It is almost inevitable that in most business sales, the vendor will make representations or statements to the purchaser to attract their interest and present the business in the most favourable way.
These representations can be spoken, supported by written material such as financial statements and records and can be made by the vendor, its directors or employees, or its agent.
Anna Cruckshank, Lawyer and Director of Aubrey Brown Lawyers says vendors need to be very careful about the promises they make to purchasers when negotiating the sale of their business.
“The risk to the vendor is that, if the vendor has made representations which have been an inducement to the purchaser buying the business and those representations have been wrong or fraudulent, the purchaser can sue the vendor after settlement of the sale,” she said.
HOW ARE PROMISES MADE BY THE VENDOR TREATED LEGALLY?
Anna advises that promises made by the vendor in the negotiations are generally treated as either a condition or a warranty.
“The Contract should identify whether the promises are a condition or a warranty. Promises that are classified as a condition normally allow the other party to terminate the Contract if there is a breach of the condition, or a failure to perform it. A warranty is a term in the Contract, the breach of which allows the other party to claim compensation, but does not allow them to terminate the Contract.”
WHAT REPRESENTATIONS CAN BECOME WARRANTIES?
Examples of representations that can be warranties include valuation information provided by the vendor, a promise about the takings of the business, guarantees that certain customers will stay with the business after settlement, or representations about the ownership of assets included in the business, including that there is no money owed on them.
Anna warns that one of the biggest areas of contention is the financial information provided by the vendor to the purchaser about the business.
“There have been several cases where a vendor has provided financial forecasts or budgets to a purchaser, and the purchaser has successfully sued the vendor after settlement when the financial performance of the business has not lived up to the forecasts or budgets,” she said.
HOW CAN I REDUCE MY RISK?
To reduce the risk of a dispute after settlement, lawyers will look to incorporate the representations that are made into the Contract for the sale of the business. This protects purchasers by making it clear what they are buying and putting the onus on the vendor to make sure the information is correct. It also helps vendors by restricting the purchaser’s ability to make a claim to only being about the matters that have been warranted.
MISLEADING AND DECEPTIVE CONDUCT
Anna advises that vendors need to be aware that, in addition to the rights of the parties under the Contract, a vendor can be liable under the Australian Consumer Law if they have engaged in misleading and deceptive conduct, even if the vendor has not communicated incorrect information.
“Silence, that is failing to volunteer a fundamental piece of information about the business you know affects its future viability or profitability, can also be misleading and deceptive conduct.”
Working closely with an experienced business lawyer is the key to ensuring that as a vendor, you don’t unwittingly run into trouble by providing the wrong information and that as a purchaser you are protected if you are relying on promises made by the vendor.
The lawyer can give you guidance around what information you should (and shouldn’t) provide and make sure the Contract properly reflects the intention of the parties in relation to the representations made.
Anna Cruckshank is a highly respected lawyer on the Central Coast, in the Hunter and nationally. She has built up an impressive portfolio of high profile clients in both the commercial and property development sectors. Her specialised areas include business sales and purchases, franchises and commercial agreements.