Facing Litigation While Selling Your Business

Any day you get served with a lawsuit is not a good day for your business.

Lawsuits may be unexpected, and they clearly are unpleasant, but they may be unavoidable, especially in this litigious society in which we live. If you own a business, and if it’s successful, you present a bigger target for anyone thinking about suing. Some will assume you’d rather settle out of court than go through the tribulations and drudgery of fighting it out in court.

There are all sorts of reasons why a business may find itself on the wrong end of a lawsuit, such as contract disputes, property liability, misrepresentation, patent infringement, and employment matters. There are also a variety of matters that can best be described as “frivolous.”

No good can come to a business from being sued. All have potential to bring about undesirable consequences for both small and large businesses. Litigation has major downsides including a negative impact on a company’s bottom line and tarnishing a company’s good reputation.  Facing litigation can ultimately drive down sales, weaken a company’s value, and kill a business sale transaction.

What Should You Do When Facing Litigation?

If your company is facing litigation, it is imperative that you fully disclose the details to any potential buyer. Failure to do so could mean facing yet another lawsuit for this lapse. Your business intermediary or broker can be the individual who presents the details of litigation to any potential buyer. Acting in this professional manner will help ease the worries the buyer will have about the litigation.

If it is you yourself who is named personally in the suit, and not your company, this should not have any effect on selling the company. The company is not involved in the lawsuit. On the other hand, if the lawsuit does involve the company, even if the complainant names only you directly, you can’t get out of the suit by selling the company.

If your business has never been sued, or if it has and the matter has been long-settled, that’s great. Let’s look at some of the things you can do to lessen the risk of being sued in the future.

4 Ways to Lessen the Risk of Being Sued

• Practice risk management. This means examining your business’s procedures and policies, being sure employees are well-trained, and using compliance programs.
• Having well-drafted policies and procedures in place helps reduce the risk of a lawsuit. Employee handbooks are a good example. These will cover common scenarios and let your employees know what is expected of them. This also includes their conduct when dealing with customers and with each other. You may even include examples of some common problems and scenarios that your employees may encounter.
• Set up a compliance team to make sure your business is following all relevant government laws and regulations,. This should include everything from OSHA safety requirements for workers to company obligations under the Environmental Protection Agency. Taking compliance obligations seriously indicates your company is serious about following the law. Being able to show your compliance efforts can reduce liability if there ever is a claim. This will also insulate company management from criminal liability.
• Insurance is a key component in planning against business lawsuits. At the very least, you need a comprehensive general liability policy. Other types of insurance may be required by law, such as workers’ compensation insurance. Added insurance coverage may be needed, such as professional errors and omissions coverage, or data breach insurance.

Benefits of an Insurance Policy

One of the main protections an insurance policy provides is a legal defense for claims that may result in payment under a policy. The duty to defend means the insurer may have to hire a lawyer to defend your business in a lawsuit and pay the legal bills.

Indemnity is the other main insurance benefit. If your business is liable on a claim, the insurance company must pay for judgments up to your policy’s limits.

Having a close working relationship with your business’s lawyer is an excellent way to manage risk. Your lawyer should be involved at the onset of drawing up internal documents. They should be well planned and well written. Having everything in order at the start of your business endeavor is a good way to avoid the risk of a lawsuit. Remember, having an ongoing relationship with a lawyer who has fundamental knowledge of your business means he/she will be able to respond quickly if any trouble arises.

Owning and operating a business comes with risk. Managing that risk can be the difference between success and failure of your business, and success or failure of your business sale transaction.

Need a professional to help plan a successful exit strategy?

A professional business broker can help you tackle this, along with other steps, based on the specific circumstances of your business.

You can also download our Selling a Business Checklist, which offers insight into how to get your business ready to sell: