Minimizing Legal Risks in Business Acquisitions: The Asset Purchase Advantage

When acquiring a business, potential legal liabilities should be at the forefront of your considerations. One crucial aspect often overlooked is whether the business carries any judgments against it. A judgment can significantly impact the financial health of the enterprise and the buyer. In this article, we’ll delve into the complexities of business judgments, examining how they persist through ownership transitions and how a strategic approach, such as an asset purchase, can help mitigate these risks.

Understanding Business Judgments

A business judgment is a court ruling that holds a company liable to pay a specific amount of money to a plaintiff. It arises from various legal disputes, including breach of contract, intellectual property infringement, or negligence claims. Importantly, judgments are attached to the business itself, regardless of changes in ownership. This means that if a new owner purchases a business with existing judgments, they inherit the obligation to fulfill those judgments.

Continuity of Judgments with New Ownership

Imagine a scenario where Company A acquires Company B. If Company B has a judgment against it, the judgment remains with Company B even after the acquisition. The new owner, Company A, assumes the responsibility of settling the outstanding judgment, posing potential financial and legal challenges. Consequently, when considering purchasing a business, understanding its existing judgments is imperative.

Strategies to Navigate Business Judgments

To avoid inheriting judgments when acquiring a business, buyers can employ strategic approaches. One effective method is to opt for an asset purchase instead of a stock purchase. While a stock purchase involves acquiring the ownership shares of a company, an asset purchase focuses on purchasing the tangible and intangible assets of the business. This approach enables buyers to cherry-pick the valuable assets and contracts while leaving behind the liabilities, including judgments, with the previous entity.

Asset Acquisition: A Solution to Judgment Concerns

In an asset purchase, the buyer acquires specific assets such as inventory, equipment, customer databases, and contracts. This allows for a more targeted acquisition, sparing the buyer from assuming the business’s historical liabilities. For instance, if a business has a judgment against it, a savvy buyer can bypass the purchase of shares and instead procure the assets they value, thereby avoiding the burden of that judgment.

Implementing an Asset Purchase Strategy

Consider a hypothetical scenario involving a piano store with outstanding judgment. Instead of purchasing the business entity, a buyer might opt to acquire the inventory, customer database, and other valuable assets while excluding the judgment-associated liabilities. This approach facilitates a fresh start for the buyer while allowing them to continue operations without the encumbrances of past judgments.

Consulting Legal Counsel

Navigating the complexities of business acquisitions, particularly concerning judgments, necessitates the expertise of legal professionals well-versed in business law. An attorney experienced in asset purchases can guide buyers through the intricacies of structuring the acquisition to safeguard against inheriting undesirable judgments.

Conclusion

When acquiring a business, it’s paramount to consider the implications of existing judgments. An astute approach involves opting for an asset purchase instead of a stock purchase, allowing buyers to selectively acquire assets while sidestepping prior liabilities. Consulting with experienced legal counsel can provide invaluable insights into crafting a secure and strategic acquisition that aligns with your business objectives. By implementing these strategies, you can mitigate the risks associated with business judgments and set the stage for a successful ownership transition.

Video Transcript

Understanding Business Judgments and Ownership

If a new owner buys a business and that business has a judgment against it, is the judgment still valid for the business, or is the judgment only for the prior owner? So, I will tell you how to get around this in a moment, but let me just first answer the question: A judgment on a business stays with that business.

Continuity of Judgments with New Ownership

So if a new owner buys the business, the judgment remains with the business. For example, let’s say we have ABC Corporation. And somebody sued ABC Corporation, and they got a judgment for $100,000.

Transfer of Judgments in Business Purchase

And let’s say you go buy ABC Corporation; does the corporation still have that judgment against it and still owe that money?

Yes, it does. There is no question about this.

Strategies to Navigate Business Judgments

So how do you get around this?

Because obviously, you don’t want to buy a business with a judgment. Instead of buying the stock of a corporation or the ownership of an LLC, don’t buy the entity; don’t buy the LLC or corporation; buy the assets out of it.

Summary

So, you are not going to buy the liabilities—those are the debts. You only buy the assets. So, let’s say, for example, you have a piano store. They have 100 pianos for sale, and you want to buy that business—you want to buy the customer list so that you can stay in touch with all these piano buyers. You want to buy the inventory. So, that is all the pianos. You may want to buy some other contracts. You might want to take over some of the business’s contracts with contractors. If that business has a judgment against it, don’t buy the shares. Don’t buy the business itself. Buy the pianos; that is the inventory. Buy the customer database; buy any assets that you want out of the business; but don’t buy the entity. Leave the liabilities in the old entity and start a new entity. This is a great best practice for buyers of businesses because even if you don’t know about a judgment that is out there, there might be a lawsuit that comes later from an old business.

Conclusion

So, I always recommend that my clients who are buying businesses buy the assets of the business, not the entity itself. You can even buy the name so you can keep using it. You let that old entity go. You create a new entity with a new name, and you authorize the use of that new name. As long as this is done right, the old entity’s liabilities will not transfer to the new entity.

This is called an asset purchase, as opposed to a stock purchase. A stock purchase is when you buy the stock of a corporation. An asset purchase is when you just buy the assets out of the corporation. You don’t acquire the corporation, and those assets can be anything of value. The company name, the customer relationships, the inventory, cash, and bank accounts—whatever you want for the employees and contractors—but what you are not buying are the liabilities, and you are not buying the shares.

I am Aaron Hall. I am an attorney for business owners and entrepreneurs.

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