Active Litigation
How do you check for litigation when buying a small business?
Recurring or spiking legal fees. Contingent-liability notes in the financials. Answers that start with "our attorney is handling it."
What to ask for
Suspecting a flag is not the same as verifying one. These are the documents and signals that turn a hunch into a decision.
- Three years of legal fees, by month rather than by year.
- Contingent-liability notes in the financial statements.
- A written list of active, threatened, and recently settled matters.
- Court records in every county the business operates in, run yourself.
The question to ask the seller
“Any lawsuits, claims, or disputes, active or threatened? Show me the filings and your attorney's assessment.”
Ask it in those words. A seller who answers straight is telling you something. A seller who dances is telling you more.
Unresolved litigation is an unpriced liability. In a stock deal it transfers with the entity. In an asset deal, successor liability can follow you anyway, which is the part buyers assume protects them and often does not.
Full indemnity, escrowed, sized to the exposure and held long enough to outlast the claim. Get your own counsel's read, not the seller's attorney's assessment.
Material unresolved litigation is a walk unless it is fully indemnified and escrowed in writing.
Travels with
Flags that show up together.
Screening one of these usually turns up the others. They share a cause more often than they share a coincidence.
Every deal you read gets safer.
The flags live in the community, applied to real deals every week. Membership is complimentary.
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