How to Sell a Business with Outstanding Legal Issues
Legal issues make any business sale process more complex. Buyers want clear answers, so sellers should be prepared to address potential risks early in the process.
The way these issues are handled can affect the purchase price, timeline, and sometimes, whether you're able to sell the business at all. Planning ahead and documenting the details can give buyers peace of mind and clarity during the due diligence process.
Common Types of Legal Issues
Legal challenges during a sale aren't unusual. Many are small matters; others can be complicated. The range of problems can include:
- Pending lawsuits
- Liens, encumbrances, or claims against the business
- Employee-related legal issues
- Regulatory or zoning violations
- Environmental or safety compliance problems
- Lease or real estate disputes
- Patents or details related to other intellectual property
- Licenses and permits
- Breach of contract or other business contract disputes
Risks for Sellers and Buyers
Unresolved legal disputes create risk for both sides of a business purchase. As a seller, you might get lower offers, have extra costs, or struggle to find a new owner willing to navigate a complex process.
Risks include:
- Future liability for pending litigation
- Higher legal fees and time spent on legal proceedings
- Lower valuation
- Loss of potential buyers
- Misrepresentation claims if issues are not disclosed
Disclosure Requirements and Legal Obligations
Being open and honest is important in any business sale. Buyers expect to see all legal matters during due diligence. Hiding details about past or current legal disputes can look (and feel) like misrepresentation. It can lead to new lawsuits, indemnification claims, or cause the potential buyer to cancel the sales agreement.
Talk about any pending lawsuits early, including class action claims, breach of contract cases, or personal injury suits. Buyers want to know what the legal issues are and how they are being handled.
Employee-related problems are also important. Wage disputes, harassment claims, or wrongful termination cases can create liability.
Regulatory or compliance violations should be shared as well. If a buyer finds zoning problems or product liability claims late in the deal, they may walk away from the business sale.
How Legal Issues Affect Business Valuation and Buyer Interest
Legal challenges can lower a business's valuation. Buyers see them as potential liabilities that can lead to extra legal fees or lower profits. A business with pending litigation may get fewer offers or a smaller purchase price.
Fixing problems before listing makes a business more appealing. For example, resolving a pending lawsuit can help prevent a discounted sale price. It also reassures buyers and could lower the escrow amount they ask for to cover risk.
Remember: Keep clear records of all business litigation. Potential buyers like to see how issues were handled. Showing historical details and steps taken can build confidence and lead to a successful sale. It also helps sellers earn the buyer's trust when legal issues are addressed early and documented clearly.
Steps to Resolve or Mitigate Legal Issues Before Listing
Business owners should take steps to reduce potential liabilities, improve valuation metrics, and make the business purchase more appealing. It's a good idea to have an attorney review contracts and key legal documents before listing the business to avoid surprises later.
No two situations are alike. Your advisors can help you navigate any of the following matters that could compromise an easy sale:
- Clear liens, encumbrances, and other legal claims
- Settle pending lawsuits (if necessary)
- Update licenses, permits, and registrations
- Review business contracts to avoid breach of contract claims
- Confirm that all leases and real estate agreements are current and transferable
- Resolve regulatory or compliance violations
- Protect trade secrets and confirm that intellectual property rights are current
- Verify that corporate records and financial statements are complete
- Work with a law firm to address product liability or personal injury claims
- Prepare indemnification terms that protect both buyer and seller
Structuring the Sale When There Are Legal Issues
How the deal is structured affects liability:
- Asset sale: A buyer only purchases assets, leaving liabilities with the seller. This is common when there's pending litigation during a sale.
- Stock sale: A buyer acquires the entire business, including all liabilities. Buyers may request stronger warranties from the seller, including indemnification and larger escrow accounts to offset risks.
The sale agreement or asset purchase agreement should clearly outline responsibilities for each liability.
Working with Attorneys and Brokers
Selling a business with legal challenges almost always requires professional help. Assembling the right team of experts can make a big difference. An attorney who specializes in business law can review contracts, help with legal proceedings, and offer legal advice on risk.
A business broker is another important partner. They can guide the sale process, connect with potential buyers, and keep negotiations on track.
These advisors work together. Their goal is to protect both buyer and seller, minimize disputes, and keep the process moving toward a smooth closing. With the right preparation and support, business owners can navigate complex legal issues and move toward a successful sale. Search BizBuySell's broker directory to find someone to guide you through the process of selling a business with outstanding legal issues.