Due Diligence

Hidden Liabilities

Learn to hunt for the obligations that don't appear on the surface (lawsuits, unpaid taxes, warranty claims, employee and environmental liabilities) and protect against them with deal structure.

  • Intermediate
  • 12 min total
  • 13 chapters

What decision this helps you make: What obligations lurk beneath a clean-looking business, and how to find them and keep them from becoming yours.

What this topic is

Hidden liabilities are obligations not obvious from the financials or the seller's pitch (unpaid taxes, pending lawsuits, warranty and product claims, undisclosed debts, employee and environmental obligations) that can become the buyer's problem after closing.

Why it matters

They're invisible on a casual read, so they must be actively hunted for. And, depending on structure, some transfer to the buyer via successor liability. "I bought the assets, not the liabilities" is not complete protection. What you can't see can sink you.

Who should learn it

Anyone buying a business. The risk is what the numbers don't show.

What you will understand

  • Understand hidden liabilities: obligations off the surface
  • Know the forms: taxes, litigation, claims, debt, employees, environment
  • See how successor liability can transfer them to the buyer
  • Defend on two fronts: find them (diligence) and protect (structure)

Prerequisites

Common misconception

"An asset purchase means I don't inherit any of the seller's liabilities." Not completely. Successor liability can attach certain obligations (some taxes, some employee and environmental claims) to a buyer even in an asset deal. Hidden liabilities are invisible on a casual read and not fully escaped by structure alone, so you defend on two fronts: find them through diligence, and protect against them through structure, escrows, and reps and warranties.