The legal procedures involved in buying an existing business can be quite complex. Even if you are the most self-reliant do-it-yourselfer, you should, in this particular situation, be sure to seek out the services of a competent business attorney to represent you. In order to ensure that you are protected under the law as fully as possible from liabilities you have not agreed to assume, you should, at a minimum, have your attorney take care of the following items in connection with the purchase:
- Review the structuring of the deal including the actual sale agreement documents. (If your attorney is not a tax specialist, it would also be wise to have a tax accountant review the terms of the agreement and advise you on possible ways to structure it better for tax purposes.)
- Comply with the local Bulk Sale or Bulk Transfer Act. In most states, the buyer of a retail or wholesale establishment or certain other types of businesses must prepare a “Notice to Creditors of Bulk Transfer” and, usually, file it in counties where the business operates and also publish it in a general circulation newspaper prior to the purchase of the business. If this is not properly done, the seller’s unsecured creditors may be able to “attach” the property that you thought you were buying free and clear.
- Check for recorded security interests or liens. Before closing the purchase, your attorney should check with the appropriate state office (usually the Secretary of State) to determine whether anyone has recorded a “security interest” (a lien or chattel mortgage) against the personal property of the seller’s business. For a fee, the Secretary of State’s office will generally provide a listing of any security interests that have been recorded as a lien against the assets of the business you are buying.
Also, if the transaction involves a purchase of real property, you will also have to have a title search performed to see if the seller has good title and if there are any recorded mortgages or other claims against the property that the seller has failed to disclose to you.
- Check on various state tax releases, including state employment taxes, sales and use taxes, and, if you are acquiring an incorporated business, you may also need to obtain tax releases for corporate income or franchise taxes, as well. Most states require you, as buyer of an ongoing business, to obtain one or more such tax releases, certifying that no delinquent taxes (of the various kinds indicated) are owed to the state by the seller.
Otherwise, if you fail to withhold any such taxes owed by the seller from the purchase price, the state will be able to look to YOU for payment of such taxes, and you will have to try to get indemnity from the seller, who may by then be in Brazil or relaxing on the Riviera, enjoying your money. Your agreement of sale should, therefore, be conditioned on the seller first obtaining certifications or releases from all appropriate taxing agencies showing that the seller is not in arrears on any kind of taxes.
- Review the terms of any important contracts, such as leases, that the seller is assigning to you, to make sure that such assignment is possible under the terms of such contracts, without any detriment to you. Similarly, if you are acquiring a business in certain kinds of regulated industries, particularly relating to food, health, or liquor sales, make sure that proper legal steps are taken to transfer any federal, state or local licenses to you– otherwise, you may not be able to operate the business you have bought!
- Look for environmental problems, and ways to protect you from them. If the deal involves acquisition of real estate, or of a corporation that previously owned real estate during its history, be aware that you may be subjecting yourself to virtually unlimited liability, far beyond the value of the property, if the property is contaminated by hazardous waste substances, under the federal Superfund legislation. Thus, have your attorney include appropriate indemnity provisions in the agreement, in case such problems come to light after the purchase.
However, this is only a partial protection, since being entitled to indemnity and actually collecting it are two different things, as the seller may be long gone or broke by the time the EPA jumps down your throat, requiring you to spend astronomical sums to clean up the toxic waste on the site. Thus, you should also have an environmental consultant do soil samples or other testing to attempt to determine if such contamination exists; or, in some cases, you should even insist upon having an “environmental audit” done before the transaction is consummated.
In either case, you are much less likely to be held liable if a hazardous waste problem later shows up, if you can show you did “due diligence” (hiring experts, etc.) before acquiring the property, and that no problem was evident to experts at the time.
…the seller’s unsecured creditors may be able to “attach” the property that you thought you were buying free and clear.