You are finally the proud new owner of a business and are ready to move full speed ahead into the glorious future you have set up for yourself. Then why is the IRS all of a sudden knocking on your door? Why are you getting served for lawsuits from people you’ve never heard of? Why did these issues seem to spring up from nowhere? The most likely answer is that your solid business actually had a lot of skeletons in its closet.
1) Undisclosed liens
If the prior owner had put up the assets of the business as collateral to secure a loan or some type of indebtedness, and then did not pay that indebtedness, the fact that you have purchased the business that uses those assets is of no moment in the eyes of the lienholder. If you purchased the business (and its assets) after the lien was filed (i.e. “perfected”), you are behind the lienholder in the line of creditors. They can repossess the assets to recoup their losses and you are not going to be able to do much about it.
2) Unpaid Taxes
The failure to pay taxes can result in the taxing authority (IRS, state, municipality) assessing a lien on the property that is the subject of the tax. As with asset liens, these liens have priority – they get to go to the front of the line, ahead of you – to get their debt satisfied. How that debt is satisfied can be as drastic as the tax authority seizing the property and selling it to the highest bidder to recoup the liability.
3) Pending lawsuits
This becomes an issue mainly when you purchase the stock of the business as well as the assets. In essence, you are not becoming a new business, but rather taking ownership of an existing business. This is a minefield of epic proportions because you could be stepping right into the shoes of the prior owner being a defendant in a lawsuit for costly issues such as employment discrimination, unfair trade practices, and trademark or copyright infringement.
4) Licenses and registrations are not current
If your business requires a license to operate and the prior owner failed to update the license before you purchased it, you could be in for a long slog trying to get it reinstated and paying for the lapse. Similarly, if permits were required for prior work but were not obtained at the time, you could be left holding the bag when it comes time to operate.
5) You assumed contracts
Many ongoing businesses have ongoing contracts, such as vendor contracts or contracts with customers. In most cases, the new owner will want to take on those contracts, but in some cases, they don’t. If the prior owner failed to disclose contracts, you could end up taking them on by default. Similarly, if contracts were not terminated according to their provisions, you could face liability from the contract holder for improper termination.
Any one of these liabilities can be enough to sink your business before you even get it going. The best defense in each case is two-fold: excellent due diligence and a well-crafted asset purchase agreement. A knowledgeable and skilled attorney is vital in this journey. They can help with due diligence and they can draft a strong asset purchase agreement that protects you as the buyer during and after the closing. Trembly Law Firm is ready and able to help you avoid these pitfalls in pursuing your dream of being a business owner. Contact us today to get started.