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Peter Siegel MBA, BizBen.com & SBALoanAdvisors.com Founder

Any Advice Or Best Practices When Selling A Business, Avoiding Lawsuits?

A seller just posed this question to me in a BizBen ProSell session. Any feedback for this business owner, potential seller? I would like to hear some feedback from my fellow BBNers on this topic. Make sure you're comfortable with the person with whom you are dealing.

Comments & Feedback From Pro Intermediaries & Pro Advisors On BizBen:

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.

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.

Contributor: Business Broker, Northern California
Something simple to remember when going through the sale of a business or practice is that the deal only gets done when there is a motivated seller that meets a motivated buyer. If you are the seller and feel your buyer wants everything their way you are probably right and so its time to look for another buyer. Selling a business is not like selling a car or house as there are many other options. At the end of the day though the seller and buyer must come together. If neither party likes the deal then its probably a good deal. If you hear a buyer or seller for that matter continually say - let me check with my attorney; that's probably not a party that will get a deal done or you want to take the risk of spending a lot of time.

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.

Contributor: Business Appraisals, Valuations Advisor
Honesty and lots of it. If you use a broker make sure you tell him about any significant problems with the business and make sure these are conveyed to a buyer early in the process. Tell your broker that you want an open and honest transaction. When you find a serious buyer and he starts his due diligence open all your records to him. Answer all his questions and provide all the backup data to support your answer.

Ask all potential buyers to sign a simple confidentiality agreement. and have the buyer sign a statement that he is satisfied with his due diligence.

No magic pill here. First and foremost as a seller be honest to your buyer. Don't embellish your numbers. They are what they are and tell the truth and be transparent.

Each purchase agreement usually has its list of contingencies that must be met in order for the buyer to complete the transaction.

Have your buyer sign off his approval on each contingency that has been met. Especially the one on the buyers approval of sellers books and records or "due diligence".

They need to sign a written statement that they have been afforded the opportunity to review all of the books and records of the subject business, have completed their due diligence process and hereby approve buyers due diligence in its entirety and remove this contingency from the purchase agreement.

I would advise you to use an Escrow Company that handles Business Sales. They will take the sale from start to finish and make sure all UCC and lien searches are done, contact the BOE, EDD, Franchise Tax Board and County Tax Collectors office for releases and clearance. All documents will be prepared, payoffs to creditors, recording, publishing all handled through escrow.

Get everything in writing! ALWAYS!! #1 Rule.

Make sure that the representations and warranties for both Buyer and Seller are reasonable AND accurate.

Make sure a business broker is involved to allow for an arm's length negotiation and ensure that the transaction is orchestrated professionally.

Make mediation a mandatory first step to solve any future dispute after closing. AND place a clause in there that any party that bypasses mediation will never be entitled to their attorney's fees or court costs if they decide to sue before starting a friendly mediator-driven dialogue first.

Contributor: CPA, Due Diligence Services
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.

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.


Contributor: Business Broker, SF Bay Area
The best answer is "full and complete disclosure". In my practice, I have sold businesses that had issues regarding the property, potential lawsuits, distribution agreement transfer issues, premises lease issues, employment issues, etc. In each and every case I asked the Seller to make a complete and full disclosure of this information long before the advertisement material was prepared and any information was sent to a potential buyer. Many times I would do that even before I took the listing. This way Buyer was fully aware of the situation and could conduct their own due diligence to assess the risk involved with the issue and then make an appropriate offer. Many potential buyers immediately walked away since they didn t want to deal with that situation. But those who persisted were willing to take the risk and Seller could then avoid any potential litigation due to these issues.

Second aspect is that if the Buyer fails in the business, buyer will try to look to the Seller and say that it is somehow Seller's fault. So during due diligence I strongly recommend to the Sellers that they also conduct due diligence on the buyer. If they feel that buyer really won t succeed then it would be better to terminate the deal, or express your concerns to the Buyer. If a business fails then all your customers and employees will be affected and whether or not you will win in the litigation, it is better to avoid selling to someone that you feel is not suitable.

BizBen Blog Contributer Buying a Business

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