What if there is a lawsuit against the business I am buying?

Discovering a lawsuit during due diligence is not automatically a deal-breaker, but treating it as background noise is a mistake buyers regularly make. Litigation exposure needs to be priced, allocated and documented specifically, rather than assumed away because the business otherwise looks healthy.

Disclosure is where this has to start

A seller is generally expected to disclose known claims, threatened litigation and circumstances likely to result in a claim, and the disclosure schedule is where that gets recorded against the relevant representation. A lawsuit that surfaces after closing, but that the seller knew about and did not disclose, is a very different problem for a buyer than one that was disclosed and priced into the deal from the start.

Structure decides who is actually exposed

In a share sale, the corporation itself remains liable for its own litigation regardless of who owns it, so the buyer effectively inherits the exposure unless the agreement carves out specific protection. In an asset sale, a buyer can be more selective about which liabilities it assumes, though certain claims — particularly some employee, environmental or tax-related liabilities — can still follow the business in ways that are not simply a matter of contract drafting.

Tools for handling known litigation specifically

• A specific indemnity tied to that claim, rather than relying on the general indemnity provisions
• A holdback or escrow sized to the potential exposure, held until the litigation resolves
• A purchase price adjustment reflecting the estimated cost or risk of the claim
• In some structures, excluding the disputed asset or contract from what is actually being purchased

What due diligence should confirm before closing

Beyond the existence of a claim, a buyer’s due diligence should look at what insurance coverage responds to it, how the litigation has actually progressed, and whether the seller’s own counsel has assessed its likely outcome. A claim that is well covered by insurance and unlikely to succeed is a very different risk than an uninsured claim with real exposure, even though both show up the same way on a disclosure schedule.