Buying a business is a huge investment that must go smoothly. However, in some cases, vendors may accidentally or fraudulently misrepresent facts. Such facts can significantly affect the deal and could change your mind. Moreover, it can be a breach of contract. You can mitigate risks of vendor misrepresentation through due diligence. This article will outline what vendor misrepresentation is and how you can mitigate it.
What is Vendor Misrepresentation?
A misrepresentation is when the seller makes a false statement or claim that influences you to enter into a contract. Some misrepresentations can be innocent or purposely fraudulent. This depends on the vendor’s intention and whether they know the falsity. Moreover, if you have suffered a loss from the misrepresentation, you are entitled to damages under the Contract and Commercial Law Act 2017.
Check Warranties
Warranties can help reduce the number of misrepresentations, although vendors will try to give minimal warranties. Warranties can include:
- solvency: ensures that the business can meet its financial duties;
- accounts: confirmation that the business has prepared its accounts according to accounting standards;
- accuracy of information; and
- litigation: guarantees that the business is not subject to legal action or investigations.
Conducting Due Diligence
Before buying a business, you must conduct due diligence. This will enable you to investigate a business’s affairs before deciding. The vendor will often require you to sign a non-disclosure agreement before reviewing the business documents. This agreement will prevent you from sharing confidential information with others. You can review the following:
- financial records;
- key contracts;
- employment liabilities;
- intellectual property rights;
- client base; and
- property lease.
When reviewing documents, you can acquire the help of your lawyer and accountant. Further, you can inspect the property and equipment in person.
Misrepresentations Before Settlement
Most business sale and purchase agreements (SPA) have a time frame during which you sign the SPA and when the sale becomes complete. During this time, you can terminate the SPA if you discover any vendor misrepresentations compared to what you noted during due diligence. You can notify the vendor of the breach and give them time to resolve it.
For example, the vendor may provide you with a warranty stating that the business owns all the IP and they do not own it personally. Your SPA can state that if IP assignments issues are resolved within seven days, a breach will not occur.
Before terminating the contract, you must check that the SPA states that the vendor must refund the deposit in this scenario.
This guide will walk you through the due diligence process when purchasing a NZ business.
Misrepresentations After Settlement
Some warranties will apply after the settlement date. However, most vendors will state how long the warranty will last to ensure the claim is not indefinite. Generally, their liability will cap at certain amounts; however, you can negotiate this with them.
If you have suffered a loss from a breach of warranty, the vendor will have to compensate you. However, the compensation and indemnities may be subject to constraints outlined in the SPA, such as time limitations and the maximum amount you can claim.
Key Takeaways
A vendor misrepresentation occurs when the seller makes a false statement or claim that causes you to suffer a loss. You can mitigate this issue by ensuring sufficient warranties and conducting due diligence. If you discover a misrepresentation before the settlement date that the vendor cannot resolve, you may be able to terminate the SPA. If the loss occurs after the settlement date, the vendor may be obligated to compensate you, although this may be capped at a certain amount.
If you need help understanding vendor misrepresentations, contact our experienced business lawyers to assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today at 0800 005 570 or visit our membership page.
Frequently Asked Questions
How can I reduce vendor misrepresentations?
You can reduce misrepresentations by ensuring the seller provides you with robust warranties. Moreover, ensure you conduct due diligence on the business to identify any issues beforehand.
Can I get damages in case of a misrepresentation?
If you have suffered a loss and can prove this happened due to the misrepresentation, there is a high chance the vendor will owe you damages.
We appreciate your feedback – your submission has been successfully received.
