In an asset purchase, only the liabilities the buyer specifically agrees to assume should transfer. However, Washington law includes successor liability rules and treats certain bulk asset transfers under state tax law in ways that can hold a buyer responsible for specific debts, including unpaid taxes and, in some circumstances, certain employee-related obligations, even when the purchase agreement says otherwise.
This is an area where many buyers in the Seattle area do not realize the risk until after closing. The assumption is straightforward: if I am only buying the assets, I am not taking on the seller’s debts. In practice, it does not always work that way.
How do successor liability rules affect business buyers in Washington?
Washington courts have recognized several situations where a buyer of business assets can inherit the seller’s liabilities. These typically arise when the buyer continues the same business with substantially the same operations, employees, and customers, or when the sale is structured in a way that leaves the seller unable to pay its creditors.
What this means: the way the transaction is structured matters as much as what the purchase agreement says. If the deal effectively transfers the entire business and leaves the seller as an empty shell, creditors may be able to pursue the buyer for pre-sale debts.
Tax obligations are a particular concern. Washington’s Department of Revenue can hold a successor business liable for unpaid sales tax, business and occupation tax, and other state tax obligations of the prior owner. Requesting a tax clearance certificate before closing is one way to reduce this risk, but the timing and process need to be managed carefully.
What should the purchase agreement say about liability allocation?
The purchase agreement should include a clear list of which liabilities the buyer is assuming and an explicit statement that all other liabilities remain with the seller. It should also include:
- Specific representations from the seller about the existence and amount of all known liabilities, including pending litigation, tax obligations, and employee claims.
- Indemnification provisions requiring the seller to cover losses arising from undisclosed or excluded liabilities, with survival periods long enough for problems to surface.
- A holdback or escrow that keeps a portion of the purchase price available to cover indemnification claims after closing.
I typically see buyers who review the asset list carefully but spend less time on the liability allocation section. That is where the expensive surprises tend to come from. Clients often describe what they think a document says, but the language may say something very different.
What steps can a buyer take to reduce liability risk?
Conducting a lien and judgment search through the Washington Secretary of State and King County Superior Court records is a starting point. Requesting a tax clearance from the Department of Revenue, reviewing all pending or threatened litigation, and confirming the status of employee benefit obligations are all additional parts of the process.
Every transaction is different, so the scope of liability review depends on the business being acquired. A retail business with inventory and sales tax obligations has different liability risks than a professional services firm. The goal is always to align the structure of the deal with what the buyer is actually trying to accomplish.
It is about catching issues early and preventing disputes later. The cost of a thorough liability review before closing is almost always less than the cost of dealing with an inherited debt after the sale is complete.
For a full overview of what due diligence involves, read our guide: What should a buyer know before purchasing a business in Seattle, Washington?
K&S Canon assists Seattle and King County business buyers with purchase agreement review and due diligence. Contact K&S Canon today. Call us at (206) 507-4009 or visit kscanon.com.
DISCLAIMER
This article provides general information about business purchase liability in Washington and should not be considered legal advice. Every case is different. Outcomes depend on specific facts and circumstances.