The decision to buy a business is a major life step, full of promise but also significant risk. You sign a purchase contract intending to move forward, but sometimes, during the process, facts emerge that make the deal seem suddenly unwise. Knowing when to stop and walk away before the closing date can save you substantial time, money and legal trouble.
Significant discrepancies in financial records
You rely on the seller’s financial representations to determine the business’s true value. If the books show major inconsistencies, you have a problem.
A business purchase in Texas is typically an “as is” transaction. This means the buyer accepts the business with all its existing flaws, known or unknown.
A seller commits material misrepresentation when they provide false information that influences your decision to buy. This gives you strong grounds to terminate the contract and potentially sue the seller.
Failure to provide complete due diligence access
Due diligence is your right to fully investigate the business before closing the deal. This includes reviewing all financial, legal, and operational documents. The seller must cooperate fully with your requests.
A serious issue likely exists if the seller repeatedly delays, hides or refuses access to important documents. If the purchase agreement has a due diligence contingency, the lack of cooperation from the seller may give you a clear exit.
Undisclosed or new lawsuits and liabilities
A pending lawsuit can quickly drain a business’s cash and reputation. During your initial review, the seller must disclose all existing or threatened litigation, as you buy the business and its liabilities.
In Texas contract law, the contract often contains representations and warranties. These are promises the seller makes about the business’s legal status. A breach of these warranties, such as failing to disclose a lawsuit, usually allows you to end the agreement without penalty.
Inability to secure financing as planned
Most business purchases depend on the buyer securing a loan. The purchase contract should include a financing contingency clause that protects you if your lender declines your loan application.
If you cannot secure the necessary funding despite your best efforts, the financing contingency lets you terminate the contract. Without this clause, you risk losing your earnest money deposit or facing a lawsuit for breach of contract.
Essential employees or customers suddenly leave
The value of many businesses lies in their key personnel and customer base. You bought the business assuming these relationships would continue after the sale. The loss of critical employees or major clients before closing can fundamentally change the business’s value.
A Material Adverse Change (MAC) clause allows you to terminate the contract if a significant, negative change affects the business between signing and closing. The sudden departure of a manager or a top customer may make the deal no longer worth the agreed-upon price.
Clarity and guidance are critical
The decision to walk away from a business purchase contract is never easy. However, proceeding with a bad deal is always worse. If you encounter any of these red flags during your acquisition process, it is imperative to enlist the help of someone who can review your situation and guide you toward a legally sound decision.