Selling a Business? Beware of Misrepresentation

Introduction

Selling a business is a complex process that requires transparency, accuracy and legal compliance. During the process of selling your business you will need to provide information regarding the business including financial information, liabilities, supplier details and other relevant information.

As a vendor, you need to ensure that in this process you are providing accurate and true information. If you instead provide false or misleading information, you could be engaged in misleading and deceptive conduct, which the purchaser could pursue you for.

This article will explore the key issues and highlight what you need to be aware of when selling your business.

Accurate and True Information

As mentioned above, you are required to provide a variety of information when selling your business and it is incredibly important that this information is accurate.

The purchaser will use this information to determine whether they wish to proceed with the purchase, help them determine the value of the business and once completed, allow a smooth transition to enable the purchaser to continue operating the business.

Representation and Warranties

In addition to the above, you will find that most, if not all, agreements relating to the sale of a business will include provisions requiring both parties to give representations and warranties. Representations and warranties are essentially promises that each party is making to the other.

You may try and limit your liability in relation to the representations and warranties by including provisions to state that the purchaser should not solely rely on the information you provide and they need to conduct their own enquiries. However, courts have not always agreed with this defence in the past, given that some of the information provided by the vendor is information that can only be obtained from the vendor (ie. financials).

However, the purchaser will also often require you as the vendor to include a warranty or representation stating that the documents provided about the business are true and accurate.

Should the information provided not be true and accurate, or it is found to be misleading, you would be in breach of these warranties and the purchaser could pursue you for breach of contract.

Proving Misleading and Deceptive Conduct

To establish that you have engaged in misleading and deceptive conduct in the course of selling your business, the following will need to be shown:

1. The conduct occurred. The purchaser will need to establish that you engaged in the relevant conduct that is alleged to be misleading or deceptive. This would include showing that you did provide the information that is alleged to be misleading or deceptive;
2. Whether the conduct occurred ‘in trade or commerce’. This is a broad concept and the transaction of selling a business is likely to fall within this; and
3. Whether there is a ‘real and not remote’ chance that the conduct will mislead or deceive. This consideration does not take into account whether the conduct was intentional but rather whether it will mislead or deceive generally.

It is worth noting that in some cases the court has found that a vendor cannot defend against these claims on the basis that the information was prepared for them and it was accurate as far as they were aware. A common example here would be in relation to financial statements prepared by an accountant. This example was also specifically seen in the case of QVB Pharmacy Pty Ltd v Le [2022] NSWSC 1612.

Conclusion

Engaging in misleading and deceptive conduct when selling your business is not just a matter of ethics but can result in significant legal and financial consequences.

When selling your business, it is important that you confirm the accuracy of the information you are sharing and the accuracy of the representations and warranties you are making.

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