What Are You Liable for After Buying an Existing Business?

The contract has been signed, the money has been sent, and, most importantly, the keys and the customer list have been handed over to you. You’re in business, right? Maybe. If you buy a business, it is very possible that you are buying not only the assets but the liabilities of the business as well.

Buying a business is different than buying just about any other asset. Real estate can come with some strings, but usually, the seller is required to provide some background on potential skeletons in the proverbial closets. With businesses, however, the caveat is usually “buyer beware.” This can be explained in some respects by the law assuming that a buyer of a business is going to be more aware and more cognizant of what they are purchasing given the time and money that will be expended in the purchase. In other words, the law expects that the buyer will have done their due diligence and knows what they are getting, warts and all.

However, some buyers simply do not have the resources to do in-depth research. Others lack the basic knowledge that this is something very important to look into. Either way, the failure to reasonably investigate potential liabilities in a deal can be very expensive in the long run. Here are the ways in which liabilities can stick around and settle uncomfortably on you.

 

  • Liens, liens, liens. Third party liens on the assets of the business can easily leave you with no assets. A lien is a recorded interest in assets such as real property, business equipment, fixtures, etc. If the seller of the business has a debt that they owe to a third party, that third party can put a lien on the particular property so that when it is sold they will get the proceeds. Other liens work by allowing the third party to seize the assets and sell them to make up the debt. It is critical to have an attorney conduct searches for liens on the property and/or assets being sold, including tax liens and UCC liens so that these liens can be removed (if possible) before the sale.
  • You didn’t expressly say that they don’t. “Put it in writing” is always good advice with contracts, and it applies to discussing what you will not be taking on as well as what you will be taking on in a purchase. Your agreement should have a clause specifically stating that you will not be assuming any of the debts and liabilities of the seller. Failure to include this provision means that the contract is technically silent on the matter and thus, can be interpreted to mean that you agreed to be liable.
  • It’s a De Facto Merger. This usually occurs in stock sales where the buyer purchases all or most of the company’s stock as a way of taking ownership rather than going through a purchase agreement. For purposes of liability, the “owner” of the business may not have actually changed even though the majority stockholder is new. Thus, the debtor’s liability remains the same, and you may are just the majority shareholder.
  • The transaction was bogus. If the purchase was a sham from the start, for example, and it was done only to hide or illegally transfer assets to avoid debt holders, the sale is usually considered fraudulent and treated as if it never happened. This means that whatever you purchased was not yours to begin with.

 

While these are the most common scenarios, an attorney with business contract negotiation should absolutely be on your list of people to consult with when you are considering purchasing a business. The attorneys at the Trembly Law Firm provide these services to businesses just like yours and can assist every step of the way from due diligence to post-closing. Contact our firm today to get started.

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Written by Brett Trembly

Brett Trembly

In the South Florida legal community, Brett sits on the Board of the South Miami Kendall Bar Association, the Florida Bar 11th Circuit Grievance Committee, volunteers on the Florida Bar Young Lawyers Division Mentoring Program, the Dade-County Bar Associations Rainmakers Committee, and annually volunteers for Miami-Dade County’s Ethical Governance Day.