When a Buyer Finds Out a Contract Was Already Gone

The situation

Valentina and Liang co-owned a mid-sized logistics coordination business in Sudbury, arranging scheduling and freight coordination for clients across the North. For years they had competed for the same contracts as a similarly sized firm run by Hua, who was ready to retire and wanted to sell. Rather than watch a competitor's client base scatter to unknown buyers, Valentina and Liang decided to buy the business themselves.

The deal was structured as a share purchase: Valentina and Liang's company would acquire all the shares of Hua's company, taking over its contracts, staff, and equipment as a going concern. After several months of negotiation, they agreed on a purchase price of roughly $3,250,000, based heavily on the target company's represented annual revenue of about $2.6 million and normalized earnings of roughly $650,000. Our team acted for Valentina and Liang on the purchase, reviewing the agreement of purchase and sale, the disclosure schedules, and the closing mechanics.

Two features of the agreement mattered more than either side realized at the time. First, Hua's company made a series of representations and warranties — formal, contractual promises about the state of the business, including a statement that no client had given notice of an intention to terminate or materially reduce its business. Second, the agreement built in the standard machinery for enforcing those promises after closing: a survival period during which a claim could be made, an indemnification clause describing how losses would be compensated, and a cap limiting how much could be recovered for an ordinary breach. An escrow holdback of $325,000 — ten percent of the purchase price — was withheld from the sale proceeds at closing and held by a third party specifically to secure claims made during that survival period.

What surfaced after closing

The deal closed in the fall, and for the first several months the transition went smoothly. Then, about ten months later, Valentina and Liang noticed that one of the company's largest accounts — a client contract worth roughly $420,000 a year, close to sixteen percent of the target's represented revenue — had quietly stopped sending new work. When they asked about it directly, the client's staff explained that they had given notice of non-renewal to the previous owner more than six weeks before the sale had even closed.

That was a problem. The disclosure schedule attached to the purchase agreement had listed the contract as active and in good standing, with no mention of any termination notice. The representation Hua's company had made — that no material client had indicated an intention to leave — appeared to have been false at the moment it was made, not just outdated by later events.

Working with Valentina and Liang's accountant, our team quantified the impact. The contract's loss reduced the business's forward annual earnings by roughly $150,000. Because the purchase price had been set using a multiple of about five times earnings, that shortfall translated into an estimated diminution in the value of what Valentina and Liang had actually received: roughly $700,000 less than what they paid for, based on the earnings the business could actually support going forward.

The gap between that $700,000 estimate and the $325,000 sitting in escrow was the heart of the dispute that followed — and the terms buried in the representations and indemnification sections of the purchase agreement, negotiated months earlier and barely discussed since, would determine how much of it Valentina and Liang could actually recover.

What we did

1. Confirmed the claim was still timely. The purchase agreement gave ordinary representations, including the one about client relationships, a survival period of eighteen months after closing — meaning a claim had to be raised within that window or it would lapse entirely. At ten months in, Valentina and Liang were inside the deadline, but with limited room to negotiate slowly. We prioritized getting formal notice out quickly rather than continuing to gather evidence indefinitely.
2. Sent a formal notice of claim under the indemnification clause. The agreement required written notice describing the breach and a good-faith estimate of the loss within the survival period, as a condition of pursuing recovery at all. We prepared a detailed notice setting out the misrepresented contract, the timeline of the termination notice, and the $700,000 valuation impact, and delivered it to Hua's counsel with the supporting accounting analysis attached.
3. Assessed how the cap applied. The agreement capped recovery for an ordinary breach of a representation at fifteen percent of the purchase price — roughly $487,500 — while representations classified as "fundamental," such as those about title to the shares, were not capped at all. Hua's side argued the client-relationship representation was an ordinary one, capping any recovery well below the $700,000 loss. We reviewed whether the circumstances supported treating the misstatement as something more serious, but the representation as drafted fell squarely within the capped category, and pursuing a fraud argument to escape the cap would have meant a much longer, costlier fight with a real chance of failing.
4. Negotiated from the escrow outward. The $325,000 in escrow was the easiest money to recover — it was already held back specifically for claims like this one and required no separate collection effort. We treated it as the floor of any settlement, not the ceiling, and pressed for additional payment from Hua directly, up to the $487,500 cap, based on the strength of the documented loss.
5. Weighed litigation against settlement. Hua's company disputed the size of the loss and suggested some of the revenue decline was due to market conditions rather than the undisclosed termination notice. Taking the matter to the Superior Court would have meant months of examinations and expert accounting evidence to prove causation and quantum, with the recovery capped at $487,500 regardless of the outcome. We advised Valentina and Liang on the real range of likely results and recommended a negotiated resolution instead of a trial that could not, even fully won, exceed the cap by much.

The outcome

After several weeks of negotiation between counsel, the parties settled. Valentina and Liang received the full $325,000 held in escrow, plus an additional $105,000 paid directly by Hua's company, for a total recovery of $430,000 — comfortably above the escrow amount alone, but well short of both the $487,500 cap and the estimated $700,000 diminution in value.

The compromise reflected the real leverage on each side. Valentina and Liang had a well-documented loss and a claim made within the survival period, which gave them a strong position. But the cap meant that even complete success at trial could not have delivered much more than the settlement achieved, and Hua's company had a genuine, if contested, argument that some of the revenue softness was market-driven rather than concealed. Both sides had reasons to avoid the cost and uncertainty of litigating a dispute where the ceiling on recovery was already fixed.

For Valentina and Liang, the settlement did not make them whole for the full value of what they believed they were buying. It did, however, recover more than two-thirds of the estimated loss without the delay, expense, and relationship damage of a lawsuit against a company they now operated alongside in the same regional market. The transition of the acquired business continued, and within a year they had replaced roughly half of the lost contract's revenue with new accounts of their own.

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