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Many people, business owners included, incorrectly assume the debt that the business has will disappear when the business is sold.
It is important to understand where the debt goes when selling the business. That largely will depend on how the transaction is structured: as a stock sale or as an asset sale.
Stock Sales occur when the buyer purchases the stock of the entity and assumes everything that the entity ( Corporation , LLC, etc.) owns, including its assets and liabilities. Generally, when you structure a transaction as a stock sale, you are buying everything that entity owns – including any unknown liabilities.
Asset Sales are only transferring specific assets and liabilities from the buyer to the seller. They can basically pick and choose which assets and liabilities are included in that transfer.
The asset sale involves the transfer of title to certain assets and sometimes certain liabilities.
Most small businesses are sold a
as an asset sale because of the unknown liabilities. A contingent liability means you don't know what's out there and so you don't know what you're inheriting.
If JuicyAds purchased the stock of AdXpansion, there could be liabilities out there such as affiliate revenue owed that JuicyAds must cover.
Exceptions to the above include leased equipment which have contracts requiring the new owners to assume them, and what I know as successor liability.
Successor re-liability in the sale of a business means that the buyer could potentially be liable for certain things, even though that wasn't agreed to contractually. Examples include unpaid utilities, sales tax , property tax, payroll taxes, income and social security taxes, etc. Successor liability occurs by "operation of law", not by contract.
Additionally, in certain states, the new buyers can be subject to claims of creditors in those states in which the bulk sale law is in effect.
Would any licensed attorneys here on GFY care to expand on or clarify what I just posted here?
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