4 Tips How Not to Inherit Liabilities When Buying a Business

You don’t want the company’s liabilities, just its assets

Follow these tips to prevent the liabilities of the company you’re purchasing from transferring to you with the sale.

  1. Examine the purchase agreement carefully.  It may require the buyer to assume the seller’s liabilities.
  2. The transaction might be viewed as a merger.  In a merger, the selling company’s rights and liabilities transfer to the buyer or surviving entity.
  3. If fraud is suspected in the sale or the sale made for the seller to avoid liability, liability can transfer to the company that purchased the assets.
  4. When the two companies are similar businesses, this may be viewed as a continuation of the seller’s operation.

If any of the above possibilities exist, I recommend that you not only carry a Product Liability Policy with higher than average liability limits. I also advise buying a Product Recall Policy for added protection of your assets.

The buyer may be strictly liable for injuries caused by product defects. This is so even regarding previously manufactured and distributed products in the case of point #4 above..

Don’t make this mistake

A perfect example of this is SFCA, Inc’s  purchase of Simplicity, Inc.  SFCA purchased the debt and then purchased the assets through a foreclosure sale of Simplicity.   Simplicity was a leading juvenile and baby furniture designer, importer and distributor.  SFCA designs, distributes and imports cribs, changing tables, toddler beds, bassinets, etc. A definite similarity exists between the two companies..

The State of Illinois brought a lawsuit against SFCA because SFCA sold bassinets with a design flaw that it acquired from Simplicity to a retailer. They did so knowing the bassinet design was responsible for at least one infant death.  SFCA refused to participate in the recall, claiming it was not responsible for the design flaws since it did not design the defective product.

A questionable outcome

The  question in my mind is whether SFCA acted on the advice of legal counsel or did officers of the company make an executive decision? Regardless of who is responsible for this curious decision, if SFCA only spends $1 million to resolve this mess they should consider themselves lucky.  Hopefully, SFCA carried both Product Liability and Product Recall insurance.

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