8 Ways to Avoid Litigation When You Sell a Business

Based on recent litigation storm clouds, business owners planning exit strategies better batten down their legal hatches.

As a small business owner, your company most likely represents a significant portion of your net worth. That’s why it’s crucial not to let litigation wash it away when the time comes to convert your years of hard work into cash.

Selling a business involves substantial amounts of money and a wide range of issues including warranties and representations, disclosures and contractual obligations. Consequently, there are many opportunities for litigation to arise. Not only is litigation highly unpleasant and disruptive to your lifestyle, it is also very, very expensive - even if you win.

But other than wishing, hoping and praying, what’s a small business owner to do? Rather than complaining try something more constructive. Here are eight strategies to follow when selling your business that can help minimize litigation issues.

1. Honesty is the best insurance policy. Tell the truth about your business. Do not attempt to hide any problems or issues that, if left undisclosed, might be the basis for future litigation. Rest assured that the cost of disclosure in a transaction is very small when compared to the cost of litigation for non-disclosure.

2. Develop a confidential business review. This is a high-quality and comprehensive document that describes your business and its background. Within this document, clearly disclose any negative issues that are involved in the business. Not only will disclosure reduce litigation risks, it will also add to your credibility with potential buyers and save you time by eliminating those who are unwilling to accept the realities of your business.

3. Accurately communicate historical financial results. Do so in a manner that demonstrates the earning power of your business. Ideally, this information will be presented in a summarized format that recasts your discretionary and certain other expenses to show EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).

4. Require your buyer to go through extensive due diligence. Due diligence is the process by which a buyer conducts an independent investigation of the information you have provided about your business. The written due diligence materials should be incorporated into the final legal documents to minimize your litigation risks.

5. Assemble a strong team of experienced professionals. Your accountant and your attorney will play key roles, and their expertise will reduce litigation risks. You may also benefit from the assistance of an experienced intermediary, broker, or merger and acquisition firm that specializes in selling privately owned businesses. However, before hiring an intermediary, make certain that they do not charge up-front fees and that they have a litigation-free track record.

6. Ensure that closing documents are thorough and complete. Not only must these documents contain appropriate legal language, they also must anticipate and address potential disagreements that may occur after closing – disagreements on issues like equipment or inventory values and condition, collection of accounts receivable and more. These issues are easily addressed during the courtship phase with a buyer, but they can cause major problems after the transaction is closed and the honeymoon phase is over.

7. Be careful with employment, transition and consulting agreements. If you enter into longer term agreements with your buyer, make sure the terms are entirely consistent with your retirement plans. Otherwise you run the risk of being unwilling or unable to perform your obligations, and that can lead to litigation.

8. Maintain confidentiality throughout the entire selling process. Although confidentiality will not directly protect you from litigation, it will help minimize the risk of losing valuable employees, customers and vendors during the process. One of the best ways to avoid litigation is to help ensure your buyer’s success, because that success significantly reduces the basis for damage claims.

The goal is a successful, worry-free transition. Take the time to recognize and act on the many opportunities you have to minimize your litigation risks and reap the benefits later.

A Peek Into The World Of Hi-Tech Litigation Support

At the heart of any legal undertaking is the mass of data that legal professionals need to perform their jobs. The demanding job of acquiring and organizing the documents that comprise this data is known as litigation support. It's a demanding task that requires a high level or organizational ability and a painstaking attention to detail. And with these documents increasingly in electronic form, litigation support professionals need even more skills and knowledge.

The legal system runs on information. Any law suit or court case involves a veritable sea of documentation ranging from witness statements to affidavits to any documents that can be applied as evidence. And the legal system demands impeccable documentation with accuracy, security, integrity, speed and efficiency. The management of this rigorous process is known as litigation support.

Litigation support can be defined as any operation involving human and mechanical systems to process information for use by attorneys or expert consultants in preparation for a lawsuit or a trial. And in these high-tech times it's an especially demanding task.

Nowadays, a major part of such documentation is likely to be in electronic form and stored on a computer system. The retrieval and authentication of such digital documents is a field in itself and one of vital importance in a successful legal undertaking.

What's more, paper documents also have to be scanned and stored in digital format. This allows easy access to concerned parties. It's a process that demands impeccable organisation and supervision. Documents have to be tagged and indexed and stored in document management centers in a way that they're instantly retrievable.

Clearly people working in this field have to skilled in both technology and law. And generally employees in firm that offer litigation support services are qualified paralegals.

The challenges of dealing with digital media are many. For one thing, there tends to be large volumes of such data and each document may have many copies or exist in several versions. Also electronic data is much more volatile than hard copy. So it requires special handling. What's more the data may be concealed or encrypted which demands special expertise.

Other than procedures such as the scanning, imaging, and indexing of documents, litigation support firms also provide such sophisticated activities as electronic discovery and computer forensics. These are essentially the same procedure - the retrieval of data from computer systems for a specific purpose. The difference is just in the reason for the retrieval; electronic discovery is for general purposes, while the term computer forensics is generally used when the retrieved information is for use in a law suit or in a court of law.

Forensic investigations could involve recovering hidden, damaged or corrupted files. Or perhaps decrypting password-protected or encrypted files, as well as recovering emails, chat data and other forms of online communication.

The range of crimes that might require these services is extremely wide ranging. Some examples are copyright infringement, money laundering, blackmail or corruption. In fact any crime in which relevant information is stored on a computer system. And in this day and age that could mean virtually anything.

The legal system depends on accurate and documented information in order to function so it's essential to have professionals take charge of this task. More and more data is now in digital form, to it's essential for litigation support firms to be able to deal with this. And with data security becoming increasingly important in this wired world, the field of computer forensics is one that has to develop accordingly.