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Beware of strangers wanting to invest in your business. If the offer sounds too good to be true, it probably is, says James B. Hunt, national practice leader of investigative services for accounting firm Price Waterhouse LLP in Los Angeles.
Hunt cites two common scams entrepreneurs often fall prey to. In the first, called "bankruptcy bust-out," someone offers to buy your company using the note payable method, in which you hold a promissory note secured by common stock in the company. "The new owner abuses all the creditor relationships and runs credit and supplier accounts up to the limit," says Hunt. "They also clean out the cash in the company by paying out bonuses or advances to stockholders and shipping all inventory out of state to sell and convert into cash."
Finally, he or she declares bankruptcy, leaving you with a worthless promissory note. The scam can take as little as a couple of months to accomplish.
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