Legal History Of Any Business Acquisition

June 24, 2016
Posted by avidamiri

Examining the Legal History Of Any Business Acquisition As Part of Due Diligence: Has the Business Being Considered Ever Been Involved In Any Lawsuits?

Proper due diligence prior to any potential website purchase is always advisable.  In particular, it is always suggested to ask a seller about the legal history of the business being considered. One entanglement you absolutely want to avoid is to assume ownership of any business that may be involved in any current or threatened lawsuits. I would suggest asking a seller directly if the website has been involved in any lawsuits or is experiencing legal issues of any kind.  Moreover, I would ask if the website has any pending or threatened legal actions.  There is a quick list of recommended questions to ask a seller listed below as part of a formal due diligence:

  • Have you received any past demand letters regarding this business?
  • Have you experienced any legal, current, past or present issues with any employees, vendors, or any other stakeholders?
  • Does your brand or trade name violate any other trademark or brand?
  • Are there any outstanding issues with the IRS or any other government agencies?

It is highly suggested that a seller provide detail on these questions. The seller should also provide warranties regarding any past or pending legal issues in any purchase agreement or contract for the purchase of the business.  I also recommend that as part of the purchase document the seller commit to being legally responsible for defending against any issues that may come up with third parties after the purchase if those items are associated with any claim arising before the purchase was made.

One other item that is essential that any lawsuit with any past partner or investor of the business being considered also be mitigated. In particular, if a seller makes the divestiture of the asset without the consent or permission of any other investors, then the seller needs to warrant that this would be his or her responsibility to address.  Also, the cost of defending any liens or judgements would be borne exclusively by the seller. Of course, the best thing here would be to know about this beforehand.  Therefore, it makes sense to have the seller answer these types of questions in writing as part of the due diligence process. If he fails to disclose other investors or partners, or provides misinformation regarding threatened or pending lawsuits then it is far easier for you as the buyer to achieve recourse from the seller.

In summary, it is always recommended that you spend time diving in the legal history of any business to explore any past or potential lawsuits or legal actions. I would suggest using the questions stated above and having a seller provide answers in writing to confirm that there are no lawsuits associated with the business. In addition, I would suggest that any seller also provide written warranties of such in any purchase agreement as well as provide guarantees that the cost of defending any such lawsuits should they come up will be borne by the seller.

Tags: , ,

Leave a Reply

Your email address will not be published. Required fields are marked *