Handling Debts and Liabilities When You Purchase a Business

Let’s say that you want to purchase a business. It looks like a great business, and it does well, and has a good reputation. You really want to purchase this business. But there’s one thing about the business that you are concerned about buying: the liabilities.

Different Kinds of Debts and Liabilities

Liability can include potential liabilities—for example, a business that has breached a contract, but hasn’t been sued on the breach, or a business that has gotten notice of a possible fine or penalty from a government agency, but hasn’t been fined yet.

It can also include pending lawsuits, or even debts that are immediately owed, like judgments recorded against the company.

You also need to determine the status of a debt owed by the business you are purchasing. A judgment, where the sheriff could come and levy your business’ property at any time, is much more serious than just a threatened claim, which could still be negotiated.

You’re Purchasing Debts

If you just purchase a business, and say nothing about the debts or liabilities, you can assume that you are purchasing the business with those debts and liabilities. That means that you will have to find a way to pay them, once you are the new owner of the business.

You can, of course, deal with debts and liabilities in your purchase contract when you buy the business.

Disclosure By the Seller

But what if the debts and liabilities aren’t told or disclosed to you by the seller? If that’s the case, you still may not be off the hook.

If you have a due diligence period, where you could have seen or discovered the debts (for example, a judgment that may be recorded in the public records), you still will owe the debt, even if the seller never told you about it. Likewise, if records existed showing debts or liabilities, and you just never investigated them, you may be liable for them, even if the seller never told you.

And even if the seller really did completely purposely hide something that you could not have discovered, you still won’t be absolved from paying the debt—it just means you may be able to sue the seller for misrepresentation or fraud, but that’s hardly an ideal situation either.

How to Deal WIth Known Liabilities

The best option is to try to deal with the debts, before you make your purchase official. You can try to negotiate with creditors or perhaps, have the seller put money in an escrow account to pay for the debts if they can’t be negotiated.

Another option is to simply lower the purchase price of the business, to account for the extra expense of paying the debts and liabilities. However, with this option, you’ll still need to ensure whether you can operate the business at a profit, while also paying off any existing debts.

That’s because even if the seller agrees to be liable for the business’ debts after the business is sold, the creditors don’t care—they still see the business as the debtor.

Buying a business? We can help. Call our West Palm Beach business litigation lawyers at Pike & Lustig today.

Source:

bdc.ca/en/articles-tools/start-buy-business/buy-business/owner-liability