What Can I Do If I Have a Dispute About The Purchase Or Sale Of A California Business?

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The purchase or sale of a business entity can be both very exciting and stressful at the same time. For business sellers, it may be hard to let go of a business that took years, or maybe an entire career, to build, or it may be a transaction that you want to be able to close quickly and without further involvement. For buyers, it may be scary to step in the shoes of a business owner without knowing substantial information about the financial condition and past revenue and expenses of the business, or it may likewise be a transaction that you want to close quickly and start doing business. 

Either way, disputes arising from the purchase or sale of a business are common, and can often be resolved quickly if you obtain legal counsel to guide you through these difficult waters and toward a positive result. 

A buyer should be concerned about representations, both financial and otherwise, made by the seller about the condition of the business, the employees, any disputes with vendors, employees, customers or competitors which are known or have the potential to be made as claims, the lease (or condition of the real estate if the building/land is also purchased as a part of the transaction), and any other information that could affect the business going forward.  

If the buyer is new to the subject matter of the business (for example, a buyer of a dry cleaning business who does not have experience in dry cleaning), the buyer should consider having the prior owner work as an employee or independent contractor consultant for a period of time after the close of the transaction to train the new buyer. The buyer should also have a transactional attorney prepare and review a purchase contract that covers all specific details of the intended transaction. 

A seller should be concerned about what representations he/she is making as a part of the transaction, and to make sure the representations made as a part of the sale are accurate and backed up by written data and documentation. The seller should also be concerned about the financial ability of the buyer to complete the transaction, particularly if the transaction includes loans or financial approval for loans or lease assumption. 

The seller should work with his/her financial adviser to gather documentation of the financial condition of the business and make sure that information is accurate and provided to the buyer consistent with the terms of the purchase agreement. In addition, the seller should make sure to disclose any matters that could affect the business going forward, and should consult with a competent California lawyer regarding how to protect him/herself during and after the transaction. 

If the seller is going to continue to consult with the new buyer, the seller should also make sure those terms are specific and limited to what he/she can reasonably afford to do, or is willing to do. 

Another item both buyers and sellers need to consider is the inclusion of a covenant not to compete in the purchase/sale agreement, which could restrain the seller from competing with the business for a reasonable period of time, in a reasonable geographical area, for example. While generally in California covenants not to compete are illegal, California Business and Professions Code section 16601 provides an exception for situation arising from the sale of a business.

Disputes often result from a lack of information or a lack of trust during or after the transaction. Both sides have rights under the law, but likely also a well-drafted purchase and sale agreement. Disputes often include potential claims for:

(1) Misrepresentation or fraud allegations concerning the financial condition of the business;

(2) Misrepresentation or fraud allegations concerning facts allegedly not disclosed by the seller as a part of the transaction;

(3) Unfair business practices;

(4) Breach of the purchase agreement;

(5) Default of any amount owed under the purchase agreement;

(6) Violation of the covenant not to compete; and

(7) Trade secret misappropriation

If you have a dispute during or after the purchase or sale of a business, you should immediately consult with an attorney with experience in business disputes (often known as a business litigator). Be careful of an attorney who promises terrific results, who overuses legal jargon or who spends substantial time talking about his/her resume to puff him/herself up. Try to find an attorney who explains in plain language your options, who is strategic and who listens to you before just talking about what he/she will do for you. 

Also look for a lawyer with experience both in resolving cases through mediation, and in trying cases before a judge or jury, in the event it is necessary to do so. 

The Coopersmith Law Firm has that experience, and the skill set to help you through this difficult time in your business. Our legal team provides cost-effective litigation advice, providing the quality of a large firm with the care and attention a boutique business litigation firm can provide. Let us guide you through rough waters, and toward a positive result. 


Answered 03/30/2015

Disclaimer: This answer was provided by an attorney selected to Super Lawyers, and is intended to be an educated opinion only. This answer should not be relied upon as legal advice, nor construed as a form of attorney-client relationship.

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