Can you sell your business during a lawsuit?

While it is certainly not impossible, it’s going to be an uphill battle trying to convince your buyers otherwise.

In this post, we take a look at the issues you need to address if you’re facing litigation but are still intent on going ahead with the sale.

Issue #1 Disclosure of litigation details to your buyers

You have an implied obligation as a seller to inform buyers of any lawsuits.

Perhaps you the business owner have been implicated in a filing and you’re personally named in the lawsuit but the company name is not.

Or, it may happen that you and the business are both implicated in the claim.

Regardless of which of these two lawsuits you’re facing, it’s imperative to tell potential buyers about it. Failure to disclose the fact that you’re being sued can lead to a secondary lawsuit post-closing from the buyer for misrepresentation.

Issue #2 Anticipation of a lower price offering

It can sometimes happen that you’re hit with a lawsuit after you’ve completed a business valuation. This is incredibly inconvenient because, following valuation, most owners will have already worked out a reasonably just price for the business.

Unfortunately, an existing legal problem will give investors leverage to drive down the price. It is advisable to settle the lawsuit first and then try selling your business again after some time has passed.

But if you’re pressed because you’re ready to retire immediately, or suffer from chronic health problems, or can’t envision working anymore, you may have to take the lower offer on the table.

Issue #3 Be aware of your seller’s responsibilities

If you want a smoother selling experience, it’s key to be aware of your responsibilities as a seller.

Some of your responsibilities involve acting in good faith with your buyer, being truthful, and being fair. Responsibilities also cover the preparation of company documents and transactional records – including any and all previous legal history. If you’ve had any interaction with the government, this too must be disclosed to the buyer.

A professional M&A broker can assist you with your preparations to sell. A working relationship with such a business broker, especially if there is a legal impediment is a great way to manage risk during the transaction.

Issue #4 Where does buyer due diligence fit in?

Every buyer should conduct due diligence on the business they’re interested in. Nothing should ever be taken at face value – even if you implicitly trust the seller.

In fact, due diligence is part of a buyer’s responsibilities, and failure to fulfill this mandate can be disastrous for the buyer. As a seller, one of the reasons you should also always be upfront with any pending lawsuits is because a diligent buyer will unearth everything you’re trying to hide.

As can be imagined, the fact that you omitted to inform the buyer of such a critical piece of information can quickly sour the relationship.

Issue #5 Factor associated damages to the business

A lawsuit can do all kinds of damage to a business. From affecting your bottom line to tarnishing your brand reputation. Other downsides of litigation are:

• Lower sales
• A decrease in company value
• A negative perception by industry peers

As a company, you’re a legal entity that can be sued – and sued for a variety of reasons:

• Misrepresentation
• Contract disputes
• Patent infringement
• Property liability
• Employee matters

You need to be realistic about the lawsuit you’re facing and tackle it head-on. Lawsuits, depending on what’s caused them can even bankrupt the business before you’ve even received any offers! Hence the necessity to have good counsel as you get ready to sell.

Surround yourself with the right team

So, to answer the question we asked at the beginning, can you sell your business during a lawsuit?

Yes.

Seasoned brokers like the team here at Sun Acquisitions can help you with a business valuation, document preparation, qualifying buyers, and negotiating an asking price.

You’ll also need M&A attorneys and accountants. Fortunately, we have cultivated a rich network and can thus make suitable recommendations.

For those in Chicago eager to get started our Sun Acquisitions brokers are ready to help. Contact us today.

Looking for more insight on selling a business? Check out these links:

• Where to Sell a Business
• When to Sell a Business
• How to Sell a Business Privately?
• What Documents are Needed to Sell a Business?
• Sell NOW – The Crystal Ball is Pretty Clear

Disclaimer: Any information provided in this blog is not intended to replace legal, financial, or taxation advice given by qualified professionals.