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There are many challenges to running a business. From maintaining stock levels to managing employees and balancing the books, you need to ensure everything is running smoothly. If you have recently purchased a business, you may later discover facts that would have stopped you from proceeding with the sale had you known about them at the time. This article will address whether you can get your purchase money back in those circumstances.

What is Settlement?

Settlement is the stage of the sale of business process when ownership of the assets transfers from the vendor to the purchaser. This typically occurs at a prescribed date when the balance of the purchase price is paid (with any adjustments). The price may be adjusted based on rent and outgoings so that neither party is liable for the rent and outgoings owed by the other.

At settlement, business assets are transferred to you and may include:

  • tangible assets such as equipment and remaining stock; and
  • intellectual property (IP) such as a business name or logo.

If you are taking over the vendor’s lease, you will need to ensure they have obtained the landlord’s consent to transfer the lease and then complete all necessary transfer documentation (typically, a deed of assignment).

From a practical perspective, there are other aspects of settlement to consider, such as obtaining council permits or transferring utilities such as gas, electricity and EFTPOS into your name.

If you have had a sale of business agreement drafted, it should clearly describe the events and processes needed for settlement to occur.

Has Settlement Occurred?

If you want to walk away from a business purchase, it is vital to consider whether settlement has occurred. Although you may be able to get your purchase money back after settlement, it is more difficult.

Settlement in a sale of business transaction indicates that you have taken on the responsibilities of running the business, finalised the sale process and stepped into the shoes of the vendor. At this point, the sale process is complete.

Have You Waived Your Rights?

It can be difficult to rescind a sale of business and recover purchase money. However, you may be able to do so if you can show that:

  • settlement has not occurred;
  • there was a breach of contract by the vendor; or
  • another legal issue such as misrepresentation or unconscionable conduct is relevant.

However, in any case, it is vital to consider whether you may pursue your infringed rights or if you have waived your rights. If you have waived your rights, settlement is concrete and you cannot recover the money.

Take a breach of contract situation, as an example. If your sale of business agreement said that the vendor was going to transfer three beauty therapy beds and a range of other beauty therapy equipment to you, but this did not happen, it may be possible for you to claim that the vendor breached the contract and you could attempt to exit the arrangement altogether.

However, imagine that you emailed the vendor to say you now want to bring your own equipment and do not need theirs. In this instance, you had a right to the stock and equipment, but you gave up, or ‘waived’, that right. Therefore, you should not expect to receive any of those items at settlement.

Naturally, each sale of business situation is different. Therefore, it is important to consider the nuances of each party’s conduct when considering whether you have waived any of your rights.

How Can You Get Your Purchase Money Back?

Your options for recovering your purchase money will depend on whether you have a  well-drafted written agreement. It is often much simpler to prove a breach of contract or misrepresentation claim if the parties’ rights and obligations are clearly set out, and a dispute resolution process detailed, in the agreement.

In circumstances where parties rely on poorly drafted agreements, verbal conversations or fragmented written communications (such as emails), it can be difficult to build a full picture of the agreement. Accordingly, it becomes harder for you to defend your rights fully.

A Step-by-Step Guide to Getting Your Purchase Money Back

1. Review your agreement and any other communications to get a picture of your rights and obligations.
2. Provide a full background of the events to-date, in chronological order.
3. Write a letter of demand to the vendor. A letter of demand sets out your rights. It also makes a demand that the vendor must fulfill any unmet obligations or you will take further action.
4. The process following a letter of demand will depend on the action the vendor takes. You may have to communicate back and forth before you can agree to settle the matter. You should finalise the matter in a deed of settlement and release so that the dispute does not resurface.
5. Instead of sending a letter of demand, you may wish to attend mediation or litigate the matter in court. This is an option if the parties cannot easily reach an outcome. You should also consider whether you have the funds to take this route. It is worthwhile to engage disputes lawyers to assist you in reaching a commercial and efficient resolution.

 

Ultimately, the best way to resolve your sale of business dispute will depend on your:

  • particular business purchase;
  • relationship with the vendor;
  • goals for the business;
  • funds; and
  • life circumstances.

Any dispute resolution action you take should be tailored to you and your particular situation.

Key Takeaways

If you have purchased a business, only to discover previously undisclosed issues or misrepresentations, you may be able to get your purchase money back. However, it is much simpler to resolve a dispute if you have clearly documented your:

  • rights and obligations; and
  • a dispute resolution process.

If you need assistance recovering your purchase money, contact LegalVision’s business purchase lawyers on 1300 544 755 or fill out the form on this page.

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