The Importance of Due Diligence to Sellers
As you are probably aware, business sales can produce a lot of litigation. For sellers it is an absolute nightmare to sell, relocate, move on to other things and then end up with large legal fees, depositions, meeting with lawyers, and court appearances, all simply to keep the money that they have already been paid!
The causes of this type of litigation are numerous. Among them are:
- Unrealistic buyer expectations
- Seller not fully disclosing all aspects of the business
- Seller misrepresenting some aspects of the business
- Poor legal documents
- Inadequate or failure to document due diligence materials and/or
- Buyer incompetence and buyer’s subsequent desire to get his/her money back.
Seller Protection Against Litigation
A seller’s line of defense should consist of honesty, integrity, good legal documents and providing very complete due diligence information in writing to the buyer. Over the last nearly 40 years ASG has been involved in approximately 400 business sale transactions, with market values ranging from under $1 million up to $31 million. Out of those transactions, there has only been one instance of litigation in which our client got sued by the buyer. As it turns out, our client failed to disclose some very material facts to us and the buyer. The case was settled but not before some significant legal costs were incurred. Needless to say, ASG is very proud of our ‘no litigation’ track record, which we believe is unmatched in the business brokerage and merger and acquisition industries.
Due Diligence
While honesty, full disclosure, integrity and good legal documents don’t need much explanation, due diligence is a different issue. At Acquisition Services Group, we believe that due diligence is for the benefit of the seller, exactly the opposite of how most people view it. Most brokers and sellers like to keep the buyer’s list of what he/she wants to see to a minimum, simply because it is somewhat of a pain to dig out all the historic information.
Documentation: A Strong Defense
The deliberate focus on extensive documentation of due diligence virtually eliminates legal action based upon verbal claims. It is extremely difficult for a buyer’s attorney to get up the courage to initiate a lawsuit when the due diligence material discloses and documents virtually everything about the company. Bear in mind that most litigation involves he said, she said or he/she did not tell me, and this dedicated approach to due diligence means that about the only way that our clients can become a legitimate litigation target is to lie or omit in writing!
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