When people, including lawyers, talk about “due diligence,” it is almost always about buyers. The buyer hires a team of lawyers, accountants, and consultants to dig through your books, inspect your contracts, and ask a lot of detailed questions.
But here’s the twist: sellers need to do due diligence too, not just on the buyer, but also on themselves. If you’re selling your business and you don’t know who you’re dealing with (or worse, what you’re actually committing to), you could be walking into a world of regret, risk, and unnecessary court dates.
You Might Not Get Paid
When selling your business, it’s not enough to trust a buyer’s promises or love their fancy pitch deck. You need to make sure that the buyer actually has the money, and that you’re not just signing up for a costly game of chase-the-check.
Here’s how your lawyer and/or financial advisor can help:
- Verify financing sources: Review loan commitments, proof of funds, or investment agreements to confirm the buyer’s money is real and ready.
- Run credit and background checks: Spot red flags like bankruptcies, liens, or lawsuits against the buyer or its principals that might impact their trustworthiness or ability to pay. This is particularly important if any part of the deal is being financed.
- Review and negotiate payment terms: Ensure there are deposits, earnouts with clear milestones, or security interests protecting you if payments aren’t made.
- Require personal guarantees: If the buyer is an entity, have the buyer’s principals personally promise to pay if their company can’t. This gives you someone to pursue beyond the business itself and increases your chance of actually getting paid. Your lawyer will make sure these guarantees are airtight and enforceable.
- Set closing conditions: Include requirements that financing is confirmed before the deal closes.
- Confirm the buyer’s authority: If the buyer is an entity, ensure the entity is valid and in good standing.
You’re Making Promises. Make Sure That You Can Keep Them
Here’s something sellers often overlook: you’re likely also making a lot of legal promises in that purchase agreement. Are you 100% sure you’re allowed to sell everything you’re selling, and can do so without risk? Are there contracts that require third-party consent? Liens that need to be released? Licenses that are not transferable?
And let’s not forget personal guarantees. If your name is still attached to anything after closing and the buyer tanks the business, you might get a very unpleasant call from a landlord, lender, or vendor, wondering why their checks stopped clearing and putting you on the hook for it.
Ultimately, inaccurate representations or overlooked personal guarantees can expose you to post-closing liability, including the risk of litigation for breach of contract or enforcement of prior obligations.
Make Sure the Buyer Can Legally Own What They’re Buying
Some businesses, especially licensed or heavily regulated ones, can’t legally be owned by just anyone. Think law firms, medical practices, liquor licenses, financial services, and franchises; essentially, any business where ownership or operation is restricted by law, contract, or regulation. This might seem like the buyer’s problem, and technically it is, but if they can’t legally take ownership or operate the business, it becomes your problem too.
Here’s why:
- The deal might fall apart prior to closing, but after you’ve invested serious time and money.
- You could accidentally violate a law or contract by selling to the wrong type of buyer.
- Regulators might unwind the sale, revoke licenses, or impose penalties.
- You may get stuck restructuring the deal at the last minute to fix something the buyer should’ve flagged.
Indemnity Works Both Ways
Buyers love indemnity clauses, and they usually ask sellers to cover any issues from before the sale. Fair enough. But here’s the catch: if the buyer gets sued for an issue that stems from before closing, they may come after you for reimbursement: for defense costs, damages, or both. How they handle that claim matters.
Depending on the contract, you might:
- Be required to defend the claim yourself at your cost.
- Have the right to take over the defense.
- Have no say at all while they rack up costs you may be required to cover. In this case, if the buyer settles too quickly, overpays, or just mishandles things, you might still be on the hook. Unless you know and trust how the buyer deals with risk, indemnity can turn into a blank check.
This is why it’s so important to know who you’re selling to, and to understand exactly what your indemnity clause says (and doesn’t say).
Your Reputation Is Still on the Line
Your business might be gone, but your name is not. If the buyer slashes service, burns vendors, or treats your employees like disposable napkins, people may still associate that with you, especially if you’re staying in the same industry or community. And if you agreed to stay on for a transition period or consulting arrangement, forget about plausible deniability; you’re in the room when the damage happens.
Before entering into a deal with a buyer, ask yourself:
- What’s their track record?
- Do they care about the people you’ve been working with for years?
- Are they trying to build something, or just flip it?
This isn’t just business, it’s your legacy. Choose wisely.
Legal Cleanup Can Be Expensive and Slow
Once a deal goes sideways, there are really only two options: suffer quietly or lawyer up. And if it gets to that point, even a “good” outcome costs time, energy, and money you didn’t plan to spend.
Enforcing payment, indemnity, or anything else post-closing means chasing someone down who now owns your business and may not be feeling cooperative. If they disappear, dispute, or delay, you’re stuck trying to unwind the damage.
It is better and easier to ask the hard questions before you enter an agreement, and certainly before you close:
- Can they do what they say they’ll do?
- Can you do what you’ve promised?
- What happens if things go wrong?
Bottom Line: You’re Not Just Selling a Business, You’re Entering a Relationship
Selling a business is not just a financial transaction; it typically creates ongoing legal relationships and obligations. With the right preparation and professional guidance, you can minimize risk, protect your interests, and move forward with confidence. A knowledgeable attorney can help you identify potential issues before they arise and ensure that the promises you make (and rely on) are clearly defined and enforceable. Because once the ink dries, it might not be your company anymore, but it can still be your problem. Have questions or need help thinking through a deal? We’re here when you need us.