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Should I buy a business that is being sued?

1 Answers. Asked on May 19th, 2017 on Business Law - Texas
More details to this question:
I have been looking into buying a swimming pool and spa maintenance and repair company and just a few weeks ago I found out that this company is being sued for $10 Million dollars! The end of last year an employee of this company was driving one of the company vans while under the influence and hit an 18 wheeler, there were no injuries but damage to both vehicles. The employee was arrested and later fired. The driver of the 18 wheeler is suing the company. The lawyers from the insurance company are handling the suit. Should I even buy and if I do will I be held liable for the outcome of the suit?
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Answered on May 19th, 2017 at 7:43 AM

The suit raises a lot of issues, but doesn't necessarily preclude you buying the business.  A few questions you need to think about:

Is the "company" a corporation, llc, or other individual entity?  If so, its owners would normally not be personally responsible for the liabilities of the business.

If the company is a separate legal entity, can you structure this transaction as an asset sale, rather that a purchase of equity?  This would help to shelter you from liability as you would not be buying the company which is being sued, but rather its assets.  You have to be careful, however, about fraudulent conveyance and successor liability issues.  Fraudulent conveyance should not be an issue if you pay fair consideration for the assets, but that doesn't mean that someone can't sue you claiming a fraudulent conveyance.  It may help you to get an expert appraisal attesting to the value of what you're buying, and the fair amount you're paying for it, before consummating the transaction.

How much does the insurance cover?  Are there any issues about coverage?  Is there a retention?  Does the policy cover punitive damages and, if so, is such coverage enforceable in your jurisdiction?

You should also (and by you, I mean a local attorney you hire to address all these issues and the transaction in general) look into the merits of the lawsuit.  The fact that the plaintiff has asked for $10 million means nothing.   Without knowing all the facts I can't begin to assess how much the suit is worth, but with no injuries it is very unlikely to be anywhere close to $10 million, although a lot depends on whether or not the company knew or should have known that its employee was intoxicated when he drove.   Obviously the case is worth more if the driver was cited for DWI twice in the past year than if he had a  clean record previously.

 

These are just some of the issues I see off the top of my head.  I would strongly recommend that you engage an attorney if you decide to continue to pursue this transaction.

 

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Business Law
Beginning on the day a new business is launched, it will encounter a host of legal issues. From selecting the optimal business structure to negotiating contracts, from ensuring that the company's name doesn't infringe on another business's intellectual property to hiring new employers--almost everything that small business owners do touches on some aspect of business law. As a company owner or manager, your focus should be on successfully running and building a business. A law firm that focuses on business law will have attorneys who have a broad cross-section of experience on the myriad legal issues that affect all businesses, large and small.
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