Buy - sell liability question

April 8, 2011

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Question

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Mr. Kirschenbaum,

In the security/fire industry, if the assets of an installer, who has no existing contracts or E&O insurance, are purchased; what is the extent of the liability that the new owner is assuming?

I appreciate any help you can give me.

Thank you.

Justin

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Answer

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A buyer of another's business has to be concerned with "transferee liability", which means the buyer ends up with the debt of the seller. This risk transcends the alarm industry, but of course the liability exposure in the alarm industry is more than the trade debt; liability for losses sustained by subscribers present unlimited enormous exposure.

Parties to a buy - sell transaction can fashion the terms of their agreement, which sometimes includes the buyer assuming all or part of the seller's debt as part of the consideration for the purchase.

More often than not however the contract of sale provides that the buyer assumes no liability of the seller.

That "no liability" sounds solid, but it's just the agreement between the seller and buyer. Others may have a different opinion, and they may be right. The list of those who might pursue the buyer for obligations of the seller include creditors of the seller, sales tax agency, state and federal taxing authorities, among others. The grounds for pursuing the buyer would include no or inadequate consideration, fraudulent transfer or statutory transferee liability when notice of the sale was not properly given.

Included in the list of potential litigants are the seller's subscribers. For them the transition from seller to buyer is going to be seamless, they are not going to recognize any change in ownership without responsibility, unless of course the buyer [in the above question] requires a new contract.

In the alarm industry it is common for the seller to provide indemnity to the buyer for any claim arising prior to the sale, and that's usually backed up by E&O insurance which the seller has to maintain post sale.

Selling or buying businesses or subscriber accounts is not something you should be doing on your own, and you should seek out and rely upon experienced alarm industry counsel [yes of course that means me]. If nothing goes wrong then it was easy and could have been done with a handshake. But when a problem arises you'll be stuck like a deer in the headlights and if the problem is serious enough, like a goose with its head stuck where thankfully you anatomically can't replicate.