address and phone number.

The sun which had been shining brightly when Sam opened the business doors Tuesday morning was soon hiding behind a dark cloud. A major vendor called demanding payment for a past due $4,300 bill. Sam learned it was for inventory which was never paid. Sam was astounded to quickly learn that the business had many debts, and he couldn’t purchase products since the store’s credit was so bad. Sam thought there must be some mistake, which Bill would quickly clear up. But dozens of urgent emails went unanswered, and they had no way to contact Bill or the invented uncle.

Sam now realizes that even if he only paid himself the same $24,000 salary he had previously earned, that this would only leave $6,000 per year to use toward his annual interest cost of $16,000! Sam had thought Bill meant the business was earning $30,000 in addition to a fair salary. Now he realized Bill meant that was the total of owner’s wage plus earnings. He also soon realized with a sinking feeling that the $30,000 stated by Bill was a ‘fish story.’

Poor Sam hadn’t asked anyone for advice. There was no written agreement of sale. No records or documents. He hadn’t contacted an accountant or attorney for assistance. Now Sam was stuck with $200,000 in loans from his family. The store’s vendors soon forced Sam into involuntary bankruptcy. He lost everything.

Sam should have contacted an advisor before buying the business. We hope Sam’s story will prevent others from meeting a similar fate.