Failure to disclose material business information, such as outstanding creditors or potential lawsuits, is a type of fraud when done during the course of buying and selling a business. Additionally, a seller may attempt to ?manipulate the books? in an effort to obtain a higher purchase price. As a result, a business may not actually be worth what was paid for it when such material business information is either misrepresented or not disclosed altogether. When this occurs, your options may include a rescission of the sale or even punitive damages. An experienced California business attorney can help evaluate your options when the business you thought you were purchasing does not meet the expectations set by the seller.
Conducting Due Diligence When Buying a Business
Sellers always want to sell their businesses ?AS IS? and routinely disclaim any warranties and representations in a purchase agreement. As a result, a buyer is normally given what is called a ?due diligence period? where the buyer is given the opportunity to satisfy himself or herself with the true value of the business and conduct an independent investigation involving all areas of the business operation. This usually includes a thorough review of the following:
- All financial records
- Tax records
- Employee files
- Legal compliance issues
- Licensing and permitting issues
- Outstanding or threatened litigation
- A detailed review of the lease and other third party contracts
- Creditor liens and releases
Most of this information is generally supplied by the seller, subject to a confidentiality agreement. The buyer must examine the information provided by the seller to determine whether the purchase is right for the buyer. Usually a seller will give a buyer 30 days to accomplish this. But, of course, the strength of the buyer?s decision lies in the validity/correctness of the information supplied by the seller.
Seller Nondisclosure: Misrepresentation and Fraud
When the information provided to the buyer is incorrect, misrepresents key information, or omits it altogether, the duty to disclose and provide necessary information by the seller is not met. If a buyer agrees to purchase the business in reliance on the bad information, he or she may have a claim against the seller to rescind the purchase as well as monetary damages. An experienced San Diego business purchase attorney can review your situation and discuss your options with you.
Learn more about business fraud or starting or buying a business.