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Posted: 2010-03-18 / Author: Bob Power

Buying A Business :let The Signer Beware

For many years, I have been coaching buyers of businesses, and giving legal advice on the wording of legal documents. Accordingly this article is given mainly from the buyer’s perspective. I would like to relate to readers some of the matters which have arose, or which I have been appraised of over the years which have or could have been extremely detrimental to the buyer. It is very much an overview put gives an insight to the play on words.

The seller’s lawyers often draw up the agreement, and the buyer believes it is saving him legal fees. This is not necessarily the case. In one case it was agreed that the legal fees would be split 50-50, although the agreement was drawn up very much is favour of the seller by the seller’s lawyers... The wise buyer must get his own advice and insert in the agreement that each party will pay its own fees. The seller’s lawyers had drawn up the agreement, which included a clause that there would be action against the buyer if he breached the agreement, but no mention was made if the seller breached the agreement. Frankly I have seen this quite a few times. The word “voetstoots” can work against a buyer. In a case in question the wording in a sale agreement the seller wanted the sale voetstoots (with all its faults). The buyer persisted and the agreement read that the seller would warrant that the business was sold in good working order and condition. Many faults were found which cost the seller dearly. Perhaps this is a case of are you buying or selling? I was recently shown a suretyship agreement, which had Latin phrases, and a clause inserted, which stated that the buyer had read and understood the agreement, which of course he didn’t. On asking the bank what the phrases meant, their advisers could not give an answer, no more said. It sometimes can work in favour of the buyer. A seller had warranted that he would be liable for any damages which arose from any claim for occurrences which took place before the effective date. A claim arose which had consequential damages, which the seller had to pay. The seller’s lawyers should have limited the warranty to simple damages-the word damages had not excluded consequential damages. In a lease agreement a clause had been inserted to the effect that if the lesser, did not report any defaults within one month of commencement then he was liable for the defaults, luckily we had inserted a clause that the same situation would apply at the end of the lease if the lessor did not report any faults within one month when taking the premises back. When the lease expired there were faults which the lessor had to cover, because he did not report them within one month. I have not seen this clause recently-I wonder why. It must be stressed that lease agreements are difficult agreement from the perspective of lessees (small business owners) and advice must be sought, especially on such matters as options, the lessor not being liable for negligence and rental increases-watch the wording closely. Further, sometimes you need the consent of the lessor if you wish to sell the business you hold as a lessee. A buyer signed an agreement as did the seller. It was found out later that the person signing on behalf of the seller not been mandated to do so. Luckily there were no significant consequences. Make sure the other party is mandated to sign. In sale of businesses agreements warranty clauses are important, from the buyers perspective the catchall clause is important “That the seller has disclosed all material facts of a deal of this nature and the price paid therefore” This clause is vital for the buyer, and the sellers lawyers are inclined to forget it. Also watch phrases such as “To the best of the seller’s knowledge and belief”-difficult to prove. What does belief really mean? Going to the beginning of the agreement, it is amazing how many times it is found that the seller is not necessarily the seller, assets are in the wrong box and the registration numbers are wrong. Check carefully. Definitions are also extremely important-I have been in court cases arguing over the definition of net asset values, stock in transit, restraints of trade, and the lawyers favourite-the word “material” To show how far misunderstandings can occur I was involved with a case where a majority shareholder retained 10% of the shares in the company which he sold. It was agreed that he would be paid out this 10% after 5 years on a price formulae calculated on net profits for the fifth year. However the formulae could be read that he was entitled to all the net profits, and not just the 10%, for the fifth year, which had not have been the intention. Eventually he settled on 30%. To conclude a buyer brought a company for R5m. There was no warranty by the seller that taxes had been fully paid etc. Tax assessments arrived and the buyer had to pay another R2m. This chapter is too short to cover all the issues surrounding the principles around drafting of legal documents, which will be for another chapter. This chapter intends just to show how you can lose out on an agreement which you did not understand, whether it was badly drafted or not. Readers are cautioned, therefore, that if you do not understand any document they have to sign; you must get advice, don’t be penny wise and pound foolish. Bob Power Corporate Consultants www.powerconsulting.co.za


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