BUYING THE COMPANY OR ONLY ITS ASSETS? WHEN THE BUYER MAY INHERIT DEBTS AND LIABILITIES

The structure of the acquisition may determine which risks accompany the transaction

Acquiring a company may represent an opportunity for growth, entry into a new market, expansion of the client base, or incorporation of an already established operation.

However, acquiring a business does not mean receiving only its assets, brand, structure, and revenue.

Depending on how the transaction is structured, the buyer may also assume debts, contracts, employment obligations, tax liabilities, and responsibilities arising before the acquisition.

For this reason, one of the first questions should be:

Does the buyer intend to acquire the company itself or only certain assets used in its operations?

The answer directly affects the structure of the transaction and the risks that may accompany it.

Buying equity interests means acquiring the existing company

When acquiring equity interests or shares, the buyer takes the place of the former partners or shareholders.

The legal entity remains the same.

Its name, contracts, employees, rights, and obligations continue to exist, even if there is a complete change in corporate control.

This means that debts do not disappear when ownership changes.

The acquired company will remain liable for obligations incurred before the transaction, including those that have not yet been identified.

A buyer may acquire an apparently healthy company and later discover:

• undisclosed lawsuits;

• tax debts;

• employment claims;

• unfulfilled contractual obligations;

• guarantees granted to third parties;

• environmental liabilities;

• accounting irregularities;

• contingencies that have not yet been formally established.

A change in ownership does not create a new company.

Control changes, but the same legal entity remains, together with its financial and legal history.

Buying assets may appear safer

Instead of acquiring equity interests, the interested party may choose to purchase specific assets.

These may include, for example:

• real estate;

• machinery;

• vehicles;

• inventory;

• trademarks;

• equipment;

• client portfolios;

• contractual rights;

• business premises;

• technology or intellectual property.

In principle, this structure allows the buyer to select the assets and rights of interest while leaving other elements with the selling company.

This may reduce certain risks.

However, merely describing the transaction as an “asset purchase” does not prevent it from being characterized as a business succession.

The economic reality of the transaction is more important than the name given to the agreement.

When may an asset purchase be considered an acquisition of the business establishment?

A business establishment is not composed solely of isolated assets.

It consists of the organized set of elements used to carry out an economic activity.

When the buyer receives a significant portion of this structure and continues operating the same business, questions may arise as to whether the business establishment itself has been transferred.

Certain factors may indicate business continuity:

• continuation of the same activity;

• use of the same address;

• acquisition of essential machinery and equipment;

• continuation of the client base;

• use of the same brand;

• hiring of former employees;

• continuation with the same suppliers;

• continuation of contracts;

• absence of any genuine interruption in operations;

• cessation of activities by the former company.

None of these factors should be examined in isolation.

Taken together, the circumstances may demonstrate that the transaction involved more than the purchase of individual assets and resulted in the economic continuation of the business.

May the buyer be held liable for prior debts?

In a duly structured transfer of a business establishment, business law may impose liability on the buyer for certain prior debts, particularly those properly recorded in the company’s accounts.

The selling company may also remain liable for a certain period, depending on the nature of the obligation and when it becomes due.

However, liability does not operate in the same manner in every area of law.

Civil, commercial, tax, and employment rules are based on their own specific principles.

A contractual provision stating that the buyer will not assume any debts may regulate the relationship between the seller and the buyer, but it will not necessarily prevent claims by creditors, employees, or tax authorities when the law recognizes a business succession.

In other words, the agreement may determine which party must ultimately bear the financial burden of a particular liability as between themselves.

This does not mean that such allocation will automatically be enforceable against third parties.

Tax succession requires particular attention

The acquisition of goodwill or a business establishment, together with the continuation of the activity, may result in liability for taxes connected to the acquired business.

The extent of this liability will depend on factors such as:

• whether the seller continues or ceases the activity;

• the nature of the transaction;

• when the taxable event occurred;

• the form of acquisition;

• the tax status of the establishment;

• the existence of specific statutory provisions.

For this reason, reviewing only the tax clearance certificates issued on the acquisition date may not be sufficient.

Certain liabilities may still be under administrative review, not yet formally registered, subject to installment arrangements, or not yet formally assessed.

The absence of an immediate collection measure does not mean that the risk does not exist.

Do the employees follow the business activity?

In employment law, changes in ownership or in the company’s structure should not prejudice employees’ rights.

When there is a business succession or continuation of the activity by another employer, the successor may be held liable for employment obligations, including those arising before the acquisition.

The analysis generally focuses on the economic continuity of the operation.

Hiring employees from the former company, maintaining the same premises, using the same productive structure, and continuing the same activity may all be relevant factors.

Merely changing the business name, creating a new legal entity, or entering into separate contracts will not be sufficient when, in practice, the business continues to operate in a substantially similar manner.

Succession may be recognized even without a formal agreement

Business succession does not always occur through a single instrument expressly declaring the transfer of the establishment.

It may also be identified from the economic reality of the transaction.

In certain situations, machinery, clientele, brand, employees, and operations are transferred gradually.

The former company ceases its activities, and another company begins to operate the same business with the appearance of continuity.

When the transaction is used to evade creditors, conceal assets, or allow the activity to continue without the accumulated liabilities, the risk becomes even greater.

The absence of a formal business-transfer agreement does not, by itself, prevent recognition of succession.

The analysis should not be limited to the balance sheet

The valuation of a company cannot consider only revenue, assets, and expected profits.

It is also necessary to understand the source of the results and the risks supporting the operation.

A company may generate significant revenue while simultaneously having:

• contracts that may be terminated upon a change of control;

• excessive dependence on a small number of clients;

• substantial tax liabilities;

• recurring employment litigation;

• irregular licenses;

• guarantees granted by former partners or shareholders;

• essential assets owned by third parties;

• obligations not recorded in the accounts;

• disputes among partners;

• contingencies arising from the way the business operates.

The acquisition price can only be properly assessed when the risks are also understood.

Due diligence must be aligned with the structure of the transaction

Due diligence should not consist merely of a generic collection of certificates and records.

It must be directed by the structure of the acquisition and the characteristics of the business activity.

In an equity acquisition, the focus is on the company as a whole.

In an asset acquisition, it is necessary to examine not only the condition and ownership of the assets, but also whether the set of assets transferred may characterize the continuation of the business establishment.

Relevant contracts, employment relationships, tax matters, litigation, ownership of assets, and the licenses and authorizations required to operate the business should also be reviewed.

The depth of the investigation should be proportionate to the size, industry, and risk profile of the transaction.

The agreement may reduce risks, but it cannot erase reality

A well-structured business agreement may include:

• representations regarding the company’s condition;

• allocation of liability for prior obligations;

• retention of part of the purchase price;

• guarantees;

• indemnification for contingencies;

• conditions precedent to closing;

• purchase-price adjustment mechanisms;

• post-closing obligations of the seller;

• consequences for withholding information.

These mechanisms are important, but they do not replace prior investigation.

An indemnification clause may have little practical value if the seller has no assets available when the liability later emerges.

Likewise, a contractual statement cannot transform a transaction involving business continuity into a simple purchase of isolated assets.

The agreement must reflect the economic reality of the transaction rather than merely attempt to assign a different name to what actually occurred.

Conclusion

Buying a company and buying its assets are legally distinct transactions.

In an acquisition of equity interests, the buyer assumes control of a legal entity that retains its rights, contracts, assets, and liabilities.

In an asset acquisition, the buyer may have greater freedom to select the items acquired, but continuation of the activity may give rise to liabilities associated with business succession.

The strategic question is not merely:

Which assets and revenue streams will be acquired?

It is also necessary to investigate:

Which obligations, risks, and liabilities may accompany the transaction, even when they are not expressly identified in the agreement?

The value of a business lies not only in the assets being acquired.

It also depends on the liabilities that have been identified, the risks that have been limited, and the ability to structure the transaction before an opportunity becomes a source of liability.

This article is intended for informational purposes only. The structure and legal effects of the acquisition will depend on the nature of the transaction, the assets transferred, the continuation of the activity, the existing liabilities, and the particular circumstances of each business.