Successor Liability…The Hazard Many Never See Coming

I was at an event recently where another attendee found out that I am a business attorney, and he asked me what I thought was the number one thing that people who try to buy a business without hiring an attorney should worry about.

I had to consider it for a moment, because I didn’t think the Inquisitor would be amused by my saying “Everything.”  After mentally flipping through the various traps and pitfalls, I finally said “Successor Liability”.  The Inquisitor’s face wrinkled up, and he said “What’s that?”

I told him “The short answer is that Successor Liability is when you think that you’re just buying a business, and then you discover that you’ve also bought your predecessor’s obligations and debts.”  Apparently that answer wasn’t sexy enough, because he soon found an excuse to drift to the other side of the room.  My feelings weren’t hurt, but I found his reaction to be illustrative of the way many people enter into the purchase of someone else’s business: sometimes the biggest problems receive the least attention.

Sometimes,  I encounter someone who thinks that they have found a clever way around a potential problem, such as when someone decides that rather than purchasing the seller’s business entity, they will instead just purchase the assets, because “then the debts of the business are still the Seller’s problem.”  Sometimes, this will end well for the buyer, which may be purely coincidental, because these Buyers rarely check to see if the business has any sort of tax liens, tax warrants filed against the business (and consequently the assets) in the local Superior Court, or if there are any UCC filings that apply to the assets they want to purchase.  But invariably, the situation that creates the most heartburn is when a Purchaser is unaware of unpaid taxes owed by the Seller, and the Purchaser learns about it for the first time when the taxing authorities inform them of the lien against the property, or inform them of a pending Sheriff’s sale.  When this happens, things are frequently already at the point where an attorney can’t stop what is going to happen, leaving the Purchaser to have to resort to the courts to try to get a remedy that may not come until years later, when the process is complete, and they have had to spend thousands of dollars to get a judgment that they may or may not be able to collect on.

Buying a business is supposed to be a time of anticipation and optimism.  Risks that you never even anticipated can wreck those emotions, and make an occasion that you make have worked years for into a curse that will take you on a journey through the court system that will take years, and thousands, or hundreds of thousands of dollars before you are through.  This will make the cost of a consultation with a knowledgeable attorney to help you with the purchase seem miniscule by comparison…or as a client of mine has stated on more than one occasion, “It’s just cheap insurance.”

 

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Filed under Business Law, Contracts and Agreements, Pieces of the puzzle, The Practice

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