The provisions of a business sale agreement are governed by the laws of contract, so it is what is in the terms of the contract which will apply. For a claim against the seller, you're looking at warranties and disclosures.
Without a thorough review of the contract of sale there can't be an attempt to make a definitive suggestion of whether there has been a breach. However, assuming you've used the 'standard' REIQ business sale contract then, for example (clauses are references to the standard conditions of sale):
- Clause 37: The seller is obligated to provide the books and records of the financial accounts of the business for verification within 3 business days of the contract date, and the buyer has 10 business days from the date of contract to determine satisfaction;
- Clause 8: The seller makes certain warranties under the contract unless otherwise disclosed, including:
(i) The trading figures and financial data are true and correct in every particular;
(k)(ii) If the seller is a corporation there has been no action taken by or against it which could lead to its winding up; and
(k)(v) If the seller is a corporation no compromise or arrangement has been proposed between it and its members/creditors, nor sanctioned by the court.
So, really, there's not much in there. That's why most contracts include a due diligence special condition. Again, it depends on what is in the clause.
Whether the particular issue was discoverable by search or on the documents disclosed is likewise unknown. With respect to searches, if the court action wasn't yet commenced or was in the Magistrates Court there's no search that could have discovered it - yet District and Supreme Courts do have a search available.
Whether the dip in business was discoverable from the company records is unknown - that may have signposted it. Any dip could also have been factored into the price however.
Unless there was a particular condition requiring disclosure of disputes about the business, or between the seller and staff, there would be no obligation on the seller to disclose. And such conditions are rare.
That being the case, any dispute is presumably between the seller and the manager - and the only effect on you is the loss of trade. It's arguable to a proper review of the trading figures should have disclosed at least the effect of the drain by the manager.
With respect to 'setting foot on the property' this is neither a necessity in most cases nor a guarantee that the situation would have been discovered. I do many due diligences without leaving my office. Sure, there are some that require a field visit but these tend to be few and far between, or better handled by the client being prepped on what to look out for. In most cases a buyer wants to know something about the business before buying; including what level of trading it should be doing.
One further aspect is that of the employees. The standard contract is framed to facilitate the buyer making an offer of employment to the business' employees, and this is best done by an interview process of each employee. Any bitter resentment may have been able to be picked up in that process.
