When buying a business, is the new owner liable for any outstanding liabilities??

QUESTION:

When buying a business, is the new owner liable for any outstanding liabilities such as debt and lawsuits from the previous owner?

ANSWER:

Acquisitions are very common today: one business - usually a corporation - takes over or buys out another business and takes its place in the market. An acquisition is when one business, usually called the "successor," buys either another company's stock or assets.

Asset Purchase

Generally, in an asset purchase, the buyer-company is not liable for the seller-company's debts and liabilities. However, there are exceptions, such as: when the buyer agrees to assume the debts or liabilities; that is, as the buyer, you could assume some or all of the seller's debts in exchange for a lower sales price.

The asset acquisition does not require the approval of the buyer's stockholders, but the seller's stockholders do have to approve the sale of all or most of the assets. Stockholders who oppose the sale usually have the right to the "appraisal value" of their stock, which is determined by an independent third party.

Stock Purchase

If you acquire a business through a stock purchase, that is, buying all or substantially all of the company's stock from its shareholders, your company "steps into the shoes" of the other company, and business continues as usual. The buyer takes on all of the seller's debts and obligations, whether they're known or unknown at the time of the sale.

A known liability might be a bank loan that is recorded in the company's books and records. An unknown liability might be money owed to employees or contractors that has not been properly recorded and has been overlooked by both the seller and the buyer. But, the most dangerous unknown liability often arises from the seller's pre-sale activities.

For example, if the seller had been making and selling paint for 15 years before the buyer acquired it through a stock purchase, the buyer can be liable for the injuries sustained by a painter who claims that the seller's paint contained toxic chemicals, even if the painter's injuries did not show up several years after the stock purchase.

A stock purchase requires stockholder approval, and stockholders have the right to oppose the sale and to have the value of their stock appraised by an independent party.

In both cases, it is highly recommended to contact a lawyer in order to define your best purchase option.   For more information on the above, call/email our Founder & CEO + Business Lawyer, Hugues Boisvert at hboisvert@hazlolaw.com or +1.613.747.2459 x 304