What is Successor Liability?
The Short Answer
Successor Liability explained simply
Successor liability is a legal concept where the buyer of a business can become responsible for the seller’s past debts, obligations, or legal issues. This means that even after the sale, creditors or claimants of the old business might pursue the new owner for problems that arose before the acquisition. It’s not automatic in every sale; it usually depends on the structure of the deal and specific state laws. For example, if you buy a company’s stock, you typically inherit its liabilities. If you buy only assets, you might avoid some liabilities, but there are exceptions, especially for things like environmental issues, product liability, or unpaid taxes.
Real-World Example
The Bakery Buyout
Imagine you buy "Sweet Treats Bakery" from its owner, who had an ongoing lawsuit for an old slip-and-fall accident. If the sale is structured as a stock purchase, you, as the new owner, might inherit that lawsuit. Even with an asset purchase, if the court finds you continued the "same business enterprise" without a clear break, you could still be on the hook. This is why due diligence is so important.
Why this matters
Understanding successor liability is crucial because it can turn a good deal into a financial nightmare. If you don’t properly identify and address potential liabilities before buying a business, you could end up paying for someone else’s mistakes. It affects the purchase price, the deal structure, and the need for indemnities or escrows to protect you.
Always get a good lawyer to review the deal structure and conduct thorough due diligence. They can help you understand and mitigate potential successor liability risks.
Always get a good lawyer to review the deal structure and conduct thorough due diligence. They can help you understand and mitigate potential successor liability risks.
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