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Beware of Successor Liability When Buying the Assets of a Business
Sell a Business
If you’re planning to purchase the assets of a business, you need to manage all risks associated with that transaction. Many people think that because they are acquiring the assets of a business (versus the stock of a corporation or the membership interests of an LLC), that they can choose not to assume any of that business’ debts, liabilities or obligations. Although this thinking may be true in many instances, a legal doctrine called “successor liability” can result in a different outcome.
What is Successor Liability:
Generally, the doctrine of successor liability allows a creditor or debt collector (such as consumers, employees, governmental agencies and taxing authorities) to seek payment from the buyer, even if the buyer specifically stated that it is not assuming those liabilities. If the buyer has assumed those liabilities in the transaction, then the buyer’s contractually agreed to be responsible for them. If the buyer explicitly disclaims certain liabilities, the buyer may still be responsible.
The usual types of liabilities that a buyer may be responsible for even if they are not specifically assumed include state and local tax obligations, product liability lawsuits, environmental cleanup actions and employment law claims.
How to Avoid Successor Liability:
To protect yourself from taking on the seller’s past liabilities and obligations, it’s important that before you purchase a company’s assets that you conduct research, such as obtaining a no-tax due certificate from the Texas Comptroller, a lien and litigation search, thoroughly interview management and managers, compile a proper due diligence request, and review the target company’s files, records and documents in response of such request.
Additionally, you’ll want to have your attorney put together a carefully worded asset purchase agreement that contains the representations and warranties from the seller and an agreement that explicitly states all liabilities of the seller that are being explicitly assumed. In every Purchase Agreement the seller should be asked to indemnify and hold the purchaser harmless for any liabilities or obligations that arise during the seller’s ownership of the assets. You may also request that the seller escrow a certain portion of the purchase price to cover any unknown liabilities that may be discovered after the close.
If you need further assistance or clarification on successor liability, then please contact us.
DISCLAIMER: The information contained in this article is intended for informational purposes in order to give the reader a general understanding of this important topic.This article is not intended to be legal or tax advice, so if you need additional information, please contact us.