The buyer wants to do a hybrid transaction structure where they acquire our assets but require us to retain all pre-existing liabilities and accounts payable. How do we evaluate this structural risk and ensure we are not left holding the bag on legacy liabilities after the sale?

Question

Tyler Smith · Accepted Answer

In an asset sale, the buyer typically selects which assets they want to purchase and which liabilities they want to leave behind. If a buyer proposes a structure where you retain all accounts payable and legacy liabilities while they take the revenue-generating assets, you must proceed with extreme caution. This structure can severely erode your net proceeds.

To evaluate this risk, you must run a detailed cash flow model of the post-closing entity. Calculate the exact dollar amount of your outstanding accounts payable, accrued expenses, and long-term liabilities. Deduct this total from the cash you will receive at close, factoring in your estimated tax liabilities from the asset sale.

Next, negotiate for a clear definition of assumed liabilities in the purchase agreement. Ensure the buyer assumes all liabilities related to ongoing client contracts and employee benefits that transfer with the business.

You must also secure a working capital adjustment mechanism that reflects this split. If you are retaining the accounts payable, you must also retain a proportional amount of the accounts receivable to cover those debts.

Use your EOS processes to maintain clean financial reporting leading up to the transaction. Your Finance seat on the Accountability Chart must ensure that all liabilities are fully reconciled and documented. This clarity prevents the buyer from sneaking additional operational liabilities into your retained column during final negotiations.