Understanding The Legal Implications & Liability Exposure Of Acquiring a Business Engaged In Lawsuits Or Facing Potential Lawsuits

Purchasing a business is a big and potentially exciting decision. You are looking forward to the future and all that the business will bring. Perhaps you bought a thriving company at the peak of success and you plan to hit the ground running. Or maybe you purchased a startup that has great potential, but requires a little more effort. In either case, gaining the assets in a business can be a huge boost. 

Buying a business can also come with liabilities attached, such as lawsuits. These liabilities will hopefully be known to you before the purchase if you have worked with an Arizona business attorney and have done your due diligence.  But sometimes they can come as a surprise. So what happens if you acquire a business engaged in a lawsuit or facing potential lawsuits? 

Performing Due Diligence When Buying a Business

There is a lot more to buying a business than there is to buying other types of assets like real estate. In real estate, the sellers are obligated to provide information on the negatives or other possible concerning issues with the asset. In businesses, however, it is up to the buyer to perform their due diligence. Some areas you should perform due diligence include:

• Finances: Look at the business’s financial statements including tax returns, income statements, cash flow statements, balance sheets, and other documents related to debts, assets, and revenue sources to make sure the company has a positive financial history and can bring in profit.
• Legalities: Your Arizona business attorney will take a look at the business’s structure, contracts, intellectual property, litigation history, and regulatory compliance to make sure you are walking into a legally sound purchase.
• Operations: When seeking success in your purchase, it is important to take a look at workflows, customer relationships, employee agreements, and technology to make sure the day-to-day is going to encourage success.
• Market: Some people choose to sell their business because the market for what they sell is decreasing. It is important to take a look at the market to ensure it will continue to be profitable for you. 
• While you may do your best due diligence, there are ways for sellers to try and conceal certain liabilities which is why having an Arizona business attorney working with you who is aware of these tactics can help mitigate surprises. 

TIP: Do a quick google search for the name of the business you are considering and the term “lawsuit,” “violation,” and similar words. Doing so is a good first step to finding scandals, a ruined reputation, or violation of regulations if there are any public ones. 

If The Business Has a Pending Lawsuit

Just because a business has a pending lawsuit does not necessarily make it a bad purchase. Some businesses may be involved in a lawsuit with a minimal settlement value, making it worth the risk. However, you cannot always know what the settlement amount will be ahead of time. What you can do is find out what the charges are against the business. You or your business attorney can then evaluate roughly how much a settlement might be and if it is worth passing up the opportunity to buy or not. 

Some lawsuits that might be manageable for you to handle can include:

• Minor employment disputes
• Customer complaints or small claims

Some lawsuits that are typically a major red flag include:

• Fraud or misrepresentation allegations
• Class action lawsuits
• Major intellectual property infringement
• Intellectual property disputes
• Regulatory compliance issues
• Criminal allegations
• Significant contract disputes
• High-stakes regulatory violations

The Ways In Which You Can Be Affected When Buying a Business With Lawsuits

When you’re looking over a sales agreement, it is essential to have an Arizona business attorney review it with you to make sure nothing is missed. At this point, you should have thoroughly researched the company and be aware of most or all of its different liabilities. In the event that there are some liabilities you are willing to take on, your attorney can help with negotiations. 

The negative implications of taking on a business with a lawsuit can be:

• The business can take a hit to its reputation
• The buyer (you) could have to pay ongoing legal fees, settlements, and more
• Pending legal actions can attract audits or other regulators
• Future investment deals can be hard to secure
• You could lose key partners

While taking on a business with a lawsuit is generally a negative circumstance, there can be some positives that come out of the situation including:

• Discounted purchase price
• Resolved litigation can add value and create path for growth
• Opportunity to rebrand or restructure
• Some aspects of settlements and related expenses may be tax deductible

Our Arizona Business Attorney Can Help You Uncover Hidden Liabilities!

If you’re concerned about the possibility of hidden liabilities or you’re trying to determine whether or not a certain lawsuit might be worth taking over, our Arizona business attorneys have you covered. We have years of experience in the field and are skilled at uncovering hidden liabilities. Not only that, but with a detailed understanding of Arizona law, we can help you evaluate how much the liability could cost you and whether or not it’s worth it.

Don’t play the guessing game when it comes to a business purchase, reach out to our attorneys today and buy your business with confidence

Brad Denton – Denton Peterson Dunn

1930 N Arboleda #200
Mesa, AZ 85213
Office: 480-660-3249
Email: [email protected]
Website: https://arizonabusinesslawyeraz.com

7272 E Indian School Rd #540-132
Scottsdale, AZ 85251
Phone: 480-690-3283
Email: [email protected]