Getting Sued After Selling a Business

An entrepreneur builds a profitable business with many years of hard work, long hours, and some luck. Dreaming of an exit and comfortable retirement, he makes the business available for sale. A larger company makes a generous purchase offer above the full asking price. The entrepreneur, surprised by his good fortune, jumps at the chance to exit his business at a greater valuation than he had hoped for. The sale closes. The entrepreneur deposits the check and begins planning his retirement in Florida where the golf courses are open all year and taxes are low.

But, soon after settling into his new Florida retirement home, there is trouble. The former business owner receives correspondence from the buyer claiming that the seller has misrepresented or omitted material facts about the business and that these misrepresentations or omissions have caused the buyer to suffer financial damages. The buyer demands compensation and threatens to file a lawsuit. The entrepreneur’s comfortable retirement is now in jeopardy.

The story above represents a common problem for business owners. Post-sale litigation is a tactic used to renegotiate the sale price and terms.

A financially strong buyer has the resources to fund complex and expensive litigation. The seller, often an individual or family business, would have to spend a large part of the sale proceeds hiring attorneys to defend complex litigation. Therefore, the seller realizes that it is better to seek a negotiated settlement that involves refunding part of the sale price.

The seller was unaware, but the buyer’s strategy from the beginning was to acquire a valuable business with a generous purchase offer and then use litigation threats to discount the end price so that the buyer ends up with the business at a discount.

Purchase followed by legal extortion.

Protecting Assets After a Business Sale

Asset protection can protect the business seller from lawsuit extortion and sale price refund. As soon as possible after closing the sale and moving to Florida, the business owner should use Florida law to protect sale proceeds from creditors.

It is crucial that the asset protection planning begin before the buyer communicates any allegations of wrongdoing or any claim for damages. Sale proceeds paid to the owner’s business in an asset sale should be distributed to the owner individually. Promissory notes that are part of the sale proceeds should be made payable to the owner or assigned to the owners individually, and the notes should permit further assignment to the owner’s family members or trusts for their benefit.

An entrepreneur can protect sale proceeds in protected Florida assets, including homestead property, retirement-oriented annuity contracts, and family trusts. If the asset protection planning is timely implemented as part of reasonable retirement and financial planning, the owner can probably defend any allegation of fraudulent transfer or conversion.

If the buyer subsequently threatens legal action to reclaim part of the sale proceeds, the seller will be in a much stronger negotiating posture because most of the sale proceeds will be exempt from judgment collection.

Remember:

1. When an entrepreneur sells a business to a large company or hedge fund, the closing is often not the end of the sale process.
2. Sale proceeds are not secure for retirement planning until they are protected from legal claims.
3. Protection of sale proceeds must be initiated immediately upon establishing a basis for Florida residency, and protection should be a part of an overall retirement plan.