Buying Seller in Debt

Question:

Dear Jennifer,

I have an opportunity to buy a colleague’s practice who is in a bad financial way.   Should I be concerned about their creditors catching up with me?

Thanks,
Dr. L
 
Answer:

Absolutely!  The first rule of buying assets is buy the assets free and clear of any encumbrances/liens. The good news is you already know you are likely to find creditors in the wings.  Part of the bad news - we can only ( likely ) find out about the secured third-party who have filed liens without a proper disclosure from the seller.   Even with an asset deal you could be dragged in for successor liability, even if the bulk of your exposure is proving you don’t owe the debt.   With the seller potentially defunct, It doesn’t matter if you have a right to be indemnified, the indemnification right is only a secure as the party securing it.  So, The first two priority items we are going to dive deeper on before you make a decision to take on any assets from the seller will be a secured unsecured debt owed, and the pockets securing an indemnification right you’re looking to negotiate….  

Also, worth noting, where there is cash in a deal, we can work indemnity escrow into key terms and/or a working capital adjustment to address accounts payable. 

Next steps, let’s see whether we can secure you enough through diligence and contractual protections to make “yes” make sense, and/or let’s vet efficiently to get to “no” as the answer.