Jacob is interested in buying a small retail clothing business called ‘Sport ‘n Surf’ in
Cronulla. One Saturday, Jacob runs into two former school friends, Rose, who owns
a hairdressing salon in Cronulla and Geoff, who is a business broker specialising in
matching prospective business buyers with sellers in the hotel sector. Jacob tells
Rose and Geoff that he is considering buying the business. Rose tells Jacob that
Cronulla is booming and that the business is sure to do well, as everyone in Cronulla
surfs and plays a sport of some description. Geoff, who is not an accountant, offers
to have a look at the books of the business and give Jacob his view. The books of
the business have been prepared by Water Accounting Services, the business’ usual
accountants. Geoff inspects the books and tells Jacob that the business is doing well
and that it made a profit of $120,000 last year. In fact, due to an error by Water
Accounting Services, the profit was reported as $120,000 when in fact it was
$12,000. Geoff advises Jacob that based on the past profit disclosed in the
accounts and his own observations of the business, the purchase price sought by
the sellers at $250,000 extremely reasonable.
Jacob bought the business for $250,000 and at the end of twelve months is very
disappointed to find that his profit was only $12,000. He learns from other business
brokers that a reasonable purchase price for the business, even based on a profit of
$120,000 would have been $200,000, but clearly less if based on a profit of $12,000.
Discuss whether Jacob may have been owed a duty of care on the above facts, and
if so, by whom. Fully explain your answer.
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