Litigation Traps in Selling a Business

"Once the decision has been made to sell a business, business owners are understandably anxious to find a buyer, make and close a deal, receive value for equity, and "end the headaches." Unfortunately, haste makes waste, and impatience and cutting corners may well lead to litigation that frustrates the seller's purpose, lessens the benefit of the bargain or compromises the value of the business. Business owners and their advisors should take care to avoid litigation traps in selling a business.

Failure to Perform Due Diligence on the Prospective Buyer...

A signed confidentiality agreement, alone, does not afford protection against a looter, an incompetent or judgment-proof buyer, who misappropriates trade secrets, runs the company into the ground, or is simply unable to operate the business...

Divulging Trade Secrets Without a Signed Confidentially Agreement...

Signing an Ambiguous Letter of Intent...

A business owner should never sign an ambiguous letter of intent without proper qualifying language approved by counsel. A letter of intent can be a valuable time- and cost-saving tool in negotiating and documenting a transaction. It can serve as a roadmap that allows the parties to determine whether they can reach agreement on the deal points of the transaction before spending time, effort and money negotiating the many other provisions that will ultimately be included in the formal agreement.

A letter of intent may or may not bind the parties...

Inadvertently Inaccurate Representations and Warranties

Representations and warranties are typically part of every business sale. However, the content of each representation and warranty should be carefully considered. The seller should never agree to even the so-called standard representations and warranties without careful consideration of what those representations are, how they will be memorialized and whether they may give rise to potential liability...

Failure to Adequately Document Disclosure of Adverse Material Facts...

Absent adequate documentation of disclosure of material adverse facts, the seller is faced with the buyer’s claim that the seller did not disclose facts which materially affected the value and desirability of the business, that the undisclosed facts were known or accessible only to the seller and not known or within the reach or the diligent attention and observation of the buyer. The seller may suffer an award of damages for misrepresentation, concealment, non-disclosure of material facts or worse, fraud and punitive damages...

The familiar adage is 'buyer beware.' However, the seller has at least as much to lose if not more, and nothing to gain from litigation arising from the sale of a business. Business owners and their advisors should take care to plan and take appropriate steps to avoid litigation traps.

Read more in this article from NLP IP Company.