Is it ever ok not to disclose information when selling a business?
When buying a business and assets, the default position is that everything is “sold-as-seen”.
This means that, whilst a prudent buyer will want to exhaust the due diligence process in order to obtain as much knowledge as possible about the business, a seller may be cautious about revealing a particular issue so as not give a buyer leverage to negotiate a reduced purchase price.
But what are the consequences of non-disclosure?
In the sale contract the seller will make a number of contractual promises (warranties). Each of these warranties will state a specific fact about the business or its assets at the time of sale. If any of these statements later turn out to be untrue, and the value of the business and assets is less than the buyer paid for them as a result, the buyer can sue the seller and claim the amount of the difference.
One of the ways that a seller can guard against this risk of future litigation is by making information formally available to the buyer, through what is known as a disclosure process. The principle is that, if the buyer is aware of something that contradicts a warranty and still goes ahead with the transaction anyway, it cannot then sue the seller for the breach of that warranty on the basis of the information disclosed.
There is no doubt that non-disclosure will always carry risk, but that risk is significantly increased if the information is simply swept under the carpet and legal advice is not sought.
It is always best to disclose the full details to your legal advisor so that they can advise you on the merits of disclosure vs nondisclosure. They will be able to guide you through the potential costs, consequences and likelihood of any claim, looking at issues such as whether the buyer can establish a loss and whether there is sufficient evidence that they have mitigated that loss.
Consideration of these issues will then enable you to receive detailed advice and guidance, which in turn can help prevent future litigation, saving both reputational damage and financial cost.
As always, if you need commercial and pragmatic legal advice, we’re here to help so please get in touch.