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Selling a Business: How to Avoid Post-Closing Legal Liabilities

Selling a Business: Avoid Post-Closing Legal Liabilities

6 October 2025: Selling a Business: Avoid Post-Closing Legal Liabilities

Selling a business is a major milestone; in most cases, it’s the most significant financial event in the business owner’s life. But long after the ink has dried on the contract, a seller can still face legal risks if the deal wasn’t structured and executed properly.

Post-closing legal liabilities can arise from a range of issues—such as undisclosed debts, misrepresentations, breaches of warranties, employment disputes, or tax liabilities—that can haunt the seller even after they’ve exited the business.

To minimize the chances of being entangled in legal problems after the sale, a proactive approach is essential. Here are some of the most effective strategies to avoid post-closing legal liabilities when selling a business.

Structuring the Deal

There are two primary ways to sell a business: an asset sale or a stock/equity sale. Each has implications for liability.

  • Asset Sale: The buyer purchases selected assets – individual assets (equipment, inventory, goodwill, etc.) – and assumes specified liabilities. This structure helps limit the seller’s post-closing liabilities, especially if liabilities not expressly transferred remain with the seller. Though this may result in multiple tax treatments for this seller, this is generally the preference of buyers as it provides legal protections for the buyer.
  • Stock Sale: The buyer acquires ownership of the entire company, (e.g., shares or membership units) in the corporation or LLC, including its liabilities. This is the proverbial “warts and all” structure. While this may seem to shield the seller, any misrepresentation or undisclosed liabilities at the time of sale can still result in claims against the seller.

Make sure you have the right talent on board – professional business brokers/advisors, legal counsel and tax professionals – to determine the most advantageous structure for your situation, and ensure the acquisition agreement clearly outlines which liabilities are being transferred and which are retained.

(For a detailed discussion of the differences between an asset and stock/equity sale structures, see this article.)

Disclose, Disclose, Disclose

Many post-closing legal disputes arise from the seller’s failure to disclose important information. Transparency during due diligence protects both parties.

Key areas to disclose:

  • Pending or threatened litigation
  • Employee claims or labor disputes
  • Environmental issues
  • Tax liabilities or audits
  • Existing contracts and obligations
  • Intellectual property ownership and disputes
  • Customer complaints or churn
  • Product liability or warranty issues

Disclosures should be made in a “Disclosure Schedule” attached to the purchase agreement. This provides a clear record of what was disclosed and can be used as a defense in future disputes.

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Clear Indemnification Provisions

Indemnification clauses outline the process by which one party (usually the seller) agrees to compensate the other for losses arising from breaches (by seller) of the agreement.

Again, good legal counsel is important but start here to protect yourself:

  • Limit how long the buyer can make indemnification claims (post-closing survival periods of 12–24 months are common, except for fraud or fundamental representations).
  • Cap your liability to a specific amount (e.g., a percentage of the purchase price).
  • Consider a basket (a minimum claim threshold) and deductible (seller only pays amounts above the basket).
  • Negotiate an indemnity cap to limit your exposure.

For example: “Seller’s liability for claims under this Agreement shall not exceed 10% of the purchase price, except in the case of fraud or intentional misrepresentation.”

(For a great discussion on Representations and Warranties, see this Live Stream replay of an interview with Michael Drath, U.S. representative of London-Based CFC Underwriting.) Short-term subscription to The Brokers Roundtable℠ required.)

Escrow and Holdbacks

Escrow accounts and holdbacks provide financial security for the buyer if post-closing claims arise.

  • Escrow: A portion of the purchase price is held by a third-party escrow agent for a defined period.
  • Holdback: The buyer retains a portion of the purchase price and releases it over time if no claims arise.

These mechanisms protect the buyer while also giving you a defined period after which you can access the full sale proceeds. Negotiate the escrow terms carefully—amount, duration, and release conditions.

As many business transfer involve some level of seller financing, such financing can work in conjunction with an escrow of holdback.

Ensure Accurate Financial Records

Buyers rely heavily on your business’s financials when deciding to purchase. Inaccurate, incomplete, or manipulated financial records are a major source of post-sale disputes.

To avoid this:

  • Use professional accountants to prepare and audit your financials.
  • Be transparent about historical performance and assumptions used in projections.
  • Don’t overstate revenue, understate expenses, or hide liabilities.
  • Provide backup documentation (bank statements, tax returns, AP/AR aging reports).
  • Use a professional business broker (CBI) or M&A specialist to value your business before bringing it to market. A properly conducted and structured valuation will 1), generally make the financial statements more transparent and easier to understand, and 2) support your asking price (assuming it relates to reality).

Financial misrepresentations can lead to lawsuits for breach of contract or fraud—even years after closing.

Employment and HR Matters

Buyers may inherit liabilities related to employees, benefits, and employment contracts. To reduce your exposure:

  • Resolve any known employment disputes before closing.
  • Comply with all termination obligations if employees aren’t being retained.
  • Ensure all employee records are complete, thorough and accurate.
  • Be transparent about compensation, benefits, and any outstanding bonuses or commissions.
  • Handle COBRA and benefits transitions properly.

Include clear language in the agreement about which party is responsible for pre-closing employee liabilities.

Legal Disputes

Any unresolved legal matters—pending litigation, regulatory investigations, or contract disputes—can be red flags for buyers and create ongoing liability for sellers.

Before closing:

  • Settle or disclose all known legal disputes.
  • Obtain releases or waivers where possible.
  • Ensure your legal team reviews any contingent liabilities and properly discloses them.

It’s FAR better to deal with these issues before closing than to be sued months or years later.


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Intellectual Property (IP) Ownership

If your business relies on IP (e.g., trademarks, copyrights, patents, trade secrets, or proprietary software), ownership and validity must be airtight.

To avoid liability:

  • Ensure all IP is properly registered and assigned to the business.
  • Review employee and contractor agreements for IP assignment clauses.
  • Disclose any third-party claims or usage rights.
  • Provide the buyer with a full list of IP assets and licenses.

Failure to properly assign or disclose IP can result in breach claims, especially if the buyer later finds they don’t own what they paid for.

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Get Professional Legal Advice

Finally, the most important step in avoiding post-closing liability is to work with experienced professional brokers as well as legal and financial advisors throughout the process.

Make sure you have the right talent to:

  • Draft and negotiate the purchase agreement
  • Identify and mitigate potential liability issues
  • Ensure compliance with state and federal regulations
  • Assist with due diligence, disclosure schedules, and indemnity structuring

Do not attempt to sell your business using a generic template or without legal counsel. The upfront cost of professional advice is far less than the potential cost of post-closing litigation.

The Bottom Line

Selling a business is not just a financial transaction—it’s a legal one. Even after you’ve signed the deal and handed over the keys, you could still be held liable for issues that arise post-closing if the sale wasn’t handled carefully.

By structuring the deal wisely, disclosing everything honestly, using robust legal agreements, and surrounding yourself with competent advisors, you can minimize your risk and walk away from the sale with peace of mind.

While it’s impossible to eliminate every risk, taking these precautions significantly reduces your chances of facing costly and stressful legal issues after the deal is done


“Far and away, the best prize life has to offer is the chance to work hard at work worth doing.

– Theodore Roosevelt

If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.

I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.

Joe


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#business #businessacquisition #sellabusiness #becomeabusinessbroker #businessbrokering #businessvaluation #MergersandAcquisitions #buyabusiness #sellabusiness #realtor #realestateagents

 

The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 1,000 in the world. He can be reached at jo*@*******************og.com

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