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  Home > Discussions > Any Advise To Avoid A Lawsuit When Selling A Business?

Blog Post Any Advise To Avoid A Lawsuit When Selling A Business?

Initiated By: Peter Siegel, BBN Facilitator at 925-785-3118, 925-785-3118 (Cell) - Log In To Message/Email This Contributor

Comments & Replies: 22   Topics: for sale by owner, legal issues, selling a business

Discussion Description: A business owner/seller on BizBenNetwork just posed this question to me in a BBN Facilitator Session: “What are the best practices for avoiding lawsuits, possible litigation when selling a business?” In this discussion, we discuss many angles and ideas on this topic for sellers, brokers, and agents.

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Yes. Be as open and as honest as you can. Make sure your broker knows your business and that you fully disclose anything you would want to know if you were purchasing the business. Then, get proof of delivery. Remember that late discovery can kill a good transaction. A professional business broker will be more effective if all the facts are known. Remember to get and to save all documentation and all disclosures.

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When practicing business law in New Jersey, I would regularly tell my clients that if they end up in litigation, in most cases, even if they win, it still will be a loss. Law suits are disastrous to a business they cost money, time, personnel resources, and attention, and they create uncertainty, bad relationships, and negative publicity. So, how do you avoid lawsuits when selling a business?

1. Be represented by an attorney from the very beginning before you sign a contract, or, if you do sign a contract, be sure you have at least a three-day attorney review clause allowing your attorney to cancel the contract for any reason or for no reason. And, make sure this attorney is a business transaction specialist a deal-maker, not a "deal-breaker."

2. Require that your buyer is represented by an attorney as well. That way any claims by the buyer that they were unaware, or unsophisticated, or at a disadvantage, or didn't know what they were signing will be groundless.

3. Disclose everything to your lawyer-he cannot repeat it. But, if you keep your lawyer in the dark, he cannot properly represent you.

4. Be honest. Don't make any statements or representations that diverge from the truth.

5. Be sure that you have an arbitration clause in your contract requiring any and all disputes related to or arising out of the transaction or involving the parties to the transaction be resolved through binding arbitration through the auspices of the American Arbitration Association.

6. During due diligence disclose everything you are asked to reveal (with the advice and counsel of your attorney); and, disclose everything that would reasonably be a material fact in the buyer making a purchase and/or valuation decision.

7. Use an escrow agent for a variety of good reasons; but, particularly so that you have on record that a professional, licensed, bonded, neutral third-party checked your representations against the public record.

There are other things you can do to avoid a lawsuit that your attorney and escrow agent can advise you about directly.

You give the buyer your tax returns for 3 years.

You give the buyer your quick books or other accounting system financials for most 3 years and the current year to date financials.

You should answer all of the buyers questions in writing and signed. Not orally given the broker to pass on the information.

The broker might not duplicate your response exactly and the buyer is acting on wrong information that you can be blamed for.
Have your accountant review your financials to see if any journal or adjusting entries need to be made to properly represent the financial condition of the company.

Have the accountant approve what add-backs are being used to increase the profit of the business.

Do not give pro-forma financial statements created from memory or averages. The buyer does not know if this is real or imagined and can create huge problems.

Do not alter or let the broker alter any financial statements with the intention of wanting the buyer to understand what the expenses should be. That is done on a add-back worksheet that lists exactly what you paid out of the business that you want added back to the profit because they really were for personal use. Life, health, and auto insurance are just a few of these type of expenses.

I would add one last item to my earlier post on this question:

At the time of the closing--just before the money and title change hands--require that both the buyer and seller sign a certification that neither party has made any oral/verbal representations, warrantees, or guarantees; that neither party relies on any verbal or oral statements; and, that each party is relying solely statements from the other that are in writing and signed. It makes it very difficult for either party to make assertions that "he said"/"she said" at a later time. We have a standard form that we require the escrow agent to have signed by both parties at the time of closing for any sale transaction we handle. It protects everyone from unfounded claims in the future.

As with any business, even though a person takes as many precautions as possible, there is a pretty good chance that if they do a fair amount of business, at some point they will find themselves involved in a lawsuit.

Even though there may be a dispute between the buyer and seller, the broker will become involved at some point because of presumed "deep pockets" and they were the one steering the transaction. It's best that everyone goes to mediation or arbitration before going to court in a lawsuit, because it's cheaper, and many times an issue can be resolved before the process gets really expensive. As others have stated, the rule of thumb in a transaction is to disclose, disclose, disclose.

A seller should make as much information about the business as possible, and a broker should have the buyer acknowledge that they have received and understate said information. I have a buyer and seller both sign the business disclosure statement, along with a warranty disclaimer, and tell the escrow officer to include in the instructions that "buyer has read and approved the books and records".

I don't open an escrow until buyer and seller have completed the due diligence, and all parties are satisfied. A buyer and seller may end up suing one another, and so it's important that a broker has excellent records and keeps them long after the transaction has closed.

This Discussion's Contributors

Contact: Tim Cunha at 650-600-3751, 650-204-1802 (Cell)   Log In To Message/Email This Contributor
Profile: I am an experienced entrepreneur, attorney, & business professor. I & my EvergreenGold® team offer business owners sound advice & expertise to build business value & achieve profitable sales. Call me today for a FREE business evaluation & SWOT analysis for your business anywhere in the USA.
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Contact: Joe Ranieri at 714-292-5448, 714-292-5448 (Cell)   Log In To Message/Email This Contributor
Profile: Having owned businesses for over 22 years, my interest turned to listing and selling businesses rather than owning them. I specialize in high volume restaurants, fast food independents & chains, bars, liquor stores, small manufacturers & service businesses in Orange and LA Counties in California.
Key Words: joe ranieri, remax, re/max commercial, business broker, restaurant, cafe, fast food, buffet, retail, bakery, food, juice, bars, mexican, coffee, tea, dessert, sandwich, grill, coffee house, mediterranean, turkish, pizza, asian, sushi, japanese, chinese, sports bar, diner, liquor, market, mart, orange, san bernardino, huntington beach, long beach, los angeles, costa mesa, hollywood, fountain valley, cerritos,
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Contact: Chuck Post at 619-227-5711, 619-227-5711 (Cell)   Log In To Message/Email This Contributor
Profile: Laundry consulting, due diligence, buyer representation: We preview laundries for you and evaluate them. 28 years laundry industry experience: buying, selling, valuing, retooling, analyzing, consulting services for laundry buyers and entrepreneurs. Contact us today about our services.
Key Words: chuck post, laundry, coin laundry, coinlaundry, laundromat, laundries, card laundry, laundrys, coin laundry, coin operated, laundramat, laundry mat, laundrys, coin laundries, laundry, laundries, coin laundry, chris mason, laundromat, laundromats, laundrys, laundry, laundries, laundrys
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Contact: Willard Michlin at 805-428-2063   Log In To Message/Email This Contributor
Profile: Willard Michlin is a business broker for 23 years. As a CPA & Certified Fraud Examiner, he works with buyers to get a FREE market valuation as well as full industry & financial due diligence on businesses they are interested in buying. He also offers FREE do-it-yourself due diligence training.
Key Words: willard michlin, due-diligence, due diligence, michlin, kismet
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Joe Ranieri - Business Broker, Orange County, LA County, California - 0219
Tim Cunha JD, Business Broker, SF Bay Area 0719
Chuck Post Laundry Consulting USA 0719

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