If You’re Buying A Business, Don’t Forget About The Liabilities

When you buy a business, or are looking to buy a business, you probably give a lot of thought to the assets you are buying. Valuing the inventory, machinery, or accounts receivable of the purchased business are all common considerations.

But what about liabilities? Many people buy businesses and give little thought about whether they are purchasing liabilities of the former business—and if they are aware of it, they may have no idea of how to handle purchasing a business’ liabilities.

Liabilities Don’t Disappear

As a general rule, debts of a business don’t go away just because you purchased the business. If your business agreements are silent, your newly purchased business could find itself saddled with debt you didn’t expect it to have. That is true, even if the purchase is a stock purchase, and not a purchase of the entire business.

Most of the time, if the purchase of a business is handled properly, the seller will have to disclose all known liabilities and debts of a business. But even if the seller doesn’t disclose a debt, it doesn’t mean that the debt is invalid, or that your newly purchased business doesn’t have to pay the debt. All it means is that you could have a lawsuit for fraud or another cause of action against the seller for the failure to disclose the known liability or debt.

Purchasing Debt

If the debts are disclosed, and assuming they are disclosed honestly by the seller, there are a number of ways to handle purchasing a business with debt.

You could just say that the seller remains responsible for formerly incurred debt. However, the problem is that the creditors still see the business as the debtor, and are entitled to pursue your newly purchased business for the debts. Your agreement with the seller doesn’t change that.

The better practice is often to negotiate with the creditors, see what they will accept, and lower the purchase price by a given amount in order to pay the debts off. You may even want the seller to escrow some money, to account for debts that may be unknown, or undisclosed, for a period of time after the sale is completed.

The other option is simply to lower the purchase price of the business, to account for the payment of the debt. This lowering may not be a dollar for dollar accounting of the amount of debt that is owed. Whether you can afford to run the business profitably, and still pay off the debts, is a decision you will have to make before the purchase.

Note that you can opt for an asset purchase, instead of purchasing the entire business. This often allows you to exclude debts and liabilities of the business-although it may exclude some of the benefits of a full business sale and purchase.

Do you have a complex business transaction? Let us help you. Call the West Palm Beach business litigation attorneys at Pike & Lustig today.

Sources:

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