Pending or threatened litigation

A lawsuit, a formal complaint or a letter threatening legal action can cost a business far more than the amount claimed. Legal fees, management time, higher insurance premiums and strained customer relationships all weigh on earnings, and the outcome stays uncertain until the matter is settled or decided.

What you take on depends on how the deal is structured. In a share sale (a stock sale in the US) the company keeps its history, so claims arising from events before completion remain its problem, and therefore yours. In an asset sale, liabilities generally stay with the seller, although some can still follow the business depending on local law, and a dispute with a key customer or supplier will affect you either way. Lawyers usually deal with known claims through specific indemnities, a disclosure letter (a disclosure schedule in the US) and part of the price held in escrow or as a holdback. An indemnity is only as useful as the seller's ability to pay it.

Disputes vary widely in seriousness. A modest claim over an unpaid invoice can usually be priced in. A claim that challenges the core product, the right to use the brand or the licence to trade, or an investigation by a regulator, can make a deal unworkable. Loupe's valuation tool reflects this: at its starting settings it reduces the multiple by 10% where some legal, tax or compliance issues are known, and by 30% where they are significant, with confidence set to low.

Take advice from a lawyer in the country where the business operates before you rely on any assessment of a claim.

• Court records, insolvency notices or regulator announcements name the business or its owners. Coverage and access differ by country, so a clean search is not proof that nothing exists.
• Legal fees in the accounts rose sharply, or the seller cannot explain them.
• The financial statements mention provisions or contingent liabilities.
• Reviews or social media posts mention lawyers, refunds refused or complaints to regulators.
• Customers are withholding payment or disputing completed work.
• Staff, business partners or customers recently left on bad terms.
• An insurer declined a claim, raised premiums sharply or would not renew a policy.
• The seller resists giving a warranty that there are no disputes.

A full Loupe dossier checks public sources for litigation and insolvency notices and records where and when each check was made. Threatened claims and private disputes rarely appear in public records, so you still need to ask.

• Is the business, or are you in connection with the business, involved in any current dispute, claim or investigation?
• Has anyone threatened legal action or made a formal complaint in the last three years?
• Have you settled any claims, and do the settlements include ongoing payments or conditions?
• Are any customers withholding payment or disputing work?
• Has a regulator, inspector or tax authority raised concerns about how the business operates?
• Which claims are covered by insurance, and has the insurer accepted cover?

• A schedule of current, threatened and past disputes for the last five years, with amounts claimed and status
• Correspondence with lawyers and other parties on each matter
• Legal fee invoices for the last three years
• Settlement agreements
• Insurance policies, the claims history and correspondence with insurers
• Correspondence with regulators or inspectors, and any notices received
• The notes to the financial statements covering provisions and contingent liabilities