Selling a Business With a Pending Lawsuit

Yes, you can sell a company while someone is suing it. It happens all the time, but buyers will not wait for the case to end. The federal courts publish how long that would take. In the year up to June 2026, a federal lawsuit that went to trial took a median of 33.7 months to get there. That is almost 3 years. So the buyer takes money off the offer as if you lose, long before a judge decides.

Last month my team at Livmo met a founder who set a price as if the lawsuit did not exist. That is one common mistake, and hoping it never comes up is the other. Here is how much a buyer takes off for a lawsuit, when to tell them, and when settling first costs less.

Can you sell a business with a pending lawsuit?

A lawsuit rarely kills a sale. A lawsuit the buyer finds on their own often does.

A lawsuit changes the terms. The buyer wants 3 things answered: how much the case could cost at worst, who pays if it goes badly, and how long the money stays tied up.

Hiding it does not work. Federal court records are public, and a buyer's lawyer searches them during the buyer's check of your company, called due diligence. A case they find on their own makes them doubt everything else you told them. Our guide to due diligence red flags from the seller's side covers what else they look for.

Which lawsuits matter most in a SaaS sale?

Three kinds come up again and again in software companies:

• Claims on your code or patents. A former contractor says they own part of your code, or a company that makes no product sues over a patent. Those companies filed 650 of the 1,166 patent cases in federal district courts from July to September 2026, 55.7%, according to Unified Patents' Q3 2026 report. Our post on IP assignment cleanup before a SaaS sale covers how to close the contractor gap.
• Customer disputes. A large customer says you broke an uptime promise or a data promise and wants money back. The buyer reads this twice: as a claim, and as a sign that the customer may leave.
• Employee claims. Unpaid wages, a contractor who says they were really an employee, or a firing someone calls unfair. When a buyer purchases your shares, the company keeps its lawsuits, so the buyer inherits them.

How does a buyer price a pending lawsuit?

Here is an illustration with round numbers, not a real case. A former contractor sues you, says they own part of your code, and asks for $1.5 million. Your lawyer expects it to settle for about $250,000. Defending it all the way to trial would cost about $200,000.

The buyer does not use your lawyer's guess. In the deals I work on, buyers hold back the worst case plus the cost to defend it: $1.5 million plus $200,000, or $1.7 million. That money sits in a special escrow, which is an account run by a neutral third party under a written agreement, until the case ends. Most cases end well before trial: the median federal civil case closed in 6.9 months in the year up to June 2026. But 26.2% of pending federal civil cases were over 3 years old, and the buyer will not release the money until yours ends.

Your likely cost is about $300,000: the settlement plus some legal fees. The buyer's holdback is $1.7 million. I call the difference the Worst-Case Gap. Here it is $1.4 million of your price that is either held for years or taken off the price.

Insurance will not close the gap for you. Many buyers buy insurance against broken promises in the purchase agreement, called representations and warranties insurance, and they use it: about 18% of policies bound from 2019 to 2023 saw at least one claim, and the median claim paid in 2025 was about $8.2 million. But insurers exclude problems the seller disclosed or the buyer already knew about, as Aon's 2026 claims study notes. A lawsuit you disclosed is, by definition, known. So the cost comes back to you.

When should you disclose a pending lawsuit to a buyer?

Early. Tell the buyer before you sign the offer letter, which is the short letter that sets the price and gives the buyer a period to deal only with you. Our guide to negotiating a letter of intent as the seller covers what that letter should say. Once you sign it, other buyers are gone, and the buyer can use a late discovery to cut the price with no one competing.

Disclose threatened claims too: a demand letter, an arbitration, a former employee who says they will sue. A court search will not find those, but the buyer's questions will ask about them.

Then list it in writing. The purchase agreement includes your promises about the company, and a disclosure schedule lists the exceptions to them. In most agreements, a lawsuit listed there cannot later be called a broken promise. One left off can, and then you pay the buyer's losses after closing. Our post on representations and warranties explains how those promises work.

Should you settle the lawsuit before you sell?

Compare what a settlement costs now with what the holdback costs you. Settling fast usually costs more than settling late. Say the contractor takes $350,000 now, against the $250,000 your lawyer expects at the end.

The $1.7 million holdback is not lost money. Most of it comes back when the case ends. But you wait for it, you may lose part of it, and some buyers walk away rather than hold money for years. Paying $350,000 now swaps all of that for one known cost, and buyers see a closed case.

Use these rules:

1. Price the gap before you decide. Ask your lawyer for the worst case and the cost to defend it. Add them. That is roughly what a buyer will hold back.
2. Settle first if the settlement is far below that number. In the illustration, $350,000 once against $1.7 million held for as long as the case runs.
3. Do not settle a claim with no merit just to clean up a sale. If the case is weak and settling would invite copycat claims, keep it and offer a special escrow with a cap and an end date.
4. Put the rules for the escrow in writing. Who controls the defense, who must approve a settlement, and when the money comes back to you. Our guide to escrow holdbacks and indemnification covers those terms.
5. Tell the buyer early, every time. A disclosed lawsuit is a price question. A hidden one is a trust question, and those deals tend to fall apart.

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