Most business brokers don't talk about it much; however, there is a lot of post-sale litigation involving sellers. You can imagine how disruptive this can be because you might have already relocated to another State; invested your funds into your retirement or estate planning; gifted monies to grandkids, a charity or to others; changed your lifestyle that might involve new time commitments; and you will have most certainly have crossed over the bridge emotionally in believing that the former business is a thing of the past and that you have successfully transitioned your life.
BANG!! All of a sudden the buyer files a lawsuit, and even though you believe that you are without blame, you realize that you have to hire an attorney, pay a retainer, and start digging into business and other records. And that is just the beginning. You will probably be answering interrogatories, attending depositions, dedicating lots of time to worrying about the litigation and perhaps traveling to where the litigation is taking place.
A Hidden Danger of Seller Financing
If you accommodated the buyer with seller financing, it is almost certain that those payments will stop as the buyer and his lawyer try to gain all the leverage they can as they proceed with the litigation and try to force a settlement. You will also become painfully aware of what many consider to be an inequity in the judicial system: The person suing might have been able to convince a lawyer of the merits of their claim to the extent that the lawyer has taken the case on a contingency basis (where their legal fees are only paid if the lawsuit either settles or results in a judgment that is paid), and you will find that there are no defense attorneys who will provide services without getting paid.
How expensive are legal fees? Clearly it depends upon a lot of different things; however, it is not unusual for a defendant's legal bills from inception of the suit through mediation, arbitration, trail and/or settlement to range anywhere from tens of thousands to hundreds of thousands of dollars.
How a Seller Can Best Protect Him/Herself
- Don't misrepresent what you are selling
- Fully and completely disclose any/all negatives involved in your business (For more information about disclosures, consider reading The Importance of Due Diligence to Sellers).
- Not only disclose, but document all of the disclosures in writing
- Minimize the amount of seller financing
- Have good legal counsel and legal documents that can:
- Limit types and/or categories of claims that a buyer may make
- Create timelines by which claims must be made (i.e. time is on your side)
- Limit financial amounts of claims that can be made (i.e. caps on different categories)
- Limit claims to written misrepresentations (i.e. no claims for he said/she said)
Proven Protection for Sellers
Experience has shown that the above disciplines work exceedingly well in protecting sellers. That being said, unfortunately anyone can sue anyone for virtually any reason. If you follow the above, though, you will make it exceedingly difficult for a disgruntled buyer to obtain the services of an attorney on a contingency basis, and you will also find it will greatly discourage even the most aggressive complainant as they will see an uphill battle ahead with both time and dollar limitations staring them in the face.
