If you are considering buying a business, you have most likely done a lot of research in terms of your return on investment. However, there is one more bit of research that is critical to conduct before signing on the dotted line. Whether you do it on your own or you hire a professional, you’ll want to thoroughly dig to uncover any liens that may have been issued against the business’s assets. This may also include doing a search on the current business owner as well. If you purchase a business, even if the transaction is structured as an asset sale, the liens against the business become your problem.
What is a lien?
A lien is a legal right that a creditor has in a business’s property. If there is a lien against any of the assets, a third party will have an interest in the business and the assets you are purchasing. It is possible that the lien could remain in effect after the closing and then it becomes your lien. You may be able to put legal protections in place during the purchase process to avoid inheriting a lien, and that is the best option. But, you have to know that the lien exists in order to take action. That’s why our California business lawyers recommend conducting a search for any of the following:
A UCC lien is quite common and is generally put in place to secure the debt for financing. They most often are a result of the owner borrowing money or trading credit for equipment. You can do a search for a UCC lien by visiting the Secretary of State’s office in the state where the business was incorporated. Be sure to search for the seller’s legal name and address in addition to the business name. If your search uncovers lien filings, you can then determine whether the lien has been terminated by looking through the records for a termination statement. These liens get terminated when the debtor pays off the debt and then files a termination statement. If there is or has been a lien for the business you
are buying, you will need to work with the seller to make sure the security interest is released prior to closing. If the lien is not released, the creditor will have an interest in the purchased business.
If the business you are interested in buying fails to pay federal taxes in full and on time, the IRS can issue a lien on all of the business’s property – including accounts receivable and future assets acquired after the lien is in effect! State and local taxing authorities can also place a lien on the business’ property for unpaid state and local taxes. You can search for these liens in the recorder of deeds and circuit where the individual lives or where the business is located.
A judgment lien is a lien created after a party loses a case in court and a judgment is entered against them. Judgement liens can be attached to personal property and property acquired after the lien goes into effect. Just like all of the other liens, a judgement lien should be paid off and released prior to closing the sale of the business. There are many aspects of buying a business that must be thoughtfully and carefully considered.
We’ve helped business owners throughout California start successful companies for years. If you’d like to make sure that you start out on a firm foundation, give us a call at (800) 244-8814.