White SW Computer Law
Intellectual Property, Information Technology & Telecommunications Lawyers
Melbourne Office - PO Box 452, COLLINS STREET WEST Victoria 8007 Australia
Sydney Office - GPO Box 2506, SYDNEY New South Wales 2001 Australia
Telephone: Melbourne Office - +61 3 9629 3709 Sydney Office - +61 2 9233 2600
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Email: wcl@computerlaw.com.au Internet: http://www.computerlaw.com.au

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White SW Computer Law Intellectual Property, Information Technology & Telecommunications Newsletter - January 2004

The importance of doing your own enquiries

You agreed on a price, signed an agreement and handed over the reins to your business - so what could go wrong? The sale of a business can be fraught with dangers for both vendor and purchaser. In a case where it all went wrong for the purchaser, the parties involved ended up in the Federal Court to have the matter decided.

The purchaser had entered into an agreement to purchase the vendor's business and also agreed to pay the vendor commissions on sales of software licences and software maintenance fees. Prior to this agreement, the purchaser had previously acquired another business, which used the vendor's software. Obviously the purchaser was impressed by the software used by that business and decided to buy the vendor's software development business.

Within two years, the purchaser had commenced litigation claiming they had been misled in relation to the forecast profits of the software development business, the stages of development of the business's various software products and the business's clients' commitment to the business's software products.

In their defence and cross-claim, the vendor and one of the vendor's employees claimed that the purchaser had conducted its own due diligence inquiries prior to the purchase of the business, including a technical review of the software. They also claimed that the purchaser was a company which was experienced in the sale of software, including selling software under licence from the vendor and had officers who had been previously involved in the operations of the vendor's business.

The court found that when the purchaser had asked the vendor's managing director for his financial projections for the business, they had not asked for future profitability in the event that the business was acquired and operated by the purchaser, rather the figures supplied had been prepared on the basis of the vendor continuing to operate the business.

The software involved was used in the labour hire and recruitment market, and the potential sales were affected following the information technology downturn in 2000 / 2001. So who was to blame for the drop in sales? Should the vendor's predictions of future profits been more accurate? The court did not think so.

The business sale agreement was executed without the most recent financial reports being supplied and it was held that the sale agreement was not dependant upon the provision of those financial reports. The court found that the purchaser had made its own assessment as to the likely future market for the vendor's software products, with the assistance of its own advisors.

It was also highlighted by the court that the purchaser had attempted to develop the vendor's software products in accordance with the wishes of clients, using staff who were inexperienced in the requirements of the requested enhancements and that the purchaser's staff lacked knowledge of the vendor's software's functionality, which in turn led to additional man hours being spent to solve customer complaints.

A purchase of a business is a complex transaction and a thorough list of all the vendor's business's liabilities and assets needs to be prepared and verified so that the purchaser fully understands the value of the asset they are acquiring. A range of tax issues need to be considered, including GST issues and comprehensive accounting and legal assistance should be sought to assist in the purchaser's assessment of the sale price.

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