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.
About 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 or 888-212-4747 to discuss strategies regarding buying, selling, (or financing a puchase of) California businesses.