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© Copyright 2002-2003. All rights reserved.
Page 51
How To Investigate Any Business Opportunity
quate investigation. 
And in any business, there are potential liabilities that neither an honest seller nor a diligent buyer can
foresee at the time of the buy-sell transaction. An accident involving a company truck, the fall of a cus-
tomer on the business premises, or the discharge of an employee may become the basis of a lawsuit
and eventual liability, even though many months have passed since the event.
Even more elusive are liabilities that may arise from the manufacture or sale of defective products, pat-
ent or trademark infringement, or violations of statutes, and so on. Tax deficiencies may arise out of tax
returns filed but audited at the time of the buy-sell transaction.
The price agreed upon in a stock transaction will, of course, take into consideration only known liabili-
ties. The possibility of unknown liabilities need not, however, preclude the buyer from entering into a
stock transaction. Such a course of action may, in fact, be necessary in order to retain the benefits of
non-assignable contracts, leases, franchises, government licenses, stock registrations, corporate name,
and so on.
The buyer of stock should take precautions against unknown liabilities. Ordinarily this would include an
agreement on the part of the seller to indemnify the buyer against such liabilities and on some means for
satisfying any claims against the seller. Holding part of the purchase price in escrow against such a con-
tingency gives the buyer at least some security.
Contract Terms
A number of problems in the buy-sell transaction are brought into focus by the necessity of "writing up a
contract." At this point, agreement has usually been reached on the major issue - price. Presumably, the
buyer and seller have considered tax consequences, assumptions of liabilities, and terms of payment in
arriving at a price.
More is involved in drafting an adequate buy-sell contract, however, than mechanically reducing these
oral agreements to written form. To protect the interests of both parties, the contract must cover possible
problems that are often far from the minds of the buyer and seller at the time.
·
What if the buyer defaults on his installment payment of the purchase price? 
·
What if the seller's financial statements, which the buyer relied on, turn out to be inaccurate or false? 
·
What if the seller turns out to have liabilities that have not been taken into account in the price? 
·
What if some of the assets purchased turn out not to be owned by the seller or are subject to undis-
closed liens? 
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