Every company has history. Maybe it’s an old customer dispute, a former employee claim, or a regulatory issue that was resolved but never formally documented. On their own, these may not seem significant — but during an M&A process, unresolved or undisclosed legal issues can become major obstacles.
Buyers don’t expect perfection. They expect transparency. And they’ll uncover everything in due diligence anyway — so it’s always better to get ahead of the story.
At Legacy Advisors, we’ve helped countless founders clean up old legal and compliance issues before going to market. The result? Smoother diligence, faster closings, and stronger valuations.
Why Buyers Care About Past Litigation
To a buyer, unresolved litigation or compliance issues are potential liabilities. They raise questions like:
- Could this result in financial penalties or reputational damage?
- Are there hidden risks the seller hasn’t disclosed?
- How well does this company manage risk overall?
Even if the issue was minor, undisclosed matters create distrust. And once trust is shaken, valuation follows.
In The Entrepreneur’s Exit Playbook, I emphasize: “You don’t lose deals because you had problems — you lose deals because you hid them.”
Transparency is always the winning strategy.
Common Legal and Compliance Red Flags
Here are the most frequent issues buyers uncover during diligence:
- Unresolved lawsuits or pending claims.
- Regulatory violations or unpaid fines.
- Employment law complaints (wage, discrimination, wrongful termination).
- Environmental or industry-specific compliance gaps.
- Tax filings under review or prior penalties not properly disclosed.
- Settled disputes without formal documentation.
Even small, old, or resolved matters can trigger lengthy reviews if documentation is missing or unclear. Buyers aren’t looking for perfection — they’re looking for confidence that you’ve managed risk responsibly.
Lessons from Experience
When I sold Pepperjam, one of the first things our M&A counsel did was compile a full history of any prior disputes or compliance matters — even those long resolved. We built a “Disclosure Schedule” that detailed everything, along with supporting documents. That transparency built enormous trust with the buyer.
On the Legacy Advisors Podcast (https://legacyadvisors.io/podcast/), Ed and I often share stories about founders who tried to downplay past issues. In one case, a company failed to disclose a minor lawsuit from years earlier. The buyer found it during diligence, interpreted it as dishonesty, and walked away. The issue itself wasn’t the problem — the lack of transparency was.
How to Address Past Issues Proactively
Here’s how to tackle this head-on before going to market:
1. Conduct a legal and compliance audit.
Work with your attorney to identify any current, pending, or historical issues — including minor disputes, warnings, or fines.
2. Verify resolutions.
Ensure that every issue has a documented outcome — settlement agreements, release forms, or clearance letters.
3. Disclose early and clearly.
Buyers appreciate honesty. Include resolved matters in your disclosure schedules upfront, along with supporting records.
4. Fix what can still be fixed.
If any issues remain open, resolve them before diligence begins. Clean resolutions make for cleaner deals.
5. Implement stronger compliance controls.
Demonstrate that past problems were learning experiences, not patterns. Updated policies and training show growth and accountability.
When you present issues transparently and proactively, buyers see you as responsible — not risky.
The Valuation Impact
Legal or compliance problems don’t automatically destroy value. The real risk is surprise. If buyers uncover something you didn’t disclose, they’ll assume there’s more beneath the surface. That usually results in price reductions, delayed closings, or extended indemnities.
When you take control of the narrative, the opposite happens. Buyers gain confidence, diligence moves faster, and you retain leverage.
Transparency doesn’t just protect value — it often enhances it.
How to Communicate Past Issues to Buyers
It’s all about framing. Lead with transparency and resolution. For example:
“We had an employment claim in 2021, which was resolved with no admission of liability. Since then, we’ve implemented updated HR training and compliance protocols.”
This shows responsibility and leadership, not weakness. Buyers appreciate founders who own their history and demonstrate how they’ve evolved from it.
Final Thoughts
No company makes it to scale without a few legal or compliance challenges along the way. What separates the prepared from the unprepared is how they handle them.
A founder who’s proactive, transparent, and well-documented turns potential red flags into proof of maturity.
Exits don’t happen when you feel ready — they happen when your business is ready. And readiness means being open about the past so buyers can believe in your future.
Find the Right Partner to Help Sell Your Business
At Legacy Advisors, we help founders prepare for exit by identifying, resolving, and documenting past legal and compliance issues before buyers ever see them.
Visit legacyadvisors.io to connect with our team, listen to the Legacy Advisors Podcast (https://legacyadvisors.io/podcast/), and explore insights from The Entrepreneur’s Exit Playbook. Together, we’ll turn potential risks into opportunities for transparency — and confidence.
Frequently Asked Questions About Managing Legal and Compliance Issues Before a Sale
Why should I disclose past litigation or compliance issues before selling my business?
Because buyers will find them anyway. During due diligence, legal teams conduct thorough searches of public records, lawsuits, and regulatory filings. If they uncover issues you didn’t disclose, it can create distrust — even if the matter was minor or already resolved. Transparency builds credibility. Buyers don’t expect a spotless record; they expect honesty and documentation. When you proactively disclose past issues, you show maturity, integrity, and control — qualities that increase buyer confidence and protect valuation.
What kinds of legal or compliance issues concern buyers the most?
Buyers worry most about unresolved or undisclosed matters that could carry future liability. These include pending lawsuits, labor or employment disputes, unpaid taxes, regulatory fines, or environmental violations. Even small issues — like unfiled settlement documents or expired permits — can raise concerns. Buyers want assurance that all matters have been identified, properly resolved, and well-documented. In other words, it’s not the existence of past issues that scares them — it’s uncertainty about what else might be hiding.
How should I handle past disputes or lawsuits before going to market?
Start by compiling a complete list of every legal and compliance issue your company has faced — even those long resolved. Work with your attorney to confirm that each one has a clear paper trail: settlement agreements, release forms, court orders, or correspondence confirming closure. If any matters are still open, resolve them proactively. Then include a summary of these items in your disclosure schedules during diligence. By owning the narrative early, you remove the buyer’s ability to use those issues as leverage later.
What if I had a compliance issue years ago that’s already fixed — do I still need to disclose it?
Yes, if there’s any formal record of it. Even resolved or minor infractions should be listed in your disclosure materials with a note describing the resolution. Omitting something small can look worse than the issue itself once buyers uncover it. Transparency is the safest approach. Framing past issues as learning moments — and showing how you’ve strengthened your compliance program since — turns potential red flags into proof of strong governance.
How can Legacy Advisors help me prepare for buyer scrutiny around legal and compliance history?
At Legacy Advisors, we guide founders through the process of identifying, documenting, and disclosing past legal and compliance matters in a way that builds buyer trust. We coordinate with your legal and financial advisors to prepare a complete “risk readiness” file, ensuring no surprises arise in diligence. Drawing from The Entrepreneur’s Exit Playbook and insights shared on the Legacy Advisors Podcast (https://legacyadvisors.io/podcast/), we help you turn transparency into leverage — positioning your company as credible, well-managed, and ready for a clean exit.