Business Sales - Why you can't just sell and walk away

When business owners reach the difficult and often emotional decision to sell a business which they have either started or grown, they might think that once the deal is done they can leave the business in the capable hands of the new owner and move on to their next venture or a well-earned retirement.

In many cases this is achieved.  However, business sellers must be aware of potential liabilities that can remain with them many months after completion of the sale.

When deciding to buy a business, the purchaser will have been provided with certain (often quite detailed) information about the business, its processes and importantly its financial position.  During the sale process, the business will be considered in much greater detail by the purchaser and its team of advisers.

In order to achieve a sale of a business, it will be necessary for the business owner to provide a great deal of information and answer many questions raised by the purchaser.  It is with great care that answers must be given as purchasers will be relying on that information when deciding whether to proceed to completion of the purchase.

That process is called due diligence and it is generally the initial stage of a business sale transaction.

The next stage of the transaction will be for a sale agreement to be agreed between the parties.  Within that sale agreement the purchaser and their advisers would ordinarily include detailed statements that the seller is required to give in order to support the validity and accuracy of the information they have provided during the due diligence process.

When providing information and answering questions it is not enough for the seller to assume information they are giving is correct and accurate.  The standard is much more onerous and the seller must have made full investigation including enquiring with key members of the seller’s staff and officers to ensure the information given is accurate.

There are two main types of action that can be taken by a purchaser after the completion has taken place if that information proves to be incorrect, inaccurate, misleading or simply false. 

The buyer could potentially commence a claim for a breach of warranty which would be possible in the event there is a statement in the contract indicating a particular state of affairs or a position that proves to be incorrect after completion.  The buyer would need to be able to prove a breach of warranty and also quantify the loss before a claim will be successful against a seller.

In addition to that or in the alternative, there might be the potential for a claim for misrepresentation.  Sellers can misrepresent a buyer innocently, negligently or fraudulently.  The standard of proof in each case differs but the damages available to a buyer following a successful misrepresentation claim can be far in excess of the amount that could be claimed for a breach of warranty.

It is therefore absolutely vital for a seller of a business to carefully disclose all relevant information to their solicitor so this can be provided to the purchaser and their advisers and disclosed in a manner that will ensure a post-completion claim could not be brought against the seller.

Selling a business can be an extremely busy and stressful time for the business owners.  However, time spent gathering accurate information and disclosing it to the purchaser in the correct way is likely to significantly limit the potential for a claim against you post-completion.  You have built your business and sold it for a price you deem acceptable, so it is just as important to ensure that price is safeguarded and cannot be reduced by warranty claims or misrepresentation claims at a later date.

An experienced business lawyer can assist by ensuring the business sale agreement and disclosure letter are drafted in a manner that protects you as far as possible.  The limitation provisions, correctly worded clauses and properly disclosed information will be key in ensuring you can move on and place your full attention in a new venture or enjoy a long anticipated happy retirement.

At Martin Tolhurst Solicitors, we have a team of experienced and dynamic commercial lawyers who can assist with the sale of all types of businesses and with particular expertise in the SME range.

Contact our New Enquiries Team 01474 546013 or email enquiries@martintolhurst.co.uk and we can make arrangements for you to be connected to one of our commercial lawyers at an early stage in the sale process in order to minimise future risk of a claim against you.