You want to buy a business?
At the core of every business purchase is the shifting of risk between the buyer and the seller. The parties must agree on the terms of the purchase and sale based on the unique facts presented. Below are a few key considerations related to this risk transfer.
Liability for past actions taken by seller
Think of it this way. Every year that the seller owned the business, he or she had to file some form of tax return. He may have offered product warranties and/or entered into long term contracts. Each of these transactions contains some level of risk. As a buyer, you have a variety of options available to you to protect you from these potential risks.
All Asset Purchase
Many people look at buying a business as though they are buying a fully furnished house. It comes with everything you see, and everything you don't. However, there is an option available to buyers that can help shield them from the risks they can't see. That option is known as an Assets only purchase.
In an all asset purchase, the seller remains saddled with any liabilities incurred up to the date of sale. In this case, the seller bears all of the "business risk" associated with his or her ownership of the company. Typically, the previous owner will leave an account active to handle warranties, or other known and unknown liabilities of the business. The buyer then proceeds forward without having to worry about the potential unknown pitfalls.
When a buyer wants to purchase the entirety of the business, the seller can "indemnify" the buyer. Put simply, the seller is willing to stand in the shoes of the buyer related to potential business losses associated with the previous owner's activities. This provides the buyer some level of protection against presently unknown risks, but it is not as strong as an all asset purchase, as the seller could be judgement proof. This language would be found in the official documents related to the purchase.
Indemnify - to protect (someone) by promising to pay for the cost of possible future damage, loss, or injury
As with many risks in life, there are insurance products designed to protect business owners from a variety of potential causes of action. If you plan to use insurance as your primary protection after having purchased all of the assets and liabilities of a company, be sure to properly understand what interests you are insuring. This involves having an in depth conversation with your insurance broker about the specific issues you would like to insure against. While most of the products listed below seem to be similar, each policy reflects a slightly different risk. A few interests would be:
- Products Liability
- Intellectual Property
- General Liability
- Professional Liability
Buying a business can be stressful. If you have questions about the process, or about this post, St. Augustine Law Group would be happy to help! Feel free to Contact Us with your questions, comments or concerns.