Legal Tip of the Week: Don't Inherit Someone Else's Liabilities

Purchasing an established, profitable business can be an excellent investment. The existing customer base, proven revenue stream, and operational infrastructure are often what make an acquisition so attractive. However, one of the most overlooked aspects of buying a business is understanding exactly who will be responsible for liabilities that arose before the transaction closes.

Many buyers spend the majority of their time evaluating financial statements, equipment, inventory, and future growth opportunities. While those are all important considerations, they should not overshadow an equally critical issue: retained liabilities.

As part of any business acquisition, the purchase agreement should clearly identify which liabilities will remain with the seller and which, if any, will be assumed by the buyer. Whenever possible, buyers should negotiate for the seller to retain responsibility for all liabilities arising before the closing date. Without carefully drafted provisions, a buyer may find themselves dealing with claims that originated long before they ever owned the business.

Just as important as allocating responsibility is ensuring there is a practical way to satisfy those obligations if a claim is made after closing. A contractual promise by the seller is valuable, but it may provide little protection if the seller lacks the financial resources to honor that obligation.

For that reason, buyers should also confirm that the seller maintains adequate insurance coverage for pre-closing liabilities. Appropriate insurance can provide both indemnity for covered claims and a defense against lawsuits arising from events that occurred before the sale. Whether the claim involves a customer injury, employment matter, contractual dispute, or another covered issue, insurance may be the difference between a manageable situation and a costly legal battle.

In many transactions, buyers also negotiate indemnification provisions that require the seller to defend and reimburse the buyer for losses resulting from retained liabilities. Those provisions should be carefully drafted to work together with the seller's insurance coverage so there is a clear path for handling claims if they arise after closing.

A successful acquisition is about far more than the assets you acquire. It is also about ensuring you are not unknowingly taking on risks that belong to someone else. Careful due diligence, a well-drafted purchase agreement, and confirmation of adequate insurance coverage can help protect your investment and reduce the likelihood of unexpected liabilities after closing.

If you are considering buying or selling a business, experienced legal counsel can help structure the transaction, negotiate appropriate liability protections, and identify potential issues before they become costly problems. Investing time in these details before closing can save significant expense and uncertainty in the future.

This article is provided for general informational purposes only and should not be construed as legal advice. Every business transaction is unique, and you should consult with qualified legal counsel regarding your specific circumstances.