We have unresolved litigation and several outdated employee agreements from our early days. How do we clean up these legacy legal liabilities during our exit runway without alerting our employees or triggering costly legal battles?

Question

Tyler Smith · Accepted Answer

Outdated contracts and unresolved legal disputes are red flags that can pause a transaction or lead to severe escrow holdbacks. You must address these liabilities systematically before you launch your sales process. Start by conducting an internal legal audit. Review all legacy employment agreements, non-compete clauses, and independent contractor agreements. If you need employees to sign updated agreements that include intellectual property assignments and clear confidentiality terms, do not frame this as exit preparation. Instead, present it as a routine corporate update. Introduce the new contracts during your quarterly state of the company address. Frame them as a necessary step to modernize your operational standards as you scale. For unresolved litigation or customer disputes, work with your legal counsel to settle these matters quickly, even if it requires a cash payout. A buyer will almost always demand a steep discount or a massive indemnification cap for open lawsuits. By resolving these issues during your runway, you present a clean, low-risk corporate profile. This preparation ensures that during due diligence, the buyer can focus entirely on your strong operations and growth potential rather than your past legal mistakes.