Don’t Buy a Previous Business’ Liabilities

So you just bought a business. This is a very exciting time. You purchased assets, customer lists, property, perhaps a name and a logo, and all the other items that make your purchase a good one. Because you purchased an already existing business, you don’t have to start from scratch—your business has a name, reputation, and customers.

Watch for Liabilities

But it also may have something else that you bought that you may wish you hadn’t: liabilities and lawsuits. You may not have realized that the business you bought may owe money to creditors, may have customers prepared to sue, may owe taxes, or may have government entities ready to penalize the business.

You need to be careful when purchasing a business to avoid this problem. The easiest way to avoid the situation is, of course, to do due diligence, and conduct an investigation into these potential claims before closing on the purchase.

Even if a search shows nothing of significance, it is always a good idea to include language in your closing or purchase documents that makes the prior business owner liable for the debts of the business. However, even in that situation, the prior owner may not have the assets to pay those debts, or else they would have presumably done so when they owned the business.

De Facto Mergers

In some cases, it may be a good idea not to continue the business in its exact form when you purchase it. In other words, changing the name or structure of the business or the physical location in some way may be necessary. This is done to avoid a de facto merger.

Where owners, employees, the nature of the business, and physical assets are exactly the same, the fact that you purchased the business won’t absolve the business from owing the debts incurred under its prior ownership. You can, of course, specify in closing documents that the transaction is not a merger, but the court will ultimately look to these factors in making that determination.

One court has analogized this to a marathon or relay race. If a baton was just passed from one owner to the next, there would be a de facto merger. The new business must be an independent entity, ready to run its own race, and forge its own way, to avoid previous liabilities.

This is also why a business can’t avoid liability by just changing its name. The idea that a business can reform over and over again just to evade paying judgments or liabilities is a myth, as the new businesses are just continuations of the prior ones, with almost exact similarities. Everything owned by the prior business is absorbed by the new one, so changing the name on the door will have no legal effect.

Don’t buy problems that aren’t yours or that could hurt your business. Contact Tampa business attorney David Toback to discuss protecting your business and to review its transactions.

Resources:

sba.gov/managing-business/closing-down-your-business/steps-closing-business

scholar.google.com/scholar_case?case=9308925052616138842&q=amjad+munim,+M.D.,+P.A.+v.+Azar&hl=en&as_sdt=40006&as_vis=1