Assumed liabilities: Overview, definition, and example
What are assumed liabilities?
Assumed liabilities refer to the debts, obligations, or liabilities that one party agrees to take on as part of a business transaction, such as an acquisition, merger, or purchase agreement. These liabilities are typically explicitly transferred from one party (the seller) to another party (the buyer) as part of the deal. When liabilities are "assumed," the party assuming them becomes responsible for fulfilling the terms and paying off the debt or obligations. This can include loans, unpaid bills, pending lawsuits, or any other obligations that the seller had prior to the transaction.
Why are assumed liabilities important?
Assumed liabilities are important because they outline the financial responsibilities that are transferred from one party to another during a transaction. For buyers, understanding which liabilities they are assuming is critical, as it affects the overall value of the transaction and the financial health of the acquiring entity. For sellers, properly defining which liabilities are being assumed helps prevent any future disputes over responsibility. Clear identification of assumed liabilities also helps in negotiating the terms of the deal, including the purchase price, as buyers often factor in the liabilities they will inherit when agreeing to terms.
Understanding assumed liabilities through an example
Imagine a company, Company A, is acquiring Company B. As part of the acquisition agreement, Company A agrees to assume certain liabilities of Company B, including an outstanding loan of $500,000. Company A is now responsible for repaying this loan, even though it was originally owed by Company B. The agreement will clearly specify which liabilities Company A is assuming, so there is no confusion about financial responsibilities after the transaction is complete.
In another example, a real estate investor purchases a commercial property from a seller. The purchase agreement states that the investor is assuming certain liabilities associated with the property, such as unpaid property taxes or existing maintenance contracts with service providers. These assumed liabilities will be transferred to the buyer, who will now be responsible for addressing them.
An example of assumed liabilities clause
Here’s how an assumed liabilities clause might appear in an acquisition agreement:
“The Buyer agrees to assume and be responsible for all liabilities of the Seller as of the Closing Date, including but not limited to the following: outstanding debts, employee compensation obligations, and pending litigation. The Seller shall retain responsibility for any liabilities incurred prior to the Closing Date that are not explicitly assumed by the Buyer.”
Conclusion
Assumed liabilities are a crucial part of business transactions, especially in mergers and acquisitions. They clarify which debts and obligations are transferred to the buyer and which remain with the seller. Understanding and properly documenting assumed liabilities helps prevent misunderstandings and ensures that both parties are aware of their financial responsibilities after the transaction. By clearly defining these liabilities, both buyers and sellers can better manage the risks and rewards associated with the deal.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.