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Undisclosed ownership change.

While a change in business ownership does not necessarily mean that the business will be operated with fraudulent intentions, such new circumstances can be a warning sign of fraud. Unscrupulous new owners take advantage of the business good credit history to set a fraud in motion, particularly if they neglect to tell suppliers that they recently bought the firm.

Fast Break Bicycles, a retailer and repairer of bicycles, opened its doors in the early 1990s. Ten years later, the store was acquired by new management, who promptly changed the firm's emphasis and began phoning in unsolicited orders to manufacturers of small appliances, clocks and jewelry. The new owners explained that they intended to open a new store and therefore needed these new product lines.

A credit reference from a reputable bicycle manufacturer reported prompt payment experiences with the company going back many years. Given these good omens, many manufacturers shipped. What these suppliers failed to take into account was that the new management had just taken control from the previous owners, and had not established their own payment track record.

Things went smoothly at first, but suppliers began to get concerned when the principals could not be reached at the business. One creditor sent a sales rep to examine Fast Break's premises, and discovered the business appeared to have been unoccupied for some time. The store had no front entrance, just a back door. The sales rep found a man sitting near the rear door, but he was evasive when asked where the merchandise had gone.

Shortly thereafter, the business closed down completely and some creditors decided to file an involuntary bankruptcy petition against Fast Break. According to a collection agency, the number of creditors affected by Fast Break was sizeable--as they alone were handling claims for several hundred creditors whom Fast Break never paid.

Credit managers should remember to carefully check out accounts whose ownership has recently changed. One confirmed credit crook told police that taking over established companies, using their good credit to order big, and then stiffing suppliers is becoming very popular with fraud artists.

When a new owner assumes control of a business that you've dealt with in the past, or especially if such a business is trying to establish credit with your company for the first time, get on the phone and find out whether they are experienced in their line of business and how they financed their purchase of the company. If the new management's need for your product is greater than its predecessor's, find out why. Are they trying to increase their customer base? Have they rented more space which would warrant carrying additional goods? If they plan to expand into different lines of business like food or health and beauty aids, it might be worthwhile to find out why they purchased a business whose previous focus was selling completely unrelated product lines.

If questions still remain, a call to the previous owners may help fill in the gaps about the new management's background and ability to run the firm successfully. It is better to get the facts before you ship.

COPYRIGHT 2004 National Association of Credit Management
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Copyright 2004 Gale, Cengage Learning. All rights reserved.

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Title Annotation:selected topic; Fast Break Bicycles
Publication:Business Credit
Geographic Code:1USA
Date:Oct 1, 2004
Words:518
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