If you are considering selling your business, you must ensure the information you share with potential buyers is accurate. If you provide false or untrue information, you could be engaging in misleading and deceptive conduct. This article will explore some key considerations you should make before selling your business.
Additionally, we will discuss a case from 2022 where a business owner engaged in misleading and deceptive conduct during a business sale agreement.
1. Provide Accurate Information
When selling your business, it is essential to provide the purchaser with specific and accurate information. As a result, they can determine whether they want to proceed with the purchase and determine how much they think the business is worth.
Consider the following case heard in the Supreme Court of NSW in 2022.
The seller gave the purchaser documents relating to the operation of the business, including some financial statements. Using these documents, the purchaser sought a valuation of the business. After reviewing the valuation, the buyer offered to purchase the company. However, after operating the business for some time, the business did not perform at the level the financial statements indicated. For this reason, the purchaser brought a claim against the vendor for misleading and deceptive conduct. In addition, the purchaser argued that they would never have entered into the transaction if they knew the true financial position of the business.
2. Consider Representations and Warranties
In almost all business sale agreements, the vendor and purchaser will provide some form of representation and warranties. For instance, as a vendor, you might ask the purchaser to provide a warranty stating they will not rely solely on the information you provide them. Instead, they will need to conduct their investigations into the business.
Moreover, it is common for the vendor to try and limit their liability to the representations and warranties within the contract alone.
In the case above, the purchaser provided a warranty that their decision to purchase the business was based on their own investigations. Further, the warranty stated that the purchaser was not induced to enter into the sale agreement by any representations or warranties other than as set out in the sale agreement. However, the Court did not find this a suitable defence to the vendor's conduct, nor did it limit their liability.
3. Proving Misleading and Deceptive Conduct Has Occurred
You must follow a specific process to determine whether someone has engaged in deceptive and misleading conduct. This includes the following steps:
- Establish that the conduct occurred.
- Determine whether the conduct occurred 'in trade or commerce'. This is a fairly broad concept and will likely include a business sale transaction.
- Consider whether there is a 'real and not remote' chance that this conduct will mislead or deceive. It does not matter whether this is intentional.
In the case above, the purchaser proved that the financial statements were inaccurate. In response, the seller claimed he relied on his accountant to prepare the financial statements. Further, he claimed that as far as he was aware, the accountant prepared the financial statements using the same process as usual, which always produced correct documentation. The Court determined this was not a valid defence and that the vendor had engaged in misleading and deceptive conduct. Had the vendor disclosed the actual figures in the financial statements, the business's value would have been much smaller and the purchase price lower.
What Was the Result of the Case?
In the case from above, the Court held that the purchaser was entitled to damages payable by the vendor due to the following:
- the reduced value of the business; and
- the interest incurred by the buyer since the date of the purchase.
Ultimately, the vendor paid over $1 million in damages.
Key Takeaways
If you wish to sell your business, ensure the information you share with potential buyers is accurate. You could be engaging in misleading and deceptive conduct if you provide false information. To avoid this, it will be helpful to confirm:
- the accuracy of the information you are sharing;
- any representations or warranties you wish to make and enforce; and
- before making any claim, follow the appropriate steps to confirm if misleading and deceptive conduct has occurred.
