Buying or Selling a Business? Four Common Pitfalls to Avoid

1. “Disappearing” Working Capital. Care must be taken to insure that the seller does not deplete the working capital (e.g., cash, accounts receivable and/or inventory) of the business prior to closing which could result in a serious cash flow shortage following closing.

Avoiding this pitfall requires certain understandings between buyer and seller regarding the operation of the business prior to closing as well as the level of working capital required at closing.

2. Liabilities – Who Gets Them? Both the buyer and seller should be acutely aware of the nature and potential of the contingent liabilities which are being assumed by the buyer or retained by the seller. Significant liabilities can arise involving employees, product warranty and liability, and environmental problems, to name a few. Simply agreeing that any liability attributable to pre-closing activities are for the account of the seller, while simple, may not be a fair and reasonable allocation of risk.

3. Pre-Acceptance Disclosure Requirements. A commonly overlooked legal requirement when selling a business is the necessity of delivering to the buyer a completed Michigan Employment Security Commission Form 1027 at least 2 business days before the buyer’s acceptance of the seller’s offer to transfer the business.

Completion of this form requires assembling historical information regarding the seller’s MESC account status. Failure to comply is a misdemeanor punishable by up to 90 days imprisonment and/or fines up to $2,000. Civil liability may also apply.

4. “Hidden” Property. The owner of a business may own a patent, trademark, license or other valuable intangible property essential to operating the business. Therefore, it is important to insure that all intangible property is included in the purchased assets.

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Article Originally Published: Spring 1996

The information contained in this article is not intended to be legal advice. Readers should not act or rely on this information without consulting an attorney.