After a sale of business is completed we see people being sued for the same issues again and again. We have outlined below two of the most commonly litigated areas and some tips to minimise the risk of being sued.
1. Misleading and deceptive conduct
This is usually where a purchaser says they relied on a false representation made by the seller (or their agent) which induced them to purchase the business. The false representations are often made in conversations leading up to the signing of the contract.
- Make sure that any conversation is recorded in writing. An email after a conversation confirming what was said is best.
- Do not provide any information which is not 100% factual and cannot be supported by documents.
- Do not provide projections for sales or reduction in expenses which have not yet been achieved even if you believe they are achievable.
2. Restraint of Trade clauses
A restraint of trade clause is one where the seller is restrained from opening (or sometimes working in) a similar or competing business for a specific timeframe in a specific geographical area.
- Ensure that it is clear in the contract of sale what type of activity would breach the clause – the more detail the better.
- If you (or a related party) have plans to open another business (similar or otherwise) specifically refer to this business in the contract.
The top ways to minimise the risk of litigation are as follows:
- Ensure that the contract of sale of business is well drafted and clear. It is important that it clearly states in plain English (not legal jargon) what you understand to be the agreement.
- Document everything in writing, even informal conversations with a prospective purchaser.
- Do not say or provide any information which cannot be supported by facts and existing documentation.