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Selling a business? How to avoid a lawsuit

Let’s say you run a small business, a tutoring company, an auto repair shop, a yoga studio. You’ve done well, but you’re also ready to retire. After much internal debating you decide to sell the business — and immediately you wonder what the potential pitfalls of a sale might be. The last thing you want is for the next owner to sue you. What should you be aware of as you initiate the process?

Disputes over the sale of a business are common. Luckily, avoiding such disputes — or worse, a lawsuit — is relatively easy if you prepare well, disclose honestly and document diligently.

Preparing to sell

Before you put your business on the market or even determine a sales price, you should gather and document accurate information on various points. These include the business’s employees and financial records, its assets, inventory, products and services, and its relationships with vendors and customers. You should also review company agreements, corporate records of organization, resolutions and so on. Having your files well organized will go a long way toward earning trust once you’ve started negotiating with a seriously interested buyer.

Disclose, disclose, disclose

Lawsuits involving the sale of a business often arise out of one mistake: misrepresentation. Sellers sometimes fail to disclose information that the buyer later claims would have been pertinent. They fail to tell the buyer that the business is about to lose an important customer. Or they don’t mention that a major competitor is about to break ground for a new store next door. Or they make misleading claims about the business regarding its income. In the long run, these kinds of misrepresentations don’t pay off. Honesty, on the other hand, will earn you goodwill along the way and peace of mind when the sale is complete.

Document the transaction

Once you and the buyer have agreed on the details of the sale, make sure to document them with a purchase agreement. This document will contain some obvious items. (Who is buying? Who is selling?) But it should also list, among other things, any actions that the buyer and seller need to perform before escrow closes, as well as any warranties and representations on either side.

Will you need a business attorney to help you with this? I highly recommend it. Your broker can help you determine the asking price and will know how to attract buyers. But if you also consult with an attorney from the get-go, he or she will ensure that you and your business are protected from a lawsuit.

By Kevin J. Moore