Yes, it’s possible to sell a business that’s facing pending litigation. Buyers and sellers can work together to structure a deal that addresses legal risks and protects both parties. If you’re considering selling your Pittsburgh-based business while a legal dispute is pending, understanding your options is key to moving forward with confidence.
While pending litigation doesn’t automatically derail a business sale, it does require additional planning and legal oversight. With the right strategy, you can address potential liabilities and close the deal on favorable terms.
Do You Have to Disclose Pending Litigation to a Buyer?
In almost every case, yes—you need to disclose any active lawsuits or legal threats during the sale process. Buyers conduct due diligence to evaluate the risk associated with acquiring your business. Pending lawsuits are usually detailed in a disclosure schedule, which formally qualifies the seller’s representations and helps shift or limit liability. Failing to disclose pending litigation could expose you to breach of contract claims after the sale closes.
Being transparent from the outset is the best approach. Most business purchase agreements include representations and warranties, where the seller affirms that all material legal issues have been disclosed. If you hide an ongoing dispute and the buyer discovers it later, the consequences can include rescission of the deal or significant financial penalties.
You don’t need to panic if your business is facing litigation. What matters is how you present the issue, document it, and account for it in the purchase agreement.
How Can Liability Be Allocated Between Buyer and Seller?
Once litigation is disclosed, the parties need to decide how the liability will be handled. There are several ways to divide responsibility:
- Seller retains full liability: This is common in situations where the litigation arose before the sale and doesn’t impact future operations.
- Shared liability: Buyer and seller agree to split potential costs, depending on how the case unfolds.
- Buyer assumes the risk: In some cases, the buyer may accept the risk in exchange for a lower purchase price.
These terms should be clearly outlined in the purchase agreement to avoid disputes, especially regarding indemnification.
Using Escrow to Manage Risk
Escrow arrangements can help manage uncertainty by allowing the buyer to place part of the purchase price in an account until the matter is resolved.
Escrow can help:
- Protect the buyer from unexpected losses
- Allow the transaction to proceed without long delays
- Build trust between both parties
A well-structured escrow agreement will include a clear timeline, release conditions, and dispute resolution mechanisms.
Are There Insurance Options Available?
Another way to address litigation risk in a business sale is through insurance. One option is Representations and Warranties Insurance (RWI), which protects the buyer if the seller’s representations turn out to be inaccurate. However, if litigation is already known and disclosed, it is usually excluded from RWI coverage. In those cases, a separate contingent risk or litigation buy-out policy may be worth exploring.
Other possible coverage includes:
- Litigation insurance, which may cover the cost of defending a specific lawsuit
- Tail coverage for professional liability claims that arise after closing
These policies have specific eligibility requirements, and certain disputes, such as fraud claims or government investigations, may be excluded. We can help you evaluate whether insurance is a practical option in your situation.
Structuring the Deal to Account for Pending Litigation
A thoughtful deal structure can help move the transaction forward even when litigation is on the table. Here are some approaches:
- Carve-outs: Exclude the legal dispute from the sale entirely, especially in asset deals.
- Deferred payments: Hold back part of the purchase price until the litigation is resolved.
- Earn-outs: Tie part of the payment to the future success of the business, which may not be affected by the pending issue.
Flexibility is key. No two transactions are the same, and the right structure depends on the size of the claim, the business’s financials, and the parties’ risk tolerance.
How We Help Pittsburgh Business Owners Sell Despite Legal Challenges
At Jones, Gregg, Creehan & Gerace, we’ve worked with business owners across Pittsburgh who are facing complicated legal issues during a sale. Pending litigation doesn’t mean your deal is off—it just means it needs to be handled carefully.
We’ll guide you through:
- Disclosing litigation without scaring off buyers
- Negotiating deal terms that protect your interests
- Drafting strong indemnification and escrow provisions
- Exploring insurance options to reduce exposure
Our goal is to make sure the sale proceeds smoothly while safeguarding your legal and financial position.
Selling a Business with a Lawsuit? Don’t Go It Alone
Selling a business while litigation is pending requires experienced legal help. With the right strategy and support, you can move forward and avoid common pitfalls.
Ready to explore your options? Contact Jones, Gregg, Creehan & Gerace today to schedule a confidential consultation with our Pittsburgh business law team.