Posted on May 12th, 2020
Below is a complete transcript of this video.
What’s happened in fellow entrepreneurs, it’s John Fagerholm again, and today I want to talk about something very specific, not just general labor claims as I normally do.
I’m not a corporate attorney. I don’t really practice corporate law, but a lot of those issues come into play when you’re practicing employment law also, at least in California.
So today I wanted to talk specifically about buying and selling, buying and, or selling a business and the liability, the employment liability attached to that.
Typically there are two ways that a business is sold, either the entire business is purchased. So for example, let’s say you have an auto body shop and you’re retiring and, somebody comes, even one of your employees that happens quite a bit, says, Hey, I’ll, I’ll buy this company from you.
Well, there’s obvious liability there with, with the employees or anything that’s happened in the past.
Simply it’s the same company. It’s the company that, employees, the employee. So it doesn’t matter who the owner is, there’s a liability.
If there’s, so if you were to, if you were the one that was to purchase that company, you would have the liability just the same as if that company was never sold or the company would have the liability, not you personally, obviously.
So, the things to watch out for a purchase of a business like that is to, first of all, do the due diligence to see what potential liability there is out there and then have the previous owner indemnify you in the contract.
The problem with that though is if it’s just indemnified with the co within the contract is that if a problem does arise, then you’re going to have to try to go back and get that money from the person that sold it to you if there’s a problem.
So there’s certainly ways around that. You can keep money in escrow part of the sale and escrow and have a little bit set aside.
If you know that there is a clear liability, you can reduce the the sale price. Lots of options there, but just know that when you purchase that new company, just because you’re the new owner, just because you’re not the person that created whatever problem is going on doesn’t mean that the company is still not liable for it.
So you will take on that liability. Another good thing to do is maybe set some money aside previous to the sale and then have a system where you have a general release signed by all the employees of any potential past claims.
And that obviously takes money. Whatever it is, I don’t know what the employees would require for that or if it’s even worth it.
Depending on the size of the company, but that’s certainly another way to get around it because then you know that you’re not going to have employment claims.
The only thing you probably can’t wait, well certainly can’t wave is workers’ comp claims and a few other government type things, but the main one is workers’ comp.
So, even if you were to get a general release of all claims, it would be for employment-related claims, but it wouldn’t be for a workers’ comp. So you can never release that.
Even if you were to pay them for that, they could still file a workers’ comp claim and it’s just too bad for you for paying that extra money. It’s just not enforceable.
So then that brings me to the other type of sale that happens with businesses, which is an asset sale. So you’re not purchasing the company.
Let, let’s go back to the body. A body shop example. So I’m not purchasing the business that is the body shop. I’m purchasing his assets. Well, what are its assets? I don’t know.
Maybe it contracts with insurance companies. Maybe it’s the customer list. Maybe it’s lease equipment, specific employees.
Those are all assets. So you can purchase those assets. I’ll take some, I won’t take others. And the reason why people tend to do that is because they don’t want to take on the liability. So I don’t want your debt.
I don’t want all of these other things. I just want the little pieces here that are part of your company. And that’s okay too, but in the employment context.
I really haven’t seen that work. So there are two issues here. Issue number one is that I see a lot of asset sales that are not really asset sales.
So imagine you go in and there’s this body shop and you say, okay, well I’m going to purchase your, your lease.
That’s one asset cause you have it for the next 10 years, then I’m going to purchase your equipment. Then I’m gonna purchase your DBA, basically, the name on the, you know, on the building there and I’m gonna purchase your client list, your insurance contracts on and on. Right.
Well, that looks to me like you’ve purchased the entire company. So I don’t know that if somebody were to Sue you, whether it’s an employee or not, would you’d be able to withstand their challenge that just because you wrote it as an, as an asset sale and just because you broke down each asset and gave a price to it.
Does it mean you didn’t buy the business? It looks to me like you bought the entire business because what’s different from the previous owner, what they were using the operate and what you’re now using to operate.
It sounds to me like it’s just the purchase of an entire company. So in that instance, I don’t think it would withstand a challenge anyway, but even if you were just to buy specific assets.
I’ve seen lots of very good asset sales that look like an asset sale to me. And employees still coming and, and suing and challenging that. And you know, with employment law they just tend to be a lot more favorable to the employee side.
So it’s much harder to withstand those challenges. That’s number one. Number two, when an employee does Sue, even on if it’s on an asset sale you still have to pay them money to litigate. So since 99% of employment claims are settled anyway.
I haven’t really seen a challenge go all the way because in every instance that I’ve seen like this, it’s, it’s settled anyway.
And the person who legitimately bought the assets kicked in a little bit of money just like the former owner kicked in a little bit of money and then it settled sometimes through insurance, sometimes through, you know, straight out of their pocket.
So I don’t know at this point in my life, you know, even after doing this for so many years how would end up if it was a legitimate asset sale and it was, and it was still sued my and it went all the way through trial.
My, my suspicion is that the person who purchased, legitimately on an asset sale would probably prevail. But at what cost? If you could settle an employment claim for 50K and then you spent 200 K to prove that this is really an asset sale and you’re not responsible for it.
I don’t know what the point was. So anyway, those are my thoughts on buying and selling a business in California and what the risks are, or at least the risks I’ve seen on the employment side. And you know, something to consider.
I think insurance is, you know, helps. I think definitely getting the waivers help. And certainly having some money set aside, you know, from the sale, if, you know, just to avoid issues or to be able to spend on issues.
Anyway, until next time, be productive.
