A friend bought a company in a transaction structured as an asset sale, but is still being sued for an accident that occurred years before he bought the company. How could this happen?
I recently caught up with an old friend. He was my best salesman at a company I started, and then went on to catch the entrepreneurial spirit. He started one company, sold it then bought another and he currently owns and operates that company.
When he bought his current company he structured the sale as an asset sale, and one of the benefits of an asset sale for a buyer is that liabilities are not transferred unless specifically included in the purchase agreement. In other words, in an asset sale the buyer assumes the assets and liabilities called out in the agreement. Other liabilities are excluded, even undisclosed or unknown liabilities. A classic example is that the buyer will be protected if the company has some legal action rising from something that happened before the buyer purchased the company. By comparison, in a stock sale the entire company, included all liabilities, are transferred to the buyer unless explicitly and carefully carved out in the agreement.
So my friend was surprised when he was named in a lawsuit for an accident (a woman fell on a wet surface) that occurred before he bought the company. In fact, it doesn’t look like the accident was the company’s fault at all, but he is named along with anyone else this person could find.
One big lesson he learned is that when he went to an attorney, he was told his agreement was weak in many areas, including the sections that define what the seller’s liabilities were. He had used a standard business broker agreement and didn’t pay much attention to it. Even though it was an asset sale, it would have been much better if he had seen an attorney to make sure he was well protected.
Of course, someone can still be named in a suit, regardless of what is in the purchase agreement. But a solid agreement would enable my friend to show he isn’t liable, and also to point out who is. His insurance company is handling the case, and he’s hoping he’ll never have to go back to the seller for relief.