Liabilities in an Asset Sale
When a business sells as an asset sale, the seller is still responsible for preexisting liabilities. However, when negotiating a sale, the buyer may agree to take over some responsibility for the liabilities. When selling a business, there are two things that can happen: the buyer is not taking over any liabilities or the buyer is taking over some or all of the liabilities.
When selling your business and structuring it as an asset sale, it is important to receive a valuation to help determine a fair market value. Peak Business Valuation, business appraiser, values companies that are part of asset sales. It is important to obtain a valuation before selling to ensure a fair purchase price. This purchase price takes into account assets and liabilities the buyer is assuming in the purchase. For your free consultation, contact us below!
The Buyer is NOT Taking Over Any Liabilities
Oftentimes in an asset sale, the seller and buyer will agree that before closing, the seller will assume all liabilities and remain responsible for any others that surface later. Some examples could be a delayed bill or a customer refund for a damaged product. To ensure there will not be any problems with previous liabilities, you can build a Seller’s Debts and Other Liabilities clause. These options include:
- Indemnification of Buyer
- Indemnification of Seller
- Confirmation of Payments of Debts
Indemnification of Buyer
This section states that the seller is responsible to pay any debts or fees for the legal defense of claims. The sales agreement includes this ‘indemnification of buyer’ option.
Indemnification of Seller
This section protects the seller from being responsible for any debts that arise after they have sold the business. The sales agreement includes the ‘indemnification of seller’ option.
Confirmation of Payments of Debts
The seller will need to pay all known debts before the sale closes. They will then sign a paper stating they have done so. At closing, the seller and buyer will waive compliance with the bulk sales law (if the state applies).
Buyer IS Taking Over Some or All Liabilities
This option is less common but not out of the question. Sometimes, a buyer will agree to take on the responsibility of paying some or all of the debts and liabilities of the business. This is usually done in exchange for a reduced purchase price. If the buyer chooses to take over liabilities, the conditions for those are added to the sales/purchase agreement.
The process to do this is fairly simple. In the sales agreement, there are certain things that are necessary for a sale to go through. These include the Indemnification of Buyer, Indemnification of Seller, and a Waiver of Bulk Sales Law Compliance.
The Waiver of Bulk Sales Law Compliance is only necessary if the buyer is living in California, Georgia, Maryland, Virginia, or Wisconsin. These states still have bulk sales laws which intend to protect business creditors. However, if all debts are paid on time, you will not have to worry about this bulk sales compliance waiver.
Summary
Whether the buyer chooses to take over the asset liabilities or not, ensuring you fill out the sales or purchase agreement correctly is essential. This will help avoid legal issues in the future or problems with businesses you have contracts with. It is best to work with a lawyer or legal professional during this process.
Peak Business Valuation, business appraiser, helps companies across the nation understand how to value liabilities in an asset sale. It is important to understand the value of the company before you buy or sell. Obtaining a business appraisal helps to make sure you get a fair selling and purchase price. No matter your valuation need, our Peak professionals would love to talk more about the specifics of your business. Please reach out to Peak Business Valuation, business appraiser, below for a free consultation.
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