Buying a small business is an exciting move. You may see it as an opportunity for growth, independence, or investment. But even when the numbers look good and the seller seems transparent, buyers often find themselves taking on more than they bargained for. The reason? Hidden liabilities.

Hidden liabilities are obligations or legal risks that are not clearly disclosed during the sale of a business. These can include:

• Unpaid sales or payroll taxes
• Unresolved employee wage claims
• Pending or threatened litigation
• Contracts with hidden cancellation fees or auto-renewals
• Liens or encumbrances on equipment or inventory
• Misclassified workers or HR compliance issues
• Undisclosed regulatory problems or licensing issues

Any one of these can follow the assets into your hands if the deal is not properly structured.

In the Louisiana case of Levin v. May, 887 So.2d 497 (La. 2004), a buyer entered into what appeared to be a clean sale of a printer cartridge business. The seller promised that the business was licensed, profitable, and free of liens. However, shortly after signing, the buyer discovered that:

• The business was not licensed to operate locally
• Sales tax had been collected but never remitted

The buyer wisely terminated the deal based on misrepresentations and successfully recovered his deposit. Still, he faced legal costs and months of conflict. The case illustrates how tax liabilities and licensing failures, if not identified during due diligence, can leave the buyer with financial and legal exposure.

Unlike Levin v. May, the Georgia case of Graham v. Palmtop Properties, Inc., 645 S.E.2d 343, 284 Ga.App. 730 (Ga. App. 2007) is an example of what happens when the sale goes through.

In Graham v. Palmtop Properties, a Georgia business purchased a service station from an individual who had formerly operated through a corporate entity that failed to remit over $300,000 in sales taxes. The buyer believed it was acquiring the real estate from an individual, not the company with the tax debt. Nonetheless, the state tried to impose successor liability, arguing the business operations had simply continued under new ownership.

Although the buyer ultimately prevailed in court, the legal fight was costly and drawn out. The case highlights a critical point: even when buying from an individual, the government may argue that you are the successor to the prior business’s liabilities.

You cannot rely on good faith or seller reassurances. You need a legal strategy tailored to your deal. At Twisdale Law, PC, we recommend the following steps in nearly every transaction:

• Conduct full due diligence. Review tax returns, payroll records, contracts, UCC filings, employee handbooks, and state and local business licenses.
• Structure the deal as an asset sale. This allows you to pick and choose what you are buying and avoid assuming unknown liabilities.
• Include clear representations and warranties. The seller should affirm that taxes are paid, there are no undisclosed debts, and that they have full authority to sell.
• Obtain indemnity clauses. These protect you if claims arise from the seller’s period of ownership.
• Verify licensing and registrations. Make sure that what is being sold can legally operate in your name.

One overlooked item can expose you to claims long after the deal closes.

At Twisdale Law, PC, we regularly assist buyers through every phase of the purchase process. We help you evaluate the business’s legal health, identify risks, and structure the transaction in a way that protects your investment. With offices in Spartanburg, Asheville, and Jonesborough, and remote services throughout South Carolina, North Carolina, and Tennessee, we are well-positioned to support your business goals wherever you are.

If you are planning to buy a small business, contact Twisdale Law today to schedule a consultation and ensure the deal protects your future, not your predecessor’s mistakes.