Buffington Law Firm's business trial lawyers have frequently dealt with lawsuits deriving from business disputes involving the purchase and sale of a business. These lawsuits typically occur when the buyer believes that the seller concealed or misstated some material fact concerning the nature of the business. Alternatively, the buyer may simply not carry out some of his or her obligations set forth in the purchase contract, such as making installment payments against the purchase price if the contract calls for this. In either context, litigation is common.
In a business purchase and sale transaction it is critical that the seller ensure that he or she has disclosed all material facts concerning the business. Failure to do so, i.e. nondisclosure of a material fact, can lead to a lawsuit based on allegations of fraud. [See generally California Civil Codes Sections 1709, 1710]. Unfortunately lawsuits making this type of allegation against a business seller are very common. This is sometimes due to deliberate (or even unintentional) concealment of facts by a seller. Sometimes, however, buyers of a business rush through the due diligence phase of the transaction and are overconfident that they "know what they are doing." There is sometimes a tendency for buyers to focus on obtaining financing for their purchase rather than to take a deep breath and really understand the business that he or she is purchasing. There is no "magic formula" for avoiding fraud (or a misunderstanding) in the sale of a business, but here are some tips:
- Always understand why a seller is selling. Be skeptical if it is for "health reasons" -- especially if the seller looks healthy.
- Ensure that revenues and expenses as reported on the financial statements are accurate. Do the bank statements support the reported revenues? Have your reviewed actual tax returns filed with the IRS that support these numbers?
- Are any expenses (example, a lease) about to change dramatically?
- Are there issues with key employees staying or leaving?
- How will customers react to a change in ownership? This is often critical.
- How hard did the seller work when he or she owned the business? Is the buyer prepared and able to do the same?
- Does the purchase and sale agreement protect the buyer from the seller? Is there an enforceable non-competition provision in the contract?
- Has the seller had a lawyer review the contract?
This short list is by no means complete.
Not uncommonly, sometimes sellers deliberately misrepresent, or fail to disclose, some critical aspect of the business. This, of course, gives rise to a fraud cause of action as well as an action for breach of contract. In other lawsuits that our Firm has handled, the buyer simply ignored one or more of the above issues through no fault of the seller. Customers may not warm up to the new owner. The new owner may not "go the extra mile" for customers the way the previous owner had to do. Not uncommonly, the new owner is simply not as good at running the new business as was the founder. This leads to a disappointed buyer and frequently, a lawsuit.
If you have a business dispute involving the purchase and sale of a business, you may speak directly with one of Buffington Law Firm's experienced Orange County business litigation attorneys in a free legal consultation. We will review your case and advise you as to how we can help. There is never any cost or obligation, so call us today!