Buying a business? Don't get snagged by hidden liabilities.

Author:LaBine, Jeffrey L.
Position:Small Business central - Letters of intent
 
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Here are a few matters to keep in mind if you're looking to buy a company.

Letters of intent -- Frequently viewed as non-binding, letters of intent are a veritable minefield for a business purchaser. Remember Texaco? A LOI it thought non-binding resulted in $3 billion in damages--including punitive damages that bankrupted the company. Great care should be taken to spell out exactly which provisions of a LOI are binding, and which are not. One particularly perilous area is the purchase price. Too often, a buyer fails to predicate LOI purchase-price provisions on the satisfactory conclusion of due diligence, thus getting locked into a price that's not supportable. Another pitfall? Allowing discussions regarding such arcane issues as "baskets," "caps" and survival periods for warranties and indemnities to enter the LOI. To be safe, involve legal counsel with experience in the area of mergers and acquisitions at the earliest possible stage and don't sign a letter of intent until you've had it thoroughly reviewed.

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Unemployment tax rates -- As a purchaser, you'll likely inherit the unemployment account of the business you're acquiring. This could represent a significant long-term liability--as much as five years, in fact. Employers pay a percentage of each employee's wages for unemployment tax, and annual rates are based on a five-year trailing calculation. If the seller has a negative account balance or has had unemployed workers over the last five years, you could be assigned a rate as high as 10 percent (as opposed to the 2.7 percent paid by a new business)--and that could have a substantial impact on your cash flow.

Electronic signatures -- E-mail is often seen as being less formal--and less binding--than traditional letters, and the passage of electronic signature acts has created a new area of vulnerability. An e-mail containing a purchaser's name where a manual signature would appear in hard copy could be judged binding, committing an unwary buyer to a contract.

Section 27a escrow -- As a general rule, the purchaser of a business in Michigan is liable for the payment of unpaid state taxes...

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