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Selling Your Business? Make Sure You Avoid Danger After the Sale

Looking to sell your company and be rewarded for your years of hard work? You may be thinking that after you sell your company, you’ll finally be able to relax and enjoy the fruits of your labor. Unfortunately, that’s not always the case.

After the Sale: Riding Off Into the Sunset – Or Are You?

After 20 years of operating his solar panel manufacturing company, Rick sold his business to a competitor. The years before the sale were increasingly stressful and Rick was looking forward to finally slowing down and having a comfortable retirement. However, just two years after the sale of his business, a lawsuit emerged over past environmental damage on the property where Rick operated the business. It came to light that the business had not strictly complied with certain state regulations regarding the remediation of contaminants at the site. Rick was dragged into the lawsuit even though the sale agreement absolved him of any liability (or so he thought). Rick faced unexpected legal fees and a portion of the cleanup costs. He learned the hard way that his company’s legacy and its liabilities were still his to bear, despite having moved on. This experience underscored the importance of thorough due diligence and legal safeguards in any business sale.

Still on the Hook? Enter Successor Liability

Many business owners believe that once they’ve sold their company, they’re free from its past, present, and future obligations. However, this is not always the case. Successor liability can rear its ugly head, leaving the seller surprisingly on the hook for the business’s liabilities even after the sale is complete. Let’s explore how successor liability works and what you can do to protect yourself.

Successor liability occurs when a buyer takes over a company and becomes responsible for the previous owner’s debts and liabilities. This can happen even if the sale agreement explicitly states otherwise. Several factors contribute to successor liability, including the nature of the sale, the type of liabilities, and state laws. For business owners looking to sell, understanding these nuances is crucial.

Is an Asset Sale the Answer?

Firstly, the nature of the sale plays a significant role. Asset sales, where only the company’s assets are bought (and not the entity itself), typically minimize the buyer’s exposure to the seller’s liabilities. However, under certain conditions, even an asset sale cannot shield the seller from successor liability. For example, if the sale is deemed a de facto merger or if the buyer continues the seller’s business operations seamlessly, courts might impose liability on the buyer, which can then boomerang back to the seller if the buyer is unable or unwilling to satisfy those obligations.

Beware: Tax, Environmental, and Employee-Related Liabilities

Secondly, the type of liabilities matters. Certain liabilities, such as environmental liabilities, taxes, and employee-related liabilities, can be particularly sticky. Even if a buyer agrees to take on these liabilities, government agencies can pursue the original owner if the buyer fails to fulfill these obligations. Successor liability laws are complex and vary significantly from one jurisdiction to another. The underlying principle is the protection of creditors and injured parties from losing their right to redress through corporate transactions.

Work with Advisors Who Know M&A

What can you do to protect yourself? Due diligence is a critical line of defense. Understand the potential liabilities of your business and how they might affect the sale. This is where working with skilled mergers and acquisitions specialists, including an experienced M&A lawyer, is critical. This is no time to choose a generalist business lawyer. There are particulars about M&A transactions that only experienced M&A lawyers will catch. Work with a skilled M&A lawyer who can navigate the complexities of successor liability and structure the sale to minimize your exposure.

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