Selling a business requires careful consideration and planning. Often, if a business doesn’t perform as expected, the purchaser will look to the vendor to compensate them for the poor performance of the business.
We see the same issues arise in litigation again and again.
Set out below are a number of take home points to remember when selling a business to try and minimise the risk of being sued and getting into a lengthy and expensive dispute.
Misleading and deceptive conduct
A claim for misleading and deceptive conduct is where a purchaser says they relied on a false representation made by the vendor (or their agent) which induced them to purchase the business. Be very careful that the information you provide and statements you make during the lead up to the sale of business are completely accurate and not open to interpretation.
With COVID-19 causing many businesses to have decreased sales, it is important not to promise any future sales figures or to provide any projections for a post COVID world (whether it be sales or profit).
- Make sure that any verbal conversations with the purchaser are recorded in writing and are very clear as to their meaning. An email after a conversation confirming what was said is the most common way of recording the conversation.
- 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.
Breach of warranties
A warranty is where the contract says that the vendor warrants (or promises) that a particular fact is true.
- Ensure that any warranty is carefully drafted so that it is not too wide.
- Ensure that all products and services sold comply with all regulatory requirements.
- Ensure that all warranties provided can be supported by documentary evidence.
Restraint of Trade clauses
A restraint of trade clause is one where the vendor 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 – be very clear what type of business would be considered to be in breach.
- If the purchase price is payable in installments, ensure that the contract specifically considers whether a default in the payment of the purchase price invalidates the restraint.
- If you have plans to open another business (similar or otherwise), specifically write into the contract that type of business in a specific location would not breach the restraint of trade clause.
Often it is claimed that there had been insufficient disclosure of financial information. This is particularly where a competing business is considering purchasing the business.
- Ensure that the Disclosure Statement accompanying the Contract of Sale (where required) complies with the statutory requirements. Where the Disclosure Statement is sufficient, the onus then falls on the Purchaser to conduct his or her own enquiries as to the suitability of the business for their needs.
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 and that the same lawyer does not draft the agreement on behalf of both parties.
- 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.