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? Not necessarily. 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. That can greatly increase debt and reduce profits. So, you need to ask what are you liable for before purchasing a business.
Purchasing A Business
Buying a business is different than buying just about any other asset. Real estate can come with a few strings attached, but usually, the seller is required to provide some background on potential skeletons in the proverbial closets. With businesses, however, for a responsible new business owner, the term caveat emptor, or “buyer beware” applies.
This can be explained in some respects by the law assuming that a buyer of a business is going to be more aware of what they are purchasing. Including, the given 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 investigate. Either way, the failure to reasonably investigate potential liabilities in a deal can be very expensive in the long run.
Buying A Business With A Pending Lawsuit
When a business owner is pressed for time, it’s in their best interest to Google a potential purchase with the term “lawsuit” as well, in quotation marks. This can notify you when a certain enterprise is facing scandals, a ruined reputation, or violation of regulations.
Should you avoid every business that has a pending lawsuit? Not necessarily, but you should remain aware of suits. While you can’t know the settlement amount, you can find out the charges in question. That can determine the seriousness of the lawsuit, and how it affects your interests.
In addition, you can talk with your board of directors, managers, or shareholders about why the purchase of a particular business is a good idea. If there is a tangible benefit, then you can lay it out in writing.
Consider, for example, if a business is hit with an ADA compliance suit regarding their website. Such a suit is often enacted by a user that wants to get a settlement over the lack of subtitles within videos, or text that doesn’t align with assistive technology. These charges arise from mistakes that are relatively easy to fix.
In contrast, fraud charges are more serious. This can refer to one business falsifying information, profits or processes, like Theranos. If a business has been caught making fraudulent claims about their products or services, it is possible that they have also lied to you or your shareholders during negotiations.
Sales Agreement
When reviewing a sales agreement, ensure that you have done your research on the company. A liability can affect your operations unless you know how to leverage it. That’s why you should have a lawyer on hand for negotiations and reading relevant contracts.
Keep an eye out for certain red flags or potential pitfalls. Here are the ways in which liabilities can stick around and settle uncomfortably on you.
Having liens with the business.
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. Meaning, 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 attorney conduct searches for liens on the property and/or assets being sold, including tax liens and UCC liens. These liens should be removed (if possible) before the sale.
You didn’t get a written agreement.
“Put it in writing” is always good advice with contracts. It applies to discuss 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. Thus, it 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 are just the majority shareholder. Such a situation may not benefit you.
The transaction was bogus.
Sometimes, it happens. For example, the purchase was a sham from the start and it was done only to hide or illegally transfer assets to avoid debt holders. In these cases, 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.
Refine Business Sales With Trembly Law’s Guidance
These are the most common scenarios. However, 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 Trembly Law provide these services to businesses just like yours. They can assist every step of the way from due diligence to post-closing.
Contact our firm today to get started. Whether you are buying or selling a business, our lawyers can protect your interests and ensure that you get a fair deal.
Arturo Arca, Esq.
Partner & Chair of Litigation Department
Arturo Arca joined Trembly Law Firm as a partner in 2018, bringing over a decade of experience in commercial and civil litigation. He represents corporate clients in consumer finance, employment, and business matters, including mergers and acquisitions and non-compete agreements. Arturo helps business owners proactively solidify their foundations and address potential issues with strategic guidance, minimizing liability and fostering growth. His passion for helping businesses thrive energizes him, ensuring his clients have the peace of mind to expand confidently. Arturo’s experience and reputation have led him to share his knowledge through presentations, seminars, and publications, including contributions to Law 360.
Follow Us on Social Media