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Post-Close Liability in an Asset Only Purchase

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Recently, in Hampton’s on King, Inc. v. Ohio Dept. of Job & Family Services, 10th Dist. Franklin No.  14AP-243, 2014-Ohio-5666, Ohio’s Tenth District Court of Appeals found that the purchaser of the assets of a business inherited the unemployment compensation contribution rates from the seller of the assets.

Often times, our clients need assistance with the purchase or sale of a business. When representing the purchaser of a business, we may recommend that the deal be structured as an “asset deal.” This means that the purchaser is buying some or all of the actual assets of a business, such as inventory, equipment, real property, contractual rights, etc. The other way to structure a purchase of a business is a “stock deal.” When this structure is utilized, the purchaser actually buys the underlying ownership interests in the business, typically the shares in a corporation or membership units in a limited liability company.

An asset deal is often used to protect the purchaser from liabilities that will be retained by the selling entity, which the purchaser does not actually buy. Although there are exceptions to this general rule, an asset deal is typically the clearest way to make a “clean break” from the purchaser.

In the Hampton’s on King, Inc. decision, the Tenth District held that unemployment compensation contribution rates may flow to the purchaser, even if a transaction is structured as an asset deal. The court held that the purchaser was the successor in interest since it purchased assets which were “integral” to the operation of the restaurant business. These assets consisted of the liquor license, the rights to the name, the goodwill associated with the name,  and certain elements of décor associated with the prior business. The effect of this decision is that the purchaser may have to pay higher than expected unemployment compensation contribution rates.

While this decision is not an earth-shattering shift in Ohio law, it does reemphasize the need for experienced counsel to evaluate the potential for unforeseen liabilities in the purchase of a business. This decision also underscores the importance of indemnity provisions, which can be used to offer some protection for a purchaser.

To discuss the purchase and sale of a business, or any other legal matter contact Daniel T. Cronin, Esq. at 440-285-2242 or dcronin@tddlaw.com