Potential Liabilities When Purchasing a Business

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Purchasing a business poses several risks to the person buying. There are various liabilities that could affect the new owner based on certain actions, but the purchase itself could have negative consequences such as equity over asset buyouts and if there debts that must be satisfied by the previous owner.

For someone considering purchase of a business, he or she must perform due diligence and understand the best manner of buying the company. If he or she has measured all the factors, then the purchase may be smooth with few complications.

However, there are inherent risks when a company is being bought. These may include loans, liens, a failing product, services that injure customers and similar problems. Seeking a new business opportunity may involve negative consequences unless the person purchasing is understands all the information. He or she should consider hiring a lawyer to assist with finalizing the deal.

One of the most important decisions to make for the purchase is whether to buy the assets or equity of the company. This may have a basis of a buyout, acquisition or a merger. Once the process has been determined, the type of purchase may already be made. However, if the owner is seeking the company alone, he or she may need to decide whether buying individual assets such as the buildings, equipment and tools and the inventory is the better route. The other option is to purchase the equity such as stock, interest or shares. Both have positive and negative aspects, and the potential new owner needs to consider these carefully.

Asset Purchase Explained

When buying assets, the person acquires the property that has been purchased, vehicles and machinery, equipment and tools, inventory and similar items that were created or bought throughout the life of the company. This is often a more advantageous purchase when buying the company due to the ability to pick and choose what is taken. If the new owner does not want certain assets, he or she does not need to take them. This method of a buyout is also better for taxes because the price in the purchase is reduced from the income over years through depreciation.

A major disadvantage of buying out the assets is that the new owner is then responsible for the companyís debts after it has been sold. There are often other obligations and responsibilities that must be satisfied as well. Some businesses have clients that must be paid for so many months of provided services or materials. This could be handled through provisions in the purchasing contract where the buyer or seller assumes the debts, liabilities or other transactions. If the debts are taken on by the new owner, this could reduce the purchase price of the company.

Equity Purchase

Equity may be purchased by the new owner through stock, interest or shares. The individual may become the majority stockholder, but there may be minor stockholders that have some voice in making decisions. However, it may be possible to purchase all the stock and become the entire owner. There are many other steps that may be necessary to complete, but this does buyout the business. This provides the new owner with all debts, obligations and equity. Some disadvantages include the unknown of loans, provisions and responsibilities to clients and customers. Some loans may be recorded in the books, but others could be unknown such as owing money to a client, contractor or other party.

Some liabilities may fall into the sellerís activities before the purchase is finalized. This could include lawsuits that are currently pending, litigation that has yet to initiate in the courts and similar concerns. Because of these complications, it is crucial to perform due diligence and discover as much about these potential disasters before the paperwork has been completed. Professionals may assist with these matters to include accountants, tax consultants and lawyers.

Protecting the Buyer

Due diligence is both necessary and important. To ensure provisions are not a disadvantage, the buyer should research all aspects of the company. This includes the employees, sales, customers, clients and other associations. It may be that the business is failing and looking to sell so the owner and management are able to pay expenses.

The lawyer becomes essential in these matters. He or she assists in due diligence as well as the contractual sale. With a business lawyer, it may be possible to avoid some liabilities and ensure any contracts signed are valid and clear of problems.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.

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