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How Do I Sell My Business Without Getting Sued

How Do I Sell My Business Without Getting Sued

Sellers wondering: how do I sell my business without getting sued, usually expect to pay high legal fees to get all the required answers. But there are ways to substantially reduce the risk of legal liability when selling a small or mid-sized business without a lawyer. They include:

1. Be careful about what is claimed. Most lawsuits initiated by business buyers against the former owner are for misrepresentation. Complaints usually state that a). seller made claims about the income, or other benefits of owning the business, that b). buyer was persuaded to make the purchase by those claims, and that c). what seller said was not factual. The buyer then totals the losses incurred because he or she relied on the seller's misrepresentations, and asks the court for reimbursement of those losses, and also to impose a penalty on the seller for having defrauded buyer.

Sellers are cautioned that the best way to answer the question about, for example, the amount of money to be made, is to explain his or her experience, supported by P&L reports, followed by the statement that there are no guarantees the buyer will have the same experience.

2. Be careful about what is not said. The other side of misrepresentation that can land a seller in court is the claim that the buyer was not told about a factor that negatively impacts the business. The buyer might argue that the seller knew about, for example, the impending loss of a major customer, or plans for a larger company to begin competing with the business being sold. And failed to disclose the information.

One important strategy to learn, for the seller who wants to know how do I sell my business and stay out of a lawsuit, is to be sure the prospective buyer is provided information regarding any changes that the seller knows about, which might occur after the buyer takes over, and may be detrimental to the business.

3. Put statements in writing. Even following the ideas about using caution regarding what is said and what is not said, there can be a dispute if a buyer has a different recollection about the discussions with the seller on these issues. That's why a smart seller puts in writing any claims made about the business and any disclosures of factors that might impact it; and requires that the buyer acknowledge with his or her signature, what was discussed.

One agreement might contain a list of the financial reports, capital assets list, company description and related materials that were provided by seller to the buyer. Included also would be a statement that the buyer agrees that no representations were made by the seller other than the information contained in the documents listed. A second document could list all disclosures made by the seller to the buyer. The seller's statement would assert that the seller knows of no other circumstances that might negatively affect the business. That would require the seller's signature. Another statement on that document, that all items listed were, in fact disclosed to the buyer, would need the buyer's signature.

4. Accepting one offer at a time. Another possible area of legal dispute occurs when there are multiple offers and the seller isn’t careful about his or her response. Once an offer is accepted the seller should work with the buyer to deal with any contingencies so the agreement can be satisfactorily completed. Any acceptance of back-up offers should be made with the clear, written understanding that they are in back-up position, with explanation of what circumstances--such as non-performance by the buyer who made an offer that was accepted--would give the back-up buyer the right to purchase the business.

5. While these measures will aid the entrepreneur who wonders: how do I sell my business without getting sued, it's not recommended that the seller avoid legal assistance entirely. It's best to have all documents - including the "claims" and "disclosure" agreements - reviewed by a business attorney whose assignment is to make sure the seller is protected, legally, by the business sales contract. That should be done before escrow is opened.

There's always some risk entering into a business sales agreement; most any contract, for that matter. For the seller asking: how do I sell my business without getting sued, the solution is to be careful about what's said and not said, and get those statements in writing.

Peter Siegel, MBAAbout This Contributor: Peter Siegel, MBA is the Founder & Senior Advisor (ProBuy & ProSell Programs) at BizBen.com (established 1994, 8000+ California businesses for sale, 500 new & refreshed postings/posts daily) working with business buyers, business owners/sellers, business brokers, agents, investors, & advisors). Phone him at 866-270-6278 to discuss strategies regarding buying, selling, (or financing a puchase of) California businesses.


Categories: BizBen Blog Contributor, How To Sell A Business, Legal Topics


Comments Regarding This Blog Post


Peter and Tim make excellent points as usual.

For most small business owners, selling their business successfully when they are ready to move on is one of their biggest dreams. But as a business attorney who handles both business sales and purchases as well as business sale lawsuits, I deal every day with cases where that dream has turned into a nightmare.

I see every day the benefits of taking the proper steps when buying or selling a business and the devastation (to both buyer and seller) that can take place when there are problems with the sale of a business.

Fortunately, there are a number of steps Sellers can take to minimize their risk when selling their business:

1. Address the unique risks your unique business creates. Trying to fit your business and all of its nuances, quirks and special issues (those of you who own a small business know exactly what I am talking about) into a form agreement and hoping that standard representations, disclosures and termination provisions will be sufficient will open you up to risk you could easily minimize.

2. Don't force your broker to practice law without a license. With a few exceptions, such as Tim, who have a legal background, most brokers don't have a legal education or license to practice law. They may be very knowledgeable and experienced in selling a business in your industry, but they are not (and should not be) focused on making sure you are minimizing your legal risks. Business sale attorneys focus on protecting you and your business, and can offer help with everything from checking out potential buyers before you sign to helping you wrap up the sale post-close to ensure you don't have any lingering liability. Brokers can be extremely helpful, but don't force them to practice law.

3. Learn from larger transactions. While you don't want to turn your small business sale into more than it has to be, larger transactions often have provisions that would surprise many small business sellers who have never heard of clauses such as "baskets" or "caps". These provisions can protect the seller from frivolous claims (such as with basket) or from excess claims when a buyer is acquiring a company where most of the value is in the intellectual property or valuable hard assets (with a cap on damages).

In summary, I can't say it any better than Tim Cunha did: An ounce of prevention really is worth a ton of cure.


Let me add to Peter Siegel's response. As a current California business broker and former New Jersey business attorney: to avoid being sued when selling your business, consult with an experienced business attorney before doing anything, keep that attorney retained during the process, and only deal with a business broker who will work closely with your lawyer. I have seen it countless times in my decades of legal practice and entrepreneurship, for the want of a small investment in preventive legal advice, business owners have suffered great loses -- even losing everything.

The analogy is simple: We buy fire insurance not because we want to "use it" or even because we think there is a high probability that we will have a fire; but, if we do have a fire, we'll lose everything. The same is true for preventive legal consultation--probably for nine out of ten business sales, you don't really need it; BUT, you have no way of knowing if yours will be the one out of 10, or one of the nine out of 10. When you do find out, prevention will be too late. And, if it is the one out of 10, you could lose everything.

An once of prevention IS worth a ton of cure.


  Helpful Resources To Assist In Selling And Buying California Businesses

Mark Chatow, Esq.: Legal Services For Buying, Selling Businesses

Mark has a broad range of small business purchase & sale experience from analyzing potential acquisition targets to successfully guiding buyers and sellers through the purchase & sale of small businesses. Mark can assist with contracts, negotiations, legal matters, etc. Reach Mark at 949-478-8393.

Diane Boudreau-Tschetter: Escrow And Bulk Sale Services

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

Janet Carrera - Escrow & Bulk Sale Services - SF Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.

Elizabeth McGovern: Escrow Services - SF Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

Brad Steinberg, Broker - Laundromat Specialists

Laundry specialists - founded in 1968 by three laundry professionals, PWS is a family-owned corporation. Through the years it has grown to become the largest vended laundry equipment distributor in the United States. Call Brad Steinberg at 323-721-8832 to sell or buy a coin or card laundromat.

Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence Services

Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 800-864-0420.

Helen Yoo: Escrow & Bulk Sale Services - Southern California

New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.


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