Disputes arising from the purchase or sale of a business are common, but can often be resolved quickly with the guidance of dependable legal counsel. Whether you are a buyer or a seller, you need smart legal advice to avoid a dispute ahead of time, or resolve one positively should one become unavoidable.
If you have a dispute about the purchase or sale of a business, the obvious first step is to try and amicably resolve it directly. But you have interests you need to protect as well, and it’s not always feasible to resolve these disputes without help. That’s when you want to talk to a lawyer.
How to prepare when you are buying a business
The best way to avoid a dispute during or following the sale of a business is by being diligent and transparent while the sale is taking place. A buyer should be concerned about representations, both financial and otherwise, made by the seller about:
- The condition of the business
- The employees
- Any disputes with vendors, employees, customers or competitors which are known or have the potential to be made as claims
- The lease (or condition of the real estate if the building/land is also purchased as a part of the transaction)
- Any information that could affect the business going forward
If you are new to the industry of the business (for example, a buyer of a dry cleaning business who does not have experience in dry cleaning), consider having the prior owner work as an employee or consultant for a period of time. The buyer should also have a transactional attorney prepare and review a purchase contract that covers all specific details of the intended transaction.
How to prepare when you are selling a business
A seller should be concerned about what representations he/she is making as a part of the transaction, and to make sure they are accurate and backed up by written documentation. You should also be concerned about the financial ability of the buyer to complete the transaction, particularly if the transaction includes loans or financial approval for loans or lease assumption.
You should work with a financial adviser to provide the buyer with documentation of the financial condition of the business and make sure that information is accurate and consistent with the terms of the purchase agreement. In addition, make sure to disclose any matters that could affect the business going forward. You should consult with a competent California lawyer regarding how to protect yourself during and after the transaction.
If you plan to provide ongoing consulting for the new buyer, make sure those terms are specific and limited to what you can reasonably afford or are willing to do.
Non-compete as part of a purchase/sale agreement
Whether you are buying or selling, another thing you need to consider is the whether there will be a covenant not to compete in the purchase/sale agreement. As the seller, this could prevent you from competing with the business for a reasonable period of time, in a reasonable geographical area. While covenants not to compete are generally illegal in California, the Business and Professions Code section 16601 provides an exception for situations arising from the sale of a business.
Disputes often result from a lack of information or a lack of trust during or after the transaction. Both sides have rights under the law, but likely also a well-drafted purchase and sale agreement.
Other regular causes for disputes
Disputes over or following the sale of a business often include potential claims for:
- Misrepresentation or fraud allegations concerning the financial condition of the business
- Misrepresentation or fraud allegations concerning facts allegedly not disclosed by the seller as a part of the transaction
- Unfair business practices
- Breach of the purchase agreement
- Default of any amount owed under the purchase agreement
- Violation of the covenant not to compete
- Trade secret misappropriation
If you have a dispute during or after the purchase or sale of a business, you should immediately consult with an attorney experienced in handling business disputes (often known as a business litigator). Beware an attorney who promises terrific results, who overuses legal jargon or who spends substantial time talking about his/her résumé to puff him/herself up. Try to find an attorney who explains in plain language your options, who is strategic and who listens to you before just talking about what he/she will do for you.
Also look for a lawyer with experience both in resolving cases through mediation and in trying cases before a judge or jury, in the event it is necessary to do so.
The Coopersmith Law Firm has that experience and the skill set to help you through this difficult time in your business. Our legal team will give you cost-effective litigation advice, and we provide the quality of a large firm with the care and attention a boutique business litigation firm would give. Let us guide you through rough waters and toward a positive result.
Disclaimer: The answer is intended to be for informational purposes only. It should not be relied on as legal advice, nor construed as a form of attorney-client relationship.