Last week I was talking with a friend whose family business has thrived over the past few decades. In 2008 they had over $5o million in annual revenue, but at that time they also discovered that one of their key employees appeared to have been committing fraud and embezzlement. In 2009 a combination of the recession and having significant attention diverted from the operation of the business to deal with the fraud investigation and fixing the damage caused by the fraud resulted in a dramatic decline in the performance of the business, with revenue plummeting to about half of what it had been. My friend is a very astute person, but unfortunately, when a clever employee decides to commit fraud it can be very difficult to detect in the short-term.
In today’s Wall Street Journal there is an article “How to Steer Clear of Fraud? The Experts Weigh In” which provides some excellent tips on things you can do to help protect your business from becoming a victim of fraud. The article also contains some interesting stats on why small businesses, in particular, should be concerned about fraud. For example:
- 31% of all business frauds nationally were in companies with fewer than 100 employees, compared with only 21% in companies with more than 10,000 employees
- The median loss for companies with fewer than 100 employees was about $150,000, compared with $84,000 in businesses employing more than 10,000
There is an accompanying article, “When You’re Most Vulnerable to Fraud” which tells the story of business owner, Ed Couvrette’s struggle with employee fraud at his company, E.F. Couvrette Co.
How would fraud impact a business sale? It would have the potential of making it very difficult to sell, unless the problem had been identified and remedied at least 2 years prior to the sale. If you are suspicious that there may be fraud occurring but you think you should sell and let the buyer deal with it, think again. There’s a good chance that the buyer will identify problems when they conduct their due diligence, and if they don’t and they buy the business and discover the employee fraud later, it may leave you open to post-sale litigation.
