Buying a business can be exciting, especially when you are purchasing a business that already has been operating for years and has a strong client base.
At the same time, however, buying a business can have its limitations.
When you are thinking about purchasing a business, it is important to think about protecting yourself from potential liabilities that you could incur as a result of the purchase.
In particular, you should think carefully about what you are getting if you are buying a business that has debts. We frequently work with clients who ask: If I buy a business do I inherit the debt?
The answer to that question depends on a couple of different factors, including the type of purchase you make. We want to provide you with more information about business sales and situations in which the buyer may be taking on the debt associated with the business.
Options for Debt in a Business Sale
Generally speaking, when a business has debts and is up for sale, one of the following will occur when the business is sold:
- Buyer will assume the business debt’
- Seller will pay the debt prior to the closing of the sale;
- Seller will negotiate with the lender to reduce the debt prior to selling the business;
- Debts will be deducted from the proceeds of the sale of the business.
Asset Sales and Business Debts
Business owners often make the decision to sell the business because they have debts and want to find a way to get rid of the debt. Some of those business owners assume that simply selling the business means that they are selling all of the business assets and debts to the buyer.
However, if you are the buyer, it is important to learn more about where that debt will go if you move forward with a purchase of the business. The first type of sale we want to discuss is known as an asset sale. As an article in The Balance explains, an asset sale means that you are selling the various assets of the business.
Assets can include both tangible assets (like a commercial building, inventory, and equipment) as well as intangible assets (such as a client or customer list, as well as goodwill developed through a long-term relationship with customers and the community).
If you are purchasing either a sole proprietorship or a partnership, an asset sale is the only way to buy the business. Yet other types of business structures also may be able to be sold through an asset sale.
Just because it is called an asset sale does not mean that you are purchasing only physical assets. In some situations, a business buyer in an asset sale also can be purchasing business debt or liabilities of the business. In most situations, the buyer and the seller will negotiate about the assets and liabilities being sold or purchased.
For example, the buyer of the business might agree to purchase certain assets for a particular amount of money with the understanding that the buyer is also purchasing certain liabilities.
The buyer typically will negotiate with the seller, emphasizing that the debt negatively affects the business and its value, and thus will take into account any liabilities or losses in the total purchase price of the business.
Stock Sales and Business Debts
The other type of business sale is known as a stock sale or a share sale.
In most stock sales, the business debts or liability are included in the sale (and the buyer thus assumes those debts). As we mentioned above, neither a sole proprietorship nor a partnership can be sold like this and would need to be restructured as a corporation to be eligible for a stock sale.
Successor Liability and Undisclosed Debt
The above scenarios assume that the seller properly disclosed all debts to the buyer when negotiating the sale.
However, it is important to be aware of situations in which the seller does not disclose certain liabilities or debts.
Through a legal doctrine known as successor liability, the business buyer ultimately may be liable for certain debts of the business even if the buyer did not agree to take on those debts in the purchase contract or agreement. In some cases, the buyer may be able to raise the issue of fraud.
Contact a Business Lawyer in Florida
If you are buying a business with debt, you should work with a Florida business lawyer on the sale to ensure that you get a fair deal on the purchase. Contact BrewerLong for more information about your options when buying a business in Florida.