Thinking of buying a business in Florida? Consider enlisting the help of an experienced business lawyer, like Gary I. Handin to conduct lien and judgment searches and ensure there are no hidden surprises before closing the deal. Buying or selling an existing business is a serious and exciting venture to undertake. Before buying a business, there is a significant amount research that needs to be conducted to ensure the business’ feasibility. Part of this due diligence process should contain conducting lien and judgment searches.
What Are Lien And Judgment Searches?
The operational running of a business requires balancing income, expenses and generating a profit. At some point, the business may suffer a cash shortage and need to use credit or loans to maintain its operation. This results in the provider becoming a creditor to the business and an outstanding debt. As a condition of the loan provided, creditors may insist on a lien (UCC-1 or security agreement) being attached to the assets of the business in the event of the debt not being paid. Legally, this means that the creditor is able to seize the business’ assets, property or investments; if the debt is unpaid. Lien and judgment searches involve meticulous investigation of the business’ legal financial records as well as the public records on a local, state and federal level.
Types of Lien
There are three main types of liens that need to be taken into account before purchasing an existing business:
Uniform commercial code liens is a security interested granted as a condition for the business to obtain financing. This is likely finance provided by banks or equipment by suppliers. Also referred to as consensual liens, the lien holder will file a UCC-1 or financing statement for public record. The financing statement, which contains details of the parties involved and collateral, is valid for five years and can be extended again.
Businesses are liable to pay state and federal taxes. Should the business fail to settle its tax obligations in time, the IRS can place a lien on the company’s property or any future assets purchased. The IRS will then have the legal right to the business property. Once the tax lien is in effect, all creditors to the business are alerted of the governments’ legal right to the company’s assets. This can also apply to sales tax and personal property tax not paid by business owners on the State level. The IRS will search for any asset owned by the individual, which can include the business he/she owns or has a stake in.
If the business or individual has been involved in a court case and lost, a judgment can be delivered against the business or individual. The judgment can be attached to personal and business property.
Impact Of Liens and How To Protect Yourself
Liens can have a devastating impact on a business’s financial obligations and also limit the possibility of resale. You can gain some protection by stipulating liability protections within the sale agreement but once ownership of the business passes, the onus of payment could still be with you. If you purchase a business which has liens against it, the liens liability is still payable by the business. This means that the business can be seized due to nonpayment of debt. You are able to settle the outstanding debt, if you wish to guard your investment and continue owning the business. Ensuring that proper due-diligence and contract terms and conditions are reviewed is the initial step to legally protecting yourself before purchasing/selling a business.
Due to the complexity and level of detail required to conduct lien and judgment searches, it’s always recommended to have a professional and experienced business lawyer to assist in vetting a potential business for purchase.