Liabilities and Obligations in Selling a Business

Question: When a business is sold, what liabilities are the buyer responsible for and which remain the obligation of the seller?

Answer: In general, whether it is as an asset sale or a stock sale, just remember sellers are obligated to provide “lien free” assets to the buyer. While all transactions are unique, buyers will typically assume liability for the following:

1. Leaseholds related to real estate, unless they are relocating the business
2. Accounts Payable (and if they do they will also get the accounts receivable)
3. Advertising commitments such as Yellow Page contracts
4. Customer deposits, provided seller relays to buyer a like amount of cash
5. Any other liabilities that are agreed upon in writing.

Sellers will typically be obligated to pay off out of the sale proceeds the following:

1. Lines of credit
2. Installment debt and/or leases related to vehicles, computers, equipment
3. All obligations to employees up to the date of closing
4. All tax related matters
5. All other debt that has any claim against any of the assets that are being transferred to the buyer.

There is another issue related to liabilities. The seller is obligated to give the buyer strong “warranties and representations” (guarantees) that there are no undisclosed or unknown liabilities that might create claims against the assets being sold. The California Bulk Sales Law essentially states that a buyer can be held liable for goods transferred to him or her that have not been paid for by the seller. Obviously, all buyers want and are entitled to protection from having to pay for the same goods twice.

In summary, it is essential that both buyer and seller commit to having everything in writing (i.e. no verbal agreements) and that both sides be represented by competent legal advice before signing on the dotted line.