The best way to complete a discussion of how to buy a business, is to discuss how to sell a business. If you have not yet read my blog post about buying a business, I recommend you do so for reference.
Representations & Warranties in the Sale of a Business
There are aspects in selling a business which are in direct conflict with what a buyer wants when buying a business. This situation calls for a negotiation of the extent to which Representations and Warranties are made: are they to be thorough, or limited in scope? You need an attorney with experience in drafting purchase and sale contracts, and, even better, who has experience in litigating the consequences of alleged violations of the Representations and Warranties.
When a buyer inspects a business to determine whether to buy, the buyer will address many of the same circumstances that are covered by the Representations and Warranties. Typically, the buyer will ask questions about the business. While the seller will tell the truth, it is also important that the seller is careful to give complete answers. Sellers should not be tempted to conceal negative facts about the business. Otherwise, the seller may find himself or herself in the midst of a lawsuit. Of course, the buyer wants broad Representations, to catch what the seller did not mention, and to get what the seller said in writing. On the opposite side of the coin, the seller wants narrow Representations, as the more the seller says, the great his or her chance is for unintentional error.
There is some safety, however, in adding a certain provision to the purchase and sale contract. These provisions may state that the buyer may not rely on anything said or written before the contract was signed. The Representations and Warranties are the sole basis for litigation. What is in the contract is enforceable. What is a different, pre-contract representation, or omission, is unenforceable. This is especially important when the buyer alleges that the seller committed fraud in the pre-contract representations.
My next post will discuss other aspects of selling a business, such as covenants not to compete, not to solicit, and not to disclose.