STRATEGY WHEN SELLING A BUSINESS WITH PENDING LEGAL ACTION

Introduction:

Selling a lower middle market business can be a complex undertaking on its own. However, when there is a pending legal action looming over the business, it adds another layer of complexity. While it may seem daunting, with careful planning and strategic considerations, it is still possible to successfully sell a business with a legal action pending. In this article, we will explore a point-by-point guide to help navigate this challenging situation.

1.    Engage a Competent Legal Team:

Hire an experienced business attorney who specializes in mergers and acquisitions (M&A) and has a strong understanding of the legal aspects surrounding the pending litigation.

Collaborate closely with your legal team to assess the potential impact of the legal action on the sale process and develop a comprehensive strategy to address any concerns.

2.    Understand the Legal Situation:

Gain a clear understanding of the pending legal action, including its merits, potential outcomes, and estimated timeline.

Identify the risks and potential liabilities associated with the legal case and assess their potential impact on the value and marketability of the business.

3.    Conduct a Thorough Due Diligence:

Prior to initiating the sale process, conduct an extensive due diligence investigation to identify and address any issues related to the pending legal action.

Disclose all relevant information regarding the legal proceedings to potential buyers to establish transparency and build trust.

4.    Mitigate Risks:

Collaborate with your legal team to develop strategies to mitigate the risks associated with the pending legal action.

Explore options such as obtaining insurance coverage, setting aside funds in escrow, or negotiating with the plaintiff to reach a settlement before the sale.

5.    Value the Business Realistically:

Take into account the potential impact of the legal action on the business's value and adjust your price expectations accordingly.

Work with a professional business appraiser to assess the fair market value, considering both the legal risks and the business's underlying fundamentals.

6.    Maintain Confidentiality:

Ensure strict confidentiality throughout the sale process to avoid any negative impacts on the legal proceedings.

Implement non-disclosure agreements (NDAs) to protect sensitive information and ensure that potential buyers respect the confidentiality of the legal situation.

7.    Seek Qualified Buyers:

Focus on targeting buyers who have experience and expertise in dealing with businesses in similar legal situations.

Engage with qualified buyers who are willing to assume the risks associated with the pending legal action and have the resources to navigate through it

8.    Disclose and Communicate:

Provide full disclosure of the pending legal action to potential buyers, including its implications and the steps taken to address the issue.

Maintain open and transparent communication channels with potential buyers, addressing any questions or concerns they may have about the legal situation.

9.    Negotiate the Deal:

Be prepared for potential buyers to request adjustments in the purchase price or deal structure due to the legal risks.

Collaborate closely with your legal team to negotiate and craft a purchase agreement that appropriately addresses the legal action and allocates risk between the parties.

10.  Plan for Post-Sale Continuity:

Develop a plan to ensure the business continues to operate smoothly during and after the sale process, taking into account the potential impact of the legal action on daily operations.

Collaborate with the buyer to establish a transition plan that allows for a seamless transfer of ownership while addressing any ongoing legal obligations.

Conclusion:

Selling a lower middle market business with a pending legal action requires careful planning, diligent preparation, and close collaboration with a competent legal team. By engaging in a comprehensive due diligence process, mitigating risks, and communicating transparently with potential buyers, it is possible to navigate the sale successfully. While challenges may arise, with the right strategy and support, you can achieve a favorable outcome and move forward with the sale of your business. Access legal professionals and services for recommendations when selling your business with a pending legal action, simply CLICK on the button below.