When a buyer files suit against the seller of a business the buyer typically believes that the seller has done one or more of the following either in person or in the purchase agreement:
1. Made a material promise (covenant) that they have not kept.
2. Made one or more statements of fact (representations) that were not true.
3. Agreed (warranted) to protect the buyer from loss if a particular fact was not true, and not lived up to that agreement.
Seller's can avoid most lawsuits by keeping their promises, not making any untrue statements of fact about the business that may induce the buyer to purchase, or warranting to protect the buyer if they can't (or won't) actually honor that agreement.
While that advice may seem obvious, sellers often rely on the language as drafted in a standard CAR purchase agreement and by escrow. They may not spend adequate time reviewing the contract to ensure they understand everything, and that the provisions are reasonable and accurate given everything they know about the business.
Instead, they skim through the agreement and sign without really knowing what they are stating and agreeing to.
If you're selling a business and want to avoid litigation down the line it is crucial that you know exactly what you're promising, representing, and warranting, and that you are completely comfortable with everything in your purchase agreement.
In addition to making statements that are not true, sellers can also get into legal trouble by failing to disclose "material" facts they knew about the business. A good rule of thumb is that if there's something about the business that you would want to know yourself if you were purchasing it, you should disclose it. A set of clearly drafted, specific disclaimers incorporated into the purchase agreement can go a long way towards protecting you down the line.
Sellers should also avoid making statements that "may" be true. These include any financial projections or statements about future potential of the business, particularly when based on prior year numbers.
Sometimes it's not the buyer of a business, but a third party who files suit against a previous owner. This typically happens when a new buyer purchases a business entity rather than just the assets, and/or the seller does not take the proper steps to ensure that their name is no longer associated with the company.
Sellers must ensure that they are no longer on any business accounts or contracts, that they file any final tax returns from state sales tax (if applicable) to employee payroll returns, and that they properly dissolve their business entity if it's an asset sale and they're no longer operating the entity. It's also important to ensure that any permits, business licenses, DBAs, trademarks, etc. are properly terminated and/or transferred as needed.
While as the saying goes, "anyone can sue anyone for anything" taking the above steps are a good start towards protecting yourself from a lawsuit when selling a business.