Facing the intricacies of asset sale transactions can be challenging. Did you know that liabilities play a crucial role in these deals? This article will break down key considerations, helping you understand what to watch out for.
Let’s begin!
Key Takeaways
-
- Liabilities are debts a company owes and can be current or non-current. Current ones need payment in less than a year, while non-current ones take longer.
-
- In asset deals, buyers might face expressly assumed liabilities (clear agreements) and implied assumed liabilities (not clearly written).
-
- Successor liability means the new business may end up paying old debts if there’s a merger or fraud.
-
- Careful checks (due diligence) help spot hidden risks. Insurance can protect against unseen problems.
-
- Always look deep into money matters, legal issues, and operations before buying any assets to avoid surprises.
Definition of Liabilities in Asset Sale Transactions
Liabilities are debts or obligations a person or company owes. They often involve sums of money. In asset transactions, liabilities show up on the balance sheet’s right side. They tell us what is owed.
Two types exist:Â current and non-current liabilities. Current liabilities need to be paid within a year. Non-current liabilities take longer than a year to pay off. For instance, unpaid bills fall under current liabilities, while long-term loans count as non-current ones.
Types of Liabilities Assumed in Asset Purchases
In asset purchases, buyers might take on different types of liabilities. These can be direct and clear or may come with implied responsibilities.
Expressly Assumed Liabilities
Expressly assumed liabilities are debts or duties a buyer agrees to take on when buying assets. These can include loans or contracts the seller has with others. The buyer must agree to accept these specific obligations as part of the deal.
When buying assets, buyers need to know what they are agreeing to assume. It is important to clearly list and specify each liability in the contract. Being clear helps avoid confusion and disputes later on.
Implied Assumed Liabilities
Implied liabilities happen in asset purchases. This can include obligations, debts, and responsibilities. These liabilities may not be written down but still need attention. Exceptions like de facto mergers or continuing the seller’s business can cause these implied liabilities.
Buyers should know about any commitments or encumbrances that come with purchased assets. Legal duties might also transfer without clear agreements. Knowing this helps avoid surprises later on in transactions.
Key Legal Considerations
Liabilities in asset transactions can be complex. Buyers must know the risks and plan well to avoid issues.
Successor Liability
Successor liability happens when a new business takes on the debts of an old one. Usually, buyers are not responsible for the seller’s debts. But there are exceptions.
If a buyer agrees to take on debts or if there’s a merger, responsibility may transfer. Continuation of the business and fraudulent deals can lead to successor liability too. This means creditors can ask the new business for payment.
Fraudulent Transfer Risks
Fraudulent transfers happen when someone moves assets to hide them from creditors. This act aims to hinder, delay, or cheat a creditor.Â
The “lookback period” is crucial in these cases. During this time, courts check if any suspicious transfers happened.
If they find fraud, consequences can be severe—assets might get returned to pay off debts.
Strategies to Minimize Liability Risks
Perform thorough checks before any purchase. Get insurance to protect against potential risks.
Due Diligence Processes
Careful checks are key to lowering risk. It means looking closely at the company you want to buy. You need to check money matters, legal issues, daily operations, and business dealings.
This process can last a few weeks or even months. The time it takes depends on how complex the company is and how deep you look into things. Doing good checks helps find hidden problems and makes sure you know what you’re buying.
Use of Insurance Policies
Insurance helps manage risks in deals. These deals need new plans to keep old and new problems apart. This is key before, during, and after the deal.
Not having cyber insurance can be an issue when checking details. Also, limits for management coverage can fall short. Having proper coverage avoids future problems.
Conclusion
Understanding liabilities in asset transactions is crucial. It helps you avoid hidden risks. Always perform due diligence and review all documents carefully. Stay informed and protect your interests.
Trust Hadri Law Firm for a professional guidance in M&A deals. Book a free consultation with our lawyers to discuss your business legal needs. You can each us at 437-974-2374 or email us at contact@hadrilaw.com to get started.
Â