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If the buyer is assuming the sellers liabilities, does this reduce the amount financed at closing?

If the buyer agrees to assume the sellers liabilities which include Accounts Payable and a Prepaid Liability, would this total amount be deducted at the time of closing from the purchase price? Thus reducing the amount financed?

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Answers (2)
Steven St
World Business Partners, Inc
Los Angeles County, CA

Yes that is what usually happens dollar for dollar reduction off of the purchase price. Many Buyers use this method because it means they have to come up with less money at closing. On the other hand if they were to buy it free and clear of any debts that money would be used to pay off the debts anyway. So it is a win/win for both Buyer and Seller but what Don posted below is good advice you should be very specific about what you are assuming.

There may even be some account that you can not legally assume. All of this will have to be worked out in advance. Get a really top business attorney is your best defense in this case.

I hope this helps

May 21, 2009
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The BAF Group LLC

Be careful in saying you plan to assume the Seller's liabilities; unless you are EXTREMELY specific, it would seem that you are opening yourself to a huge number of potential disasters. You never know what is lurking around the corner. There may be liabilities out there that even the Seller does not know about. There are some reasons to purchase the Seller's Corporation, which would then include liabilities. But again, you need to be extremely careful with that.

That aside, normally you incur his/her liabilities, but also obtain the business' Accounts Receivable, which would (if it is a profitable business,) hopefully more than offset the Seller's historical liabilities for which you are then responsible. If that is the case, no; normally, you would not deduct that from the price. However, if the liabilities exceed the Accounts Receivable, or if you are not getting the Accounts Receivables with the sale, I would think that the price would certainly be adjusted. But I would not wait until the "time of closing"!!! This is something that should be set out in ironclad terms, in the Contract of Sale. It is all negotiable, with a lot of give and take. But this nothing to play with: If you make an error in this, it could spell disaster for you, from the beginning of your acquisition. You need to be extremely careful and involve your attorney and accountant, in this process - again, BEFORE closing!

May 21, 2009

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