Legal Question in Business Law in California

Re: Business Purchase

You need to have properly negotiated agreement with abundant clarity that you are not assuming their debts and liablities.

Re: Business Purchase

Then you need to do an asset purchase, not 'purchase the business', otherwise you WILL owe the taxes. You'd better confirm there isn't a tax lien and judgments against the assets. Hire a local attorney that knows what he is doing.

Re: Business Purchase

Protecting yourself from creditors and various liens including tax liens requires an exposure-by-exposure analysis. What works to protect a buyer from Problem X may be ineffective against Problem Y.

The starting point would be to know what form of business organization conducts the business. The approach to acquiring a proprietorship will be somewhat different from even buying just the assets of a corporation. It is also useful to know what kind of business, since those that sell from inventory (whether purchased or manufactured) and restaurants may be subject to the Bulk Sales Act, Commercial Code sections 6101 et seq.

A cautious negotiation of the terms of purchase, sufficient due diligence, all followed by a carefully-drafted purchase agreement will go a long way toward protecting you. Be sure to quiz the business' outside accountant and check the county recorder for recorded liens and the Secretary of State for UCC-1s. In the agreement, try to get the seller to idemnify you against all undisclosed liabilities and for the current and ongoing accuracy of all his disclosures and warranties.

If the business has employees, take precautions to find out whether there are workers comp or other claims, any lawsuits filed, accrued vacation or other fringe benefit liabilities, or unfavorable contracts including union contracts or contracts for continued employment. Look for unpaid commissions and missing subscription or prepayment deposits. And on and on.

If the seller has personally guaranteed any leases or other debt, this requires special handling; try to keep him on the hook if his credit is good or he has assets. Consider keeping some of the purchase money in escrow to pay undisclosed liabilities that may crop up in the six or so months following the closing.

Most important, be sure you have a sound plan for making profitable a business that wasn't successful for its prior owner, even though he didn't pay all the bills.

Re: Business Purchase

You need to decide how much risk you're willing to take. What you contemplate is complicated because it is risky. An attorney will want to be cautious because we incur risk when we advise/represent someone in a risky transaction, and risk equates to costs--e.g., insurance. So you should either have a lawyer help you do this right or at least pay for general advice separate from this specific transaction so the attorney doesn't incur your risk. We can assist you either way.