I would like to tell you a cautionary tale, in which I may definitely not identify the parties involved and all I will say is it took place some years ago, somewhere in Eastern Europe.
A certain foreign investor, prior to coming to me for advice, had already down-paid a million on non-refundable deposit (so-called “vadium”) to the seller in order to be allowed to proceed with Due Diligence on an SPV containing a building he considered (although I disagreed with that too) to be worth a lot more. Let’s say five million. I’m hiding the actual transaction details in order not to embarass anyone, so five million is in fact correct, but the currency I’m using is fictional.
Well, needless to say, as ever I discovered plenty of question marks in the SPV, in fact SPV was not the correct word for this company at all. “SPV” means “Special Purpose Vehicle” and in real estate that basically means it’s there to own a building so as to allow some flexibility on the way of sale of a building and the choice with depend on the seller and buyer’s tax positions whether the building is sold out of this then empty company as an asset or whether it is sold in it’s corporate coating. There isn’t supposed to be anything else going on in an SPV. Well, there was in this one. Some proper monkey business, as we say in the trade. Although, in fairness, zoological supplies was about the only thing they hadn’t done. Among other things this company was holding shares in other entities which had been written off to a nominal value of one Euro in the balance sheet, but which under local law entailed liability for the owner and therefore had negative worth (of about five million Euro in total therefore nullifying the value of the Entity even if the building had been worth what the seller claimed and the buyer believed) It’s not easy by the way to spot such things using traditional audit methods. There’s a tendency to see no figure in the investments line on the balance sheet and then not even ask the question – but you have to ask it. Continue reading “Never make non-returnable down payments when buying a business.”
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