buying a business: revenue lower than when negotiating

[Leonp]

hi

Recently bought a business. Will take ownership in 2 weeks time.

while negotiating price (6 weeks ago), seller confirmed in writing the revenue and contracted customer base at the time. This week we rechecked the latest numbers, and it is about 25% less (both revenue and contracted customers. contract is term based but with exit clause). apparently a number of clients exercised the exit clause when they heard about transfer of ownership.

i want to hold seller to the agreed number of contracts, but there is really nothing seller can do in remaining time to resign 25% of revenue, so can i renegotiate purchase price or should i walk away and loose a significant deposit. we are convinced we can rebuild the lost client base within 4 to 6 months.

any ideas

[flaker]

Have you signed a purchase/sale agreement? Are there any clauses stating something to the effect that seller makes no representation as to revenue/turnover etc.

i will simply not walk away. it might not be as simple as just losing the deposit, the seller can hold u responsible for balance of the purchase price.

Everything depends on what is contained in the agreement. it appears obvious that you have not consulted an attorney. perhaps this might be the time to do so

[sterne.law@gmail.com]

Did he disclose the exit clause options?

[Dave A]

Another suggestion that might be worth exploring -

while negotiating price (6 weeks ago), seller confirmed in writing the revenue and contracted customer base at the time.

Ask for the last 12 months VAT returns. If the seller was foolish enough to misrepresent their performance, the VAT returns often show this up pretty well.

[Leonp]

thanks all

The purchase agreement shows the numbers at the time of negotiation, but no exit clause and no confirmation or negation re maintaining those numbers. The seller has committed to investigate the original numbers vs what we have now, but has indicated she is not going to take responsibility for any discrepancy. Our gut feel is we were inexperienced going into this and should have tied this clearly into the agreement. We may be able to enforce this legally but it will take time and money and probably destroy the business anyway, so given our confidence to recover it by year end, i think were going to pay some school fees and live with it.

[Leonp]

Another suggestion that might be worth exploring -


Ask for the last 12 months VAT returns. If the seller was foolish enough to misrepresent their performance, the VAT returns often show this up pretty well.

Hi Dave. yes we checked this and it was fine until 3 months ago. im sure it will show a different picture now.

also, what we've realized, is that where clients choose to exit the contract, they get to pay and exit fee. off course the seller will just take this fee now as it doesn't affect her later, i.e its free cash for seller now and we carry the burden as buyer

[IanF]

Some businesses are sold on the basis of commission on sales for the next few years payable out of the sales. That can negate this.

[HR Solutions]

Another suggestion that might be worth exploring -


Ask for the last 12 months VAT returns. If the seller was foolish enough to misrepresent their performance, the VAT returns often show this up pretty well.

This is a very good way to find out a lot about the company when you compare vat returns to the turnover they say they are doing etc etc etc.

[CLIVE-TRIANGLE]

I have personal experience with this type of thing; but in my case it was deliberate or careless misrepresentation.

In any event, the misrepresentation led directly to an overstatement of goodwill.

In fact, had I known the true state of affairs I would not have contracted in the first instance.

The truth only came out some 8 months after I had taken ownership. I subsequently sued for overstatement of purchase price and consequential damages and won.

The point to bear in mind is that initial representations made by the seller regarding performance cannot simply be negated by the usual clause in the eventual sale agreement whereby the seller makes no warranty etc etc. If the seller misleads you at any stage prior, then it is what is, misrepresentation. And that has consequences.

From what you say the seller did not misrepresent the figures, but that the pending sale impacted on them down the line?

[Dave A]

Perhaps another issue to interrogate is why are existing clients terminating their contract?

If a proper hand-over process is in place, it really shouldn't be as a result of the change in ownership. Ordinarily existing, happy clients will take a "wait-and-see" approach if they get to hear about a change in ownership. Jumping ship before the event is... a bit unusual.

[flaker]

".......will take a "wait-and-see" approach if they get to hear about a change in ownership. Jumping ship before the event is... a bit unusual."

I would imagine there would be a restraint of trade clause in place ??

[Dave A]

There could be plenty of perfectly valid reasons contributing to a drop-off. For example, if you're a supplier to the metals industry right now, a drop off would not be surprising at all.
If you were a supplier to the platinum mines during their big strike this year, sales probably did not so much drop as plummet.

I'm just suggesting areas to examine. No use paying school fees if you don't get around to understanding the lesson.

[Leonp]

not sure i understand. commission to the seller based on future sales. makes sense but i believe its a bit late now. the damage has been done.

had a looong conversation with seller yesterday and she insists all cancellations are valid.

[Leonp]

yes i agree. we don't supply the metals industry but we revenue from salary earners in the industrial sector, so im sure its related. This can be negated though, by engaging the individuals who want to cancel and offering them a 3 month pause in contract responsibilities or a reduced fee, etc, on a case by case basis. This was not done though, and we weren't given a heads up or opportunity to intervene. We've now taken over all cancellations to stop the exodus.

[Leonp]

2 things:

its a franchise, so she cant compete directly in restricted area.
and the base for selling is her intention to move to cape town and run same franchise there.