This edition of "Coin Dealer Ethics" deals with inheritance; not the kind of inheritance where someone dies and you get their fabulous coin collection, but where a coin dealer decides to retire and sell his business to another person. Should the new owner benefit from that dealer's "goodwill?" Here's the scenario:
Ernest K. of Honest Man Coins (names are fictional) had been in the coin business for 40 years. He had an excellent reputation, and belonged to numerous numismatic associations, including the ANA and PNG. Although his coin business wasn't large, it had a devoted following of customers, and Ernest attended several coin shows each year which helped him broaden his reach and gain access to a wider range of material. When Ernest retired, he sold the coin business to a single buyer, including the stock, the business name and goodwill, the lease to his excellent downtown location (which still had 14 years left on it at a great monthly rate,) and all other assets that belonged to the business (including the customer list, store fixtures, coin safe, etc.) The "stock," of course, was the coins that Ernest had in his inventory, plus a goodly assortment of coin collecting supplies and books. Basically, Ernest sold everything that you'd find in a normal local coin shop, what business salesmen call a "turn-key operation." Unfortunately, less than a month after the sale, Ernest had a massive heart attack and died, leaving his wife very well-off finanacially.
I want to draw your attention to the term "goodwill," as used above. Business goodwill is generally defined as the difference between what a business' assets are worth, and what the actual asking price is. It represents the value of the good name itself, and in Honest Man Coins' case, it included the fact that Ernest's integrity was unimpeachable. Ernest was known to be a conservative coin grader who was reputed to have never sold a single fake or altered coin. In fact, Ernest gave a lifetime guarantee of authenticity for all of his coins, and had never once had to make good on this guarantee. When the new owner, (whose name is Robert D.), took over Honest Man Coins, he would enjoy the "goodwill" that Ernest had earned through the years, at least until such a time as the new owner made his own reputation known. But does this "goodwill" also bear any potential liabilities?
Shortly after buying Honest Man Coins, a company in Austria figured out a radical new way to authenticate coins using a computerized laser system that would scan the coins and render a rating as to whether the coin was genuine or not. (This system is just as fictional as the buyer, seller, and coin business name in this column.) The new laser authentication system was a big hit, because it could weed out the counterfeit (but full gold-weight) coins that plague U.S. gold coin collectors. (It is a fact that full-weight fake gold coins exist; they were created by the millions in Europe during the early-to-mid twentieth century, not to defraud collectors but because gold coins issued by a nation were worth a premium over gold bullion ingots, when sold to banks. Some experts estimate the problem may affect as many as 10% to 15% of all U.S. gold Double Eagles currently on the market, and that surely most are undetected by the average collector and dealer because the weight, diameter, thickness, color, and gold purity of the coins are all correct.)
Jason P. was a good regular customer of Honest Man Coins. He loved Double Eagles, and tried to buy at least one a month, usually of higher grades and/or better dates. He kept careful records of his purchases and always saved his receipts. When the new laser-scan technology from Austria determined that six of the 43 Double Eagles Jason had bought from Honest Man (when Ernest owned it) were now condemned as fakes, Jason took the coins back to the store, hoping to exchange them for genuine coins of similar grade and date. Robert, the new owner, refused, saying that it wasn't his fault that Ernest sold fakes, and that he shouldn't have to honor a previous owner's lifetime guarantee, and anyway, Ernest was dead.
What do you think? Is Robert bound by the promises made because he also bought the "goodwill" of the company? In other words, he hoped to enjoy Ernest's good reputation, but does he also inherit the problems that might arise? Or is Jason out of luck with his fake double Eagles? The greater question is, should coin dealers and grading services be held accountable if new technology suddenly condemns a goodly percentage of the gold coins once thought genuine? This isn't as much of a theoretical question as you might think; some people think this laser-authentication technology is viable and could emerge any day now. Share your thoughts in the Comments section below, and next week we'll look at some of your responses in the follow-up article.
Comments
Whose lifetime? A coin’s? It can last thousands of years. Earnest’s? He is dead so I would think the guarantee has expired and so is his reputation. Robert is not bound to honor Earnest’s promises unless he agreed to honor them when he bought the business and he didn’t agree so unfortunately Jason is out of luck. Yes, Robert could extend goodwill to Jason and refund or exchange the coins in order to keep Jason as a customer but he doesn’t have to and I think it is rediculous to think Robert has to keep the promise of the late former owner. Also, how does Robert know that the fake coins were actually bought at Honest mans coins? Robert wasn’t there when Jason bought them so they could have come from another source and Jason is trying to recoup his losses from this new business owner. As far as this new technology is concerned, I don’t think dealers should be held accountable for selling fakes prior to the new technology if the coins were sold in good faith as real and the dealer sold very few fakes. If the dealer sold lots of fakes and very few real coins then I say throw the book at them because they knew they were selling fakes. If any dealer sells fakes after the new technology is adopted then they should be accountable.
That’s a great question. In general, I would say that dealers shouldn’t be held accountable for fakes, if the technology wasn’t available to them to tell the difference beforehand, totally irrespective of the question of goodwill regarding the store purchase. If the dealer is suspected of creating or purposely selling fake coins, he should be prosecuted, but that’s a different question.
From a business perspective, it might make sense to work out some kind of deal for Jason, who is a regular customer. If the exchange would be too expensive, maybe he could offer Jason personalized service, free shipping, a discount, or something similar to keep him a loyal and happy customer in the future.
If you buy a business, lock, stock, and barrel, you should honor all warrenties offered by the previous owner. If a car dealership changes ownership, does this void the warrenty on your car? If you don’t want to honor the warrenty, then change the name.
Jason needs to get a second or third opinion before approching the new owner.
I would hold a grading company responsible, even if it changed ownership, if it offered a guarantee of authenticity. I am not sure a local coin dealer should be held to the same standard, however, for an unavoidable error that was made by the previous owner.
I’m not a lawyer but I have been involved with several sales of businesses. Unless the buyer (new owner) has inserted a specific statement to the contrary, he/she is asssuming all the rights, obligations and responsibilities of the existing business. This includes to his customers, suppliers and employees. The legal accountabilities of a business cannot be thrown aside by selling the business.
I’m not sure how it is possible to really sell “goodwill.” Any time you take over a business and keep it in the same location, you inherit their reputation to some extent.
As far as guarantees, I don’t think he should be obligated to honor it.
As far as the car dealership analogy, that is a different situation as a car dealership is a franchise and warranties are required to be honored by those offering the franchise.
The lifetime guarantee regarding who’s life was a great question. I don’t think Ernest had thought of that when he was offering the guarantees.
Can someone tell, Names of the Austria Company/ies or Austria People/s that provide that kind of Laser Technology ?
Sincerely,
George Kanellopoulos.
George:
Of course you are kidding.
Right?
If not, reread the above.
Some new thoughts:
What if Ernest had not died and had not sold the business. What if the business had closed due to a bad economy? Would Ernest be expected to honor the guarantee?
New what if: What if Ernest had knowingly sold 6 fake coins. Sure he was a candidate for sainthood but that’s only an assumption. Everyone could be considered a great person until they are caught doing wrong. What if Jason was only the first of dozens to have bought Ernesterrific Faux Gold Coins™? Perhaps it was no coincidence that Ernest decided to leave the coin business right as that new technology appears in Austria.
Basically, it was the business that offered the guarantee, not Earnest himself (even if he was the sole proprietor). The business itself is still alive and functioning and the new owner has to make sure that the business honors all of its commitments. The new owner should make some sort of offer to those who bought what is now known to be counterfeit product. The difference in value between the coin and the gold has effectively disappeared and there should be someplace between those two points where the two parties can come to an understanding that honors the commitment while allowing the business to continue as a healthy enterprise. If the business dies, its commitments effectively die with it (this escape clause has been used many times by less than honest owners who kill their business through bankruptcy, only to start a new, debt free and unencumbered business, often of the same type, under a new name). There are no easy answers, but the Golden Rule does help point us in a direction that can allow all involved to move forward. Perhaps if the only way to detect these counterfeits is some fancy new technology that can tell whether or not the gold in the coins is of US origin (a requirement of most US gold coins) through some sort of isotope analysis then it does really not matter if they are fakes. Maybe using the new technology on coins that have been in the marketplace for many years is not a good idea. Maybe it should be reserved for coins that are newly entering the market. Lots of maybes, lots of what ifs. Chart the best course to maintain honesty and integrity of dealers and coins that current technology allows and try to avoid extreme reactions when our foundations are shaken.
Robert has a decision to make: Is the goodwill and guarantee something that is important to him and his business. If it is, he should do everything in his power to maintain the good name of the business.
Jason also has a few choices: 1). Make a big stink about the coins to Robert and make life hard for himself and Robert. 2). Contact the grading service and see if there is anything they can do to rectify the situation.
My recommendation is for Robert to educate himself on the situation, write a great letter explaining the situation and contact the previous customers of Ernest. Tell them that if they are worried about their coins they can take them back for a free evaluation. Then, if any coins are found to be full-weight fakes, offer to contact the grading service to resolve it. Or, if the customers want, to take them back at current spot prices and help them find the same grade/date coins at a no margin price. It is all about taking care of the customers.
And god bless Ernest’s soul, I’m sure he was a honest business man. As you stated, the full-weight fakes are common in places and there is no way to know.
I’m a new hobbyist that is also getting ready to start my own limited coin store for gold and silver eagles.
It dosen’t matter what robert wants or dosen’t want. If he wants to stay in business, then he better take his first course in business 101. All customers have rights. Depending on the state and federal consumer protection laws. While ernest was an honest guy. Robert is not acting in good faith. As did his predicessor. If there is a writen warrenty on the coins ernest sold to his clients. Ten i believe robert is obligated to honer the warrnties ernest wrote.
coiny
You know now that I think about it, if Robert bought the complete business including the name, then I do believe he is responsible for the guarantee.
Had he simply acquired the inventory and location, I would not think he should be responsible. However, he bought everything so I think he bought the responsibility as well.
Of course Robert can change company policy at any time–at the cost of his own reputation.
Without the benefits of a first class third party grader and a subsequent slab, there is no way for the dealer to know if the coin that is being presented, is actually the one that was sold. When buying raw coins, at the end of the day, you are on your own.
All legalities aside, it just makes good business sense for Robert to continue the policies and goodwill of his predecessor even if it means having to eat a few. If the previous policies and goodwill of Earnest is reinforced by Robert, then Robert should continue to be at least as successful as Earnest.
Reputation is everything in this business. Although a good business has been purchased, the reputation still has to be earned and maintained just like Earnest did.
Goodwill is strictly an accounting concept. It is the difference between the book value of the business and the selling price. As an intangible asset, it is amortized and written off as an expense over a period of years thereafter. Accountants call it “goodwill” for lack of a better term, but for a retail business, it represents as much the familiarity of the business location and its signage within a trade area & word of mouth over a number of years as it does a loyal & dedicated customer base.
I believe the issue is not so much ethical as it is a legal issue. In a case like this, unfortunately, it would probably wind up in a court of law.
This is a great post for people who buy and sell coins. Most people have spent all their lives collecting and have acquired a lot of respect from the community. Anyone should make their own reputation by doing good business and not just buying off coins from people who are renowned in the field. If you want to buy investment grade coins, please visit Superior Discount Coins for more information.