What Happens if You Breach a Contract to Purchase a Business

Beware, a Breach of Contract Can Cost You Money, and Lots of It!

A business purchase contract is formed when a party makes an offer to buy a business and the seller accepts the offer upon the same terms that the offer was made. For example, if you or your company offer to buy a business from a seller for $100,000 in cash, closing within 60 days and the seller accepts your offer, there is an enforceable contract for the purchase of that business.

Chances are that you will enter into several additional but closely related contracts when you decide to make an offer to purchase a business, including:

  • An assignment of lease agreement or a new lease agreement to locate and operate the business
  • An agreement to purchase materials, equipment, and supplies for the business
  • An agreement to build, renovate, or have built a structure to operate the business
  • An agreement to finance the purchase of your business with a lender, i.e., a commercial bank
  • A sales agreement with your customers
  • An agreement to employ people or consultants

When you buy a business, you may agree to assume the obligations of the sellers’ outstanding business contracts unless you specifically omit these contracts/obligations in the purchase agreement.

Each party to a contract is responsible for fulfilling the terms of the contract. A failure to perform the obligations of the contract by either the seller or purchaser is called a breach of contract.

Statute of Frauds in the Purchase of a NJ Business

It is always best, and generally required, to have a contract for the sale or purchase of a business in writing. New Jersey has laws called the Statute of Frauds that lists the types of contracts that must be in writing to be enforceable. The purpose of these laws is to prevent fraudulent claims.

Breach of Contract in New Jersey: What is it?

A breach of a contract will generally terminate the obligations between the parties to a business contract. A breach occurs when either one or both parties have failed to perform their obligations and promises under the contract. A breach may occur when the business:

  • Refuses to perform the terms of the purchase or sale listed in the business contract
  • Does something that the contract prohibits
  • Prevents the other party from performing its obligations under the contract

Not all breaches of contract, however, end up in a NJ court or qualify as an actionable breach of contract.

NJ law distinguishes between different types of breaches. For example:

A material breach of contract gives rise to a claim in court. A material breach is a serious one; it is a breach that goes to the heart of the contract. The injured party can seek damages — damages are money payment(s) adequate to cover the economic losses resulting from the breach of contract.

For example, suppose your contract proposes a closing date of July 1st but instead the seller calls you and says he can’t close till September 30th? The seller that was supposed to close the contract July 1st has materially breached the contract to perform and can be held liable for damages caused by the delay until September 30th.

Damages Under a Breach of Contract Case

A damages award for a contract breach for the sale or purchase of a business depends on many factors. Courts will usually only award money damages if the damages are provable and foreseeable. Foreseeable damages are those that could be anticipated or should have been anticipated at the time the contract was created. New Jersey courts place the innocent contract party in the same position he or she would have been had the contract been performed as promised and not breached.

Specific Performance as a Remedy for Breach of Contract

There are some situations in which money damages are inadequate. Because real estate is unique, for example, one cannot simply go out and buy the same property. In such cases, the courts may specifically order the breaching party to perform the obligation required by the contract, namely, to sell the real estate. This remedy is called specific performance. Specific performance is used only in rare cases.

Liquidated Damages as a Contract Remedy

Liquidated damages are damages specified in the contract itself. For example, if you want to close title on your new business by a certain date and in time for a big sales promotion, you should include a provision in the contract providing that the seller must pay you $100 (it can be any reasonable dollar amount) per day for every day after the closing date that the sale has not closed.

Fredrick P. Niemann Esq.

Courts disfavor liquidated damages clauses and will not enforce them if they are grossly unfair. If you include a liquidated damage clause in a contract, you must be careful to ensure that it is a reasonable forecast of your damages.

If liquidated damages are being included in your NJ contract, speak with an experienced NJ contract law attorney. You can reach Fredrick P. Niemann, Esq. toll-free today at (855) 376-5291 or email him at fniemann@hnlawfirm.com.

Fredrick P. Niemann, Esq. NJ Buying a Business Lawyer

Compensatory Damages are the Typical Remedy in a NJ Breach of Contract Case

Compensatory damages help compensate you for your economic loss caused by a broken contract.

For example, Mr. Smith signs a contract to buy 10 hours of computer services from High Tech Computer Consulting, LLC for $50 an hour. If Mr. Smith breaks the contract and does not use any of High Tech’s services, compensatory damages paid to High Tech would be $500, which is the economic loss they suffered. Ten hours plus $50 per hour.

If High Tech, LLC breached the contract and Mr. Smith was forced to hire another service for $60 an hour, compensatory damages paid to Mr. Smith would equal $100 ($10 an hour times 10 hours, the difference in price between the original contract and the new contract).

Consequential Damages are Generally Not Available in a Breach of Contract Case

The consequential damages are additional damages caused indirectly by the broken contract. Consequential damages in a contract setting can be very significant.

For example, say a retail store buys customized software to run its cash registers and inventory system. One day the system breaks down completely. As a result, the store must close for the day to repair the system. The store’s loss of business for that day is a consequential damage of the broken contract.

Threatened by a breach of business purchase contract in NJ? Have questions about what you just read? Then contact Fredrick P. Niemann, Esq. toll-free today at (855) 376-5291 or email him at fniemann@hnlawfirm.com. He welcomes your inquiries.


Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, New Jersey Buying a Business Attorney