Does a pending lawsuit lower my business’s asking price?

A buyer is paying for a business, and a lawsuit against it is a possible cost that the buyer may inherit. Whether that changes the price is something the two sides negotiate. It may also change the terms of the deal rather than the headline number. What you control is how early and how clearly the lawsuit is disclosed.

Why it will come up

BDC tells buyers to start with searches in government databases and to check for pending lawsuits, human rights complaints and bankruptcy filings. It also says that significant price adjustments typically occur during due diligence, and it names undisclosed liabilities, including pending lawsuits, among the usual reasons. BDC adds that the gap between the initial offer and the final price is often narrower when the seller is well prepared. Because BDC’s list refers to undisclosed liabilities, ask your lawyer how and when to disclose the suit rather than leaving the buyer to find it.

How a sale agreement can handle it

BDC explains that the vendor’s representations are where the vendor describes the business’s condition, for example that there is no litigation, and that such a statement typically excepts litigation the vendor has disclosed in a schedule. BDC also describes an indemnity agreement, in which the seller promises to be responsible for unforeseen liabilities for a period after the sale, and notes that buying shares carries different responsibilities from buying assets. Ask your lawyer how the structure you are using would treat this particular claim, and whether the buyer will want a holdback.

What to prepare

• a short summary from your litigation lawyer of what is claimed, the stage the case has reached and the next steps
• whether an insurer has accepted the claim and who is paying defence costs
• the pleadings and any settlement offers, ready to place in the data room

For the buyer’s side of the same problem, see what happens if I inherit a lawsuit. For the wider list of value factors, see what lowers the value of my business.