Buyers of a small business would do well to conduct as much due diligence as a purchase agreement allows concerning the alleged income of the business being purchased. Certainly, any representations made by a seller should not be taken at face value when there is an opportunity to have income figures independently verified.
In 10443204
The case involved a coin laundry business in
The owners decided to sell the business in
In
The buyer claimed that he was told in a meeting with the seller and the listing agent that the business was profitable and generated
The parties then signed a conditional Agreement of Purchase and Sale (APS), which included a written covenant from the seller stating that "the Business has been carried on in the ordinary course and all financial statements and other information provided to Buyer are true, accurate and correct in all material respects and have been prepared in accordance with generally accepted accounting principles ...".
However, the only financial statements that were actually reviewed by the buyer consisted of a brief one-page statement prepared by the listing agent based upon information provided by the seller. The statement indicated gross monthly income of
The buyer also had the opportunity to conduct an inspection of the revenues of the business over a 14-day period and was entitled to attend at the business during that time. He mostly went on evenings and weekends. The cash count provided by the owner's son during the time period was approximately
The purchase transaction was completed in
Following closing, the buyer discovered that the monthly income was significantly less than
In
On this point, the court noted that to the extent there was a factual dispute between the parties over what the seller had told the buyer in their initial meeting, the APS that they subsequently negotiated contained an "entire agreement clause" stating that there were no representations, warranties, collateral agreements or conditions, affecting the agreement other than as expressed therein.
The seller further relied on the opportunities that the buyer had to conduct his own due diligence and cancel the APS during the conditional period. The buyer could have consulted a lawyer, his own real estate agent (rather than using the same listing agent), or an accountant, and he could have demanded greater financial disclosure before completing the transaction.
The court agreed with the seller's position. Contrary to the buyer's assertions, he had not relied completely on the seller's representations as a matter of law. The buyer had a negotiated right to independently verify the business' income. In the circumstances, the entire agreement clause was enforceable. In the court's view, the buyer was seeking a guaranteed minimum business income from the seller of the business after the completion of the transaction which had not been made part of the bargain. The APS was conditional and had provided the buyer with a reasonable opportunity to conduct whatever due diligence he saw fit. The time for doing so had passed.
As a result, the seller obtained summary judgment against the buyer for the amount owing from the purchase and an order repossessing the business. The court rejected the buyer's request for further financial records to be produced by the seller as such information had not been sought during the time provided by the APS to independently verify the income of the business.
The case reflects the difficult hurdles that a buyer of a business will face when attempting to show that a seller misrepresented-either fraudulently or negligently-its former revenue. A seller can be protected from claims for representations occurring before an agreement is signed by way of an entire agreement clause. If the buyer negotiates the right to conduct their own independent due diligence to verify financial information before closing, then the failure to take the opportunity to air out any dirty laundry will be at their own peril. A PDF version is available to download here.
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