Business Fire Sale: Exclude Financial Warranties
When a business owner is selling a business for the value of plant and equipment or less, is it beneficial for the seller to exclude any warranties in the sale contract relating to the financial performance of the business?
If a business is being sold at rock bottom, or for the cost of the plant and equipment or less in a fire sale, it is important that the seller does not leave any doors open for the buyer to re-negotiate the contract or make a claim for breach of any representation regarding the financial performance of the business.
In the circumstances, the seller should:
- not agree to any due diligence condition, and certainly not in relation to the financial performance of the business;
- if using the REIQ Business Sale Contract, delete the application of standard condition 8.1(i) which warrants the accuracy of any trading figures attached to the contract;
- similarly, delete the application of standard condition 37 of the REIQ Business Sale Contract which specifically allows for the buyer to verify the books and records of the business; and
- insert a special condition into the contract advising that the seller makes absolutely no warranties about the financial performance of the business.
A no-warranty clause does not, on its own, protect a seller who has misled the buyer. Liability for misleading or deceptive conduct under the Australian Consumer Law cannot be excluded by contract, so anything the seller says or provides about the business’s performance before the contract must still be accurate.
This way, the seller potentially removes a significant obstacle in successfully completing the sale or at least another headache to deal with.
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Joe Kafrouni, Accredited Specialist in Business Law, Kafrouni Law
Disclaimer: This article is general information only and is not legal advice. Before acting on it, get advice on your own circumstances. To the extent the law allows, Kafrouni Law accepts no liability for any loss arising from reliance on it. This article is the copyright of Kafrouni Law.
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