A salesperson knows that landing a big customer may be a consuming passion, but as soon as the customer is secured, the focus suddenly shifts to retaining the customer.  Similarly, business owners acknowledge they are initially preoccupied with price and finding a suitable buyer, but once they find a buyer who will pay an acceptable price their thoughts turn to how they will be able to keep it.  The buyer’s default on a promissory note is always a concern, but a seller’s greatest fear is a claim by the buyer that the seller misrepresented or failed to disclose important facts about the business.  If the buyer is correct, the seller may never receive any payments on the promissory note, or even worse, may have to return part or all of the money he has already received.

Are You Borrowing or Keeping the Purchase Price?

If a seller plans to keep the purchase price he must keep the contractual promises made to the buyer.  Misrepresentations and omissions by the seller often breach the sales contract and enable the buyer to forgo future payments and perhaps recover what has been paid.  Some sellers mistakenly conclude that the buyer’s only remedy is to stop payments on the note, but in some cases buyers can rescind the sale and demand repayment of all monies paid to the seller.  This, of course, is the seller’s worst nightmare.

Trading Headaches for Ulcers

Clearly, the psychological relief of unloading the business and its related problems and stresses is one of the prime motivators for selling.  If business owners did not have to worry about business downturns, loss of key customers or employees, shifts in demand for their product or service, personnel problems, and daily aggravations they might not sell at all.  Owners who are not careful, however, may subject themselves to a whole new set of worries after the sale.  These new worries may be worse in fact, because the former owner has no control over what has already occurred.

Sleeping Better After the Sale

By far the best protection against post-sale insecurities is pre-sale investigation by the seller.  A seller who conducts his own due diligence will be able to detect problems before the closing and resolve it or disclose it to the buyer.  Unfortunately, many business owners don’t even want to read the representations made by them in the contract.  They think of the contract as legal mumbo jumbo that will be handled by the lawyers.  Nothing could be further from the truth.  (Well, of course, there is mumbo jumbo, but the lawyers aren’t signing the representations; the business owner is.)  It is imperative that the business owner read and understand every statement of fact and every disclosure and supply any missing information.  It is preferable to disclose more than is necessary than to omit something.  For more information on this topic I suggest you read Disclosure, a chapter written by David Bishop in The Handbook on Buying and Selling Small to Mid-sized Companies.

Worst Case Scenarios- Contractual Protection

Business sellers chaff at the idea that the buyer will come back to them every time an innocent misstatement or omission is discovered.  Setting a threshold in the contract that the damages must exceed is one way to minimize this aggravation.  Sellers also routinely limit the period of the representation period so that claims must be made within a reasonable time after closing, such as one to two years.  The contract will not protect a seller from gross misrepresentations or omissions.

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