Buying or acquiring businesses in California is an opportunity to expand your business footprint and create generational wealth for your family. Of course, acquiring a business also comes with additional costs and potential liabilities. Some of these can be avoided with the proper approach and legal team on your side.
Acquiring individuals and entities must be aware of successor liability. When you purchase a business, you are often purchasing the seller’s liabilities. We help clients throughout California avoid purchasing crippling liabilities and lawsuits.
What is Successor Liability?
Successor liability is a legal doctrine that states that the successor of a business — in this case, the buyer or acquiring entity — assumes certain liabilities owed to creditors. Those creditors can seek recovery from the successor in certain cases if specific circumstances are present, including:
- When a buyer expressly agrees to assume the seller’s liabilities
- The transaction is a consolidation or merger of two separate entities
- The buyer is a mere continuation of the seller
- The buyer operates the business in essentially the same manner with the same products or services of the seller’s entity
Understanding these conditions is crucial for any potential business acquisition to avoid unexpected liabilities.
How to Avoid Successor Liability in California Business Transactions
First, there is only assumed successor liability in stock purchases. Asset purchases where only a portion or totality of a business’s assets are changing hands do not typically have successor liability unless the liability is directly attached to one or more of the assets (although this is still possible if some of the factors above are present).
Additionally, a buyer or acquiring entity may avoid successor liability through the details of a well-structured agreement. For instance, you can expressly agree to have the seller retain any liabilities associated with the work they’ve done in their time as the owner. You may also write in any agreements that any unknown or uncovered liabilities that stem from the previous ownership period are strictly the seller’s liability. There can also be a well-structured indemnification clause that requires the other party to pay for court costs and attorney’s fees due to these liabilities.
The value of a business that carries significant successor liability is notably impacted. If you agree to assume your predecessor’s liabilities, then it makes sense to note the potential costs associated with those liabilities and adjust the price accordingly. All of this highlights the importance of due diligence in any business transaction. It’s critical to have your attorneys look deep into the company’s background, documents, intellectual property, and more to ensure an effective accounting of these liabilities.
Avoid Successor Liability with Dahl Law Group
At Dahl Law Group, we’ve seen just how troubling successor liability can be for poorly structured corporate transactions. It’s important to do your due diligence and consider these liabilities before proceeding. We can help in every stage of the deal to ensure an effective and thorough strategy is in place. Contact us to discuss legal strategies to avoid or account for successor liability when buying or acquiring businesses in California.
Dahl Law Group
