One day, the owner of a year old call center business walked into his office. For now we will call him John.
John's employees are gone. His computers are gone. His files are gone. His phone equipment is gone. Half of his furniture is gone.
After a day or two of sleuthing, John discovers that his office manager conspired with one of his suppliers to steal his business. They had set up shop at the supplier's business location using John's assets and customers.
John confronted them. They told him to buzz-off and came up with a lame excuse as to why they had an entitlement to everything they stole from him. John filed a lawsuit. The ex key employee and supplier actually presented, in their answer to the complaint, an argument that since the business wasn't making a profit, it had no value, and since it had no value, they did not owe John anything. This goes beyond dishonesty. I think it's called "Chutzpah."
The time came for them all to appear at a settlement conference. John's attorney would never tell him what to ask for insisting that he come up with a number on his own. Some attorney's are experts in the law, but do not know how to put value on a start-up business that was not yet turning a profit.
As a graduate of Bizar Financing, John sought my advice. I asked him four questions to which his answers are interspaced below.
1. Q. How much did you invest in the company through the date of the theft?
A. $85,000
2. Q. Are there any debts of the business for which you are still liable?
A. $150,000 to the bank and the landlord is suing for $300,000
3. Q. What were your average personal earnings over the 5 years prior to starting this business?
A. Tax returns show average of $226,000/year
4. Q. What did you conservatively expect the business profit to be in its fourth or fifth year?
A. $200,000/year
I then instructed him to have his attorney ask the ex key employee and supplier, at the hearing and under oath; what are the earnings of the business for the last several months?
Here is what I advised John to ask for and why:
1. John is entitled to the value of his stolen investment $85,000
2. John is entitled to recovery of the debts he owes where the debts were incurred in the building of the stolen business and where he cannot be repaid from its revenue $150,000 + $300,000 = $450,000
3. John is entitled to the time value of his efforts as part of his investment in the business for the start-up year of $226,000 where he withdrew nothing.
4. John is entitled to recover the value of lost opportunity. By calculating the value of a business making $200,000 a year net profit using the Bizar Financing Business Price Calculator, John can establish the value of the business opportunity lost as $650,000. By deducting the value of his investment, $85,000 and the time value of $226,000, John can establish his opportunity cost as $339,000.
The answers to the above questions justifies John's settlement request in the total amount of $1,100,000.
By getting an answer to the question of what is the business making now, John can ask for more in settlement if the business is currently earning enough profit to value it at more than the $1,100,000 asked for above. The law does not support people benefiting from the commission of a crime and John can ask that the excess profit from their illegal act be disgorged to him as the victim.
Will John ever collect the amount asked for? His chances are Slim and None… and Slim just left town. The legal system is less than perfect, far less. Please notice, I said legal system not justice system.
As a practical matter, unless the business has blossomed into a cash cow from Krypton, John will be lucky to receive the amount of his cash investment and an off-set to whatever he ends up paying his bank and his landlord. After legal fees, if John clears his debts and puts $50,000 net into his pocket, I will be surprised.
But, I can tell you this. If he doesn't ask for the amounts stated above, John's settlement (or payment on any judgment if he goes the distance) will be significantly less.
The real question is; what could John have done that would have protected him from this happening in the first place?
Here is what I have done to lock the barn door before the horse leaves. I typically ask each of my key personnel to sign a confidentiality agreement. This confidentiality agreement contains several provisions that make this type of theft a highly unlikely event. Among these provisions is my right to get a restraining order without the need to post bond which would permit me to immediately get a court order stopping the ex key employee from operating the stolen business. The threat of this immediate halt, can act as a deterrent to the theft in the first place by rendering the stolen business immediately worthless. Even if it does not serve as a deterrent, the threat of its use still serves as a weapon to cause a rapid and favorable settlement.
The purpose of this blog post is not to give legal advice. In fact, it is here to show by example the value of a good attorney. My experience is even when you have good legal counsel; it is still incumbent on you as the entrepreneur to know what to ask of your attorney.
