Do I have any recourse after close regarding info provided during DD?

searcher profile

March 15, 2024

by a searcher from California Polytechnic State University - San Luis Obispo in Irvine, CA, USA

I closed on a project based small business in December of###-###-#### In this business we receive upfront deposits and need to track work in progress (WIP) as many projects last multiple months and sometimes years.

Leading up to the close, I requested an updated WIP. For the largest current project, the previous owner had the entire ~17% deposit shown as a cost to the project, which after apply gross margin resulted in an "earned to date" amount of ~34%. I caught this, and got that 17% moved from a cost to the earned amount, so that he would get the 17% earned instead of 34%. I pushed a little bit saying that I thought 17% complete on this project seemed to be farther along that it really was. He assured me that a lot of work had been completed and that the 17% was appropriate. At the time, I didn't have the knowledge to know if the project was really 17% completed or more like 5-10% which is what I suspected.

Prior to this conversation on WIP, I had requested the estimate project cost breakdown for this particular project which had been around for some time (in planning for well over a year). Now that I have access to all of the company files, I can see he edited the file (spreadsheet) the day he provided it to me during due diligence. That is the only file that was saved in the project estimating folder when I took over the business, but I can see that the estimator provided him a much different file about a year prior. Essentially, I believe he edited the estimated project cost file immediately before sending it to me to move the estimated costs around in such a way that would lead me to believe the project was about 17% complete, when it reality I know now that it was probably closer to 5% complete. That 12% discrepancy is nearly $25k.

Clearly, I made a mistake not pushing harder at this prior to close. I do believe he changed the estimated cost spreadsheet with the intention of being able to justify keeping the entire deposit. My question is, did I learn an expensive lesson or do I have any recourse? I have not brought this up to the seller yet as I wanted to seek advice here before approaching him.

I have the excel file that shows it was updated on the day he sent it to me and I have the older version of the file from an email so both are fairly easy to prove when they were last edited. I can't prove what the file contained in the time leading up to when I requested it though.

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commentor profile
Reply by a professional
from Georgetown University in San Diego, CA, USA
Good thoughts above, but no one can answer this without reviewing your purchase agreement. There are plenty of potentially relevant provisions, but whether the "prevailing party" gets attorney's fees might be most important. What you're describing sounds fraud-like if true (and fraud is typically excepted from all limitations in serious purchase agreements), but fraud is hard (expensive) to prove, so with $25k on the line, you'd need to be able to get your fees covered to make it worth a good litigator's time to pursue it. Before litigating, you also need to be comfortable torching your relationship with the seller. Good luck!
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Reply by a searcher
from Virginia Polytechnic Institute and State University (Virginia Tech) in Blacksburg, VA, USA
Have you tried asking him for the funds? That’s where I’d start. Your other recourse options will depend on how your APA was written, but any APA worth its salt will have a material misrepresentation clause. If you ask him, and he says no, get an attorney to write a threatening letter. That might work. If not though, you likely wouldn’t want to push it because you’d easily spend more than $25k pursuing. Possibly you could get legal fees covered, but that’s dicey.
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