Key Takeaways for Business Owners

• In an asset sale, the buyer takes only the liabilities the agreement lists as assumed.
  
  
• Pre-closing problems stay with the seller, even if the claim shows up after closing, when the agreement excludes them.
  
  
• Taxes for periods ending on or before closing, including later audits and assessments, should be treated as seller liabilities.
  
  
• Owner-level and affiliate tax exposure should be expressly excluded so it does not follow the business after closing.
  
  
• Each side’s legal, accounting, broker, and other deal fees should be assigned clearly so unpaid invoices do not land on the buyer.

If you're thinking about selling a business through an asset sale or buying one that way, it's natural to worry about where the liability line gets drawn. As a buyer, you don't want to be left holding the bag for the seller's past-due debts or, worse still, be taken to court by some disgruntled party with a claim that's been hanging over the business for years.

As a seller, your goal is probably a clean exit, with no nasty surprises waiting for you once you've moved on. You don't want to find out after you've closed the door on your old business that you still have unresolved tax troubles, unpaid taxes, or other liabilities that somehow managed to land with the business, only to surface later.

That's why the asset purchase agreement has to get two key things right. First, it must clearly set out which liabilities the buyer is taking on - assumed liabilities. And second, it needs to make it crystal clear which liabilities are still firmly the seller's problem - excluded liabilities.

Join us in the next article in our ongoing series for business owners, “What’s Missing from Your Asset Purchase Agreement”. Last time, we discussed the importance of listing excluded assets from the sale. Today, we’re discussing the importance of listing excluded liabilities in your asset purchase agreement. Join us below.

Quick Definition: What Are Excluded Liabilities in an Asset Purchase Agreement?

In an asset sale, you are not buying the whole company. You are buying specific assets, which may include both tangible and intangible assets. Because the deal is structured that way, the asset purchase agreement has to draw a clear liability line.

If something goes wrong later, who is held responsible?

That is what excluded liabilities are for. Excluded liabilities are obligations that stay with the seller and do not transfer to you as the buyer. You take on only the assumed liabilities listed in the asset purchase agreement.

Everything the purchase agreement treats as excluded remains the seller’s responsibility, even if it shows up after closing. This often includes:

• Tax liabilities
• Tax obligations
• Unpaid taxes
• Accounts payable
• Other contractual obligations tied to the seller’s business that arose prior to closing.

For you as the buyer, excluded liabilities let you buy the upside of the business with a clearer starting point.

Excluded Liabilities Your Asset Purchase Agreement Should Include

The exact excluded liabilities will depend on your transaction and the seller’s business. But there are common categories that show up in almost every deal. You want the purchase agreement to be clear, so you’re not guessing later which liabilities belong to the seller and which ones are assumed by the buyer.

Pre-Closing Operations Liabilities

Let’s take a practical example.

Say the seller was running the business in the ordinary course before you, the buyer, came along. Six months before closing, the seller served a customer who was unhappy and suffered losses but didn’t react right away. Three months after closing, that customer sends a demand letter threatening to sue. Even though it arrives after closing:

• The service was performed before closing.
• The dispute arose before closing based on pre-closing conduct.

That’s a pre-closing operations liability. If the asset purchase agreement is properly drafted, it stays with the seller.

Taxes Tied to Periods Ending on or Before Closing

Let’s say you’re buying an online business that operates in multiple states. The seller collects sales tax in some states but not all of them. At closing, there is no audit pending. No tax bill has been issued. On the surface, the seller’s tax filings look normal.

A few months after closing, a state tax authority determines the seller should have been collecting sales tax in that state for the year prior to the sale. They issue a notice of audit, then a proposed assessment for unpaid sales tax, penalties, and interest. That notice is sent to the business address, which you now control as the buyer.

If your asset purchase agreement clearly lists taxes tied to periods ending on or before closing as excluded liabilities, then this is a no-brainer. The tax liabilities relate to the seller’s business prior to closing, so they are the seller’s responsibility. If the purchase agreement doesn’t address this or leaves it unclear, then it can quickly turn into a dispute over who’s responsible for taxes that arose before you owned the business.

Owner-Level Taxes

Let's say you're buying a business that is set up as an S corporation . The deal goes through, and at first glance, everything looks fine. Nevertheless,, if the accountants are not careful, income made before the sale could still end up being taxable to the buyer.

If your asset purchase agreement doesn't cover excluded tax liabilities, you might run into trouble later on down the road. The seller might argue with you over who's ultimately responsible for paying those taxes, claiming you're now in charge of the business and should be covering the tax bill - or at least some of it.

But if your purchase agreement is clear and lists the liabilities the buyer is taking on, and specifically says that the seller is responsible for their own pre-closing tax obligations, it makes things a lot simpler. In that case, the buyer is only on the hook for the liabilities you explicitly agreed to assume, and the seller still has to deal with their own tax bill.

Affiliate Taxes

In some deals, the seller owns multiple entities that share back-office systems. You may be buying assets used by the operating business, but the seller’s other entities may be tied into the same payroll, benefits, or tax reporting behind the scenes.

Here’s a common real-world scenario:

The seller owns OperatingCo (the business you’re buying) and ManagementCo (an affiliate the seller is keeping). For convenience, the seller runs payroll through OperatingCo’s EIN, and then “reclasses” the expense by having ManagementCo reimburse OperatingCo each month. The employees may split time between entities, but the quarterly payroll tax returns and state unemployment filings are all made under OperatingCo.

After closing, a state agency audits ManagementCo and determines that certain workers should have been treated differently (for example, as employees instead of independent contractors) or that payroll taxes were misallocated across the seller’s entities before you acquired OperatingCo through the asset purchase agreement. The agency then follows the paper trail to the EIN that reported and paid payroll taxes historically—OperatingCo’s EIN—and sends notices to the business address and payroll accounts that are still active. That’s now your operation.

If your asset purchase agreement clearly excludes (i) any taxes or tax liabilities of the seller’s affiliates and (ii) any liabilities arising out of shared payroll arrangements, intercompany reimbursements, or pre-closing filings made under OperatingCo’s EIN on behalf of any other entity, then this remains the seller’s problem. If the agreement doesn’t address affiliate entanglements (or just says “taxes” without spelling out the shared-payroll risk), you can end up dealing with tax notices, information requests, and potential collection activity tied to an affiliate you never agreed to buy.

Deal Costs and Professional Fees

Asset purchase agreements often involve both sides bringing in professionals to help negotiate the deal. You're likely to have lawyers drafting up the purchase agreement, accountants helping out with financials and due diligence, and maybe even a broker or consultant who helped find the buyer or shape up the deal. And of course, these experts will bill the party they were hired by - that's only fair, in theory.

Sellers may assume they will cover the bills from the sale proceeds, but then payment does not happen quickly or at all. When the professional follows up, they may contact the business that just changed hands, which you now control as the buyer.

This is why your asset purchase agreement should treat the seller’s unpaid deal costs as excluded liabilities. If the asset purchase agreement is clear, those expenses remain part of the seller’s liabilities. If the purchase agreement is vague, you can end up dealing with demands for payment tied to work you never agreed to cover.

Excluded Liabilities Checklist to Review Before Signing an Asset Purchase Agreement

Final Thoughts

We hope this article gave you a clearer, real-world sense of why excluded liabilities matter in an asset purchase agreement. When the purchase agreement spells out what stays with the seller, it reduces the chance that you end up arguing later about tax liabilities, unpaid taxes, or other obligations tied to the seller’s business that arose prior to closing.

FAQs

What’s the Difference Between Assumed Liabilities and Excluded Liabilities in an Asset Purchase Agreement?

In an asset purchase agreement, assumed liabilities are the specific obligations the buyer agrees to take on, and nothing more. They are usually listed clearly and often tied to ongoing operations, such as certain customer contracts or assigned leases.

Excluded liabilities work the opposite way. They are obligations that remain with the seller, even if they surface after closing. The key rule is simple: the buyer is only responsible for the assumed liabilities listed in the purchase agreement. Everything else stays with the seller as part of the seller’s liabilities.

If a Claim Shows up After Closing, How Do We Determine if It’s a Seller Liability or a Buyer Liability?

You look at when the issue arose and what caused it. If the conduct, transaction, or failure happened before closing, it’s usually a seller liability, even if the claim shows up later. Next, you look at the asset purchase agreement itself.

If the agreement excludes liabilities that arose prior to closing, the seller is responsible. If the liability is in the assumed liabilities section, then it’s the buyer. Timing, cause, and the language of the purchase agreement answer the question.

Do Excluded Liabilities Apply if the Issue Was Unknown at Closing?

Yes, if the purchase agreement is drafted clearly, excluded liabilities remain excluded even if neither party knew about the issue at closing. The key is not knowledge, but when the liability arose and how it’s allocated in the agreement.

Unknown tax liabilities, undiscovered compliance issues, or dormant claims tied to the seller’s business prior to closing can still be the seller’s if they fit within the excluded liabilities definition. That’s why clear drafting matters more than what was known at the time of the sale.

Are you wondering about any of the issues mentioned above? Please email us at info@wilkinsonlawllc.com or call (732) 410-7595 for assistance.

At Wilkinson Law, we give business owners the clarity they need to fund, grow, protect, and sell their businesses. We are trustworthy business advisors keeping your business on TRACK: Trustworthy. Reliable. Available. Caring. Knowledgeable.®