I was duped into buying a business a flawed business. What recourse...

I was duped into buying a business a flawed business. What recourse do I have?

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I was duped into buying a business a flawed business. The seller has also established a rival business close by and is trying to poach my existing customer base. What recourse do I have?

There isn’t much you can do. The only remedy currently available to individuals who purchase a business and who has not received full disclosure of the costs and repairs associated with the purchase would be a contractual one.

The success of any such action would be determined by the ability of the buyer to show that the seller misrepresented what she was purchasing and it was a material misrepresentation that had she been aware of, she would not have bought the business in the first place.

Beware the “voetstoets” clause

“It is extremely difficult when someone does buy something “voetstoets” because, to a large extent, the buyer relinquishes their rights to claim for or to complain about defects in the product or item purchased,” says Rosalind Lake of Deneys Reitz Attorneys. It is important to read contracts carefully to find out if a restraint of trade clause should be included in the agreement.

“With regard to the sending of ‘smses’ to the existing customer base of the Laundromat purchased in order to promote another Laundromat, this will only be considered problematic if the customers were explicitly included as part of the business sold by the seller, or if there is some sort of confidentiality undertaking or restraint of trade clause within the sale of business agreement,” advises Lake.

“It is important to ensure that one doesn’t come to any arrangement with the seller regarding Laundromat customers in the same area (such as stay away from my customers or don’t solicit my existing customers) as this can constitute customer allocation which is a very serious contravention of the Competition Act”.

Conduct a thorough due diligence

“My advice to individuals purchasing businesses in particular would be to take sufficient time to ensure that they are purchasing exactly what they have been promised. In many circumstances, in order to avoid problems down the line,” recommends Lake.

It is well worth obtaining legal advice before signing the contract and also procuring the services of an auditor or attorney to conduct a ‘due diligence’ can be a way to ensure that you are not sold a lemon.

Always get warranties

In addition, a lawyer should advise you to obtain warranties from the seller regarding particular issues and this will make it far easier to prove when something goes wrong,” she says.

For example, you would obtain a warranty from the seller that the business will turnover a minimum amount monthly, or that there are no outstanding creditor issues, or that there is no pending litigation against the business.

“There are many instances where a seller will just want to get rid of a business (and the haste with which they want to sell it is often a good indication that something may be amiss) and in order to do so will avoid disclosing any factor that would make someone reluctant to make the purchase,” says Lake.

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