You bought a business based on the Profit & Loss statements (P&Ls) provided by the seller. They showed healthy margins and a steady upward trend. But now, six months post-closing, the bank account is empty, and the numbers don’t add up.
You dig deeper and realize: The numbers were fake.
Maybe they recorded revenue for products never shipped. Maybe they hid expenses by paying them out of a personal account.
This is not just “buyer’s remorse”; this is likely fraud or breach of contract. In New Jersey, you have aggressive legal avenues to recoup your losses.
1. Breach of Representations and Warranties
Every well-drafted Asset Purchase Agreement (APA) or Stock Purchase Agreement (SPA) contains a section called “Representations and Warranties.” Here, the seller explicitly states: “The financial statements provided are accurate and prepared in accordance with standard accounting practices.”
If the financials are wrong, they have breached this warranty.
- The Cap: Check your contract. There is often a “Cap” on damages (e.g., 10% of the purchase price).
- The Basket: There may be a “deductible” you have to exceed before you can sue.
Crucial Exception: most contracts state that the Caps and Baskets do not apply in cases of Fraud. If the seller lied on purpose, the limits are off.
2. Proving Fraud vs. Incompetence
To prove fraud in New Jersey, you must demonstrate:
- The seller made a material misrepresentation.
- They knew it was false (scienter).
- They intended for you to rely on it.
- You did rely on it lawfully.
- You suffered damages.
This requires evidence. You will need a forensic accountant to compare the “Deal Financials” vs. the “Tax Returns” vs. the “Bank Statements.” Significant discrepancies usually point to fraud.
We work closely with financial experts during business litigation and dispute resolution to build this factual roadmap for the judge.
3. The Remedy: Rescission vs. Damages
What do you want to achieve?
- Damages: You keep the business, but the seller pays you the difference in value. If you paid $1M for a business making $300k, but it only makes $100k, you might be owed $500k+ in damages.
- Rescission: This is the “undo button.” You ask the court to unwind the entire transaction. You give the business back; they give you your money back. This is difficult if you have already changed the business operations significantly, but it is possible in severe fraud cases.
4. Going After the Earn-Out or Seller Note
If you structured the deal correctly, you likely still owe the seller money (a Seller Note or Earn-Out payments).
Stop paying immediately.
Your attorney can issue a “Notice of Set-Off,” stating that you are withholding future payments to cover the damages caused by their misrepresentation. This is the fastest way to recover funds because you are simply keeping cash you already have.
5. Third-Party Liability
Did the seller’s accountant verify these fake numbers? Did a broker knowingly pass on false data?
Sometimes, the seller is broke (judgment proof) by the time you sue. In those cases, we look at aiding and abetting claims against the professionals who facilitated the fraud.
Community Discussion: This is a nightmare scenario for many. This Reddit thread on buying a business with cooked books highlights the practical emotional toll and the importance of swift legal action.
If you have been duped, time is critical. Evidence disappears, and money gets spent. Contact a business valuation and fraud attorney to analyze your claim immediately.
