In many dental practice sales, the buyer does not automatically assume the seller’s liabilities. Whether responsibility transfers depends on how the transaction is structured, what the purchase agreement says, and the nature of the obligation. Thorough due diligence helps buyers identify potential risks before closing and avoid unexpected obligations after taking ownership.
Do Buyers Automatically Assume the Seller’s Liabilities?
Not necessarily. In many dental practice acquisitions, the transaction is structured as an asset purchase, meaning the buyer acquires specific assets of the practice rather than the seller’s entire business entity. Under this structure, the purchase agreement typically identifies which liabilities, if any, the buyer agrees to assume.
However, simply completing an asset purchase does not eliminate every potential risk. Certain obligations may remain with the seller, while others may require additional review depending on the facts of the transaction and applicable law. A small set of obligations, described below, can attach to the buyer under California statute even when the purchase agreement labels them as excluded.
Because every deal is different, buyers should avoid assuming that all liabilities either transfer automatically or remain entirely with the seller. The answer depends on how the transaction documents are drafted and on certain statutory requirements that exist independent of the contract.
What Types of Liabilities Should Buyers Review?
One of the primary goals of due diligence is identifying existing obligations before the transaction closes. Buyers should understand not only the financial condition of the practice but also whether unresolved issues could affect operations after the purchase.
Areas commonly reviewed include:
- Outstanding tax obligations
- Employment-related claims or disputes
- Vendor contracts and unpaid obligations
- Office lease responsibilities
- Pending or threatened litigation
- Regulatory or licensing issues, including transfer of the practice’s Dental Board of California permits
- Insurance claims or coverage questions
Some liabilities may be specifically addressed in the purchase agreement, while others require further investigation during due diligence. Identifying these issues early provides an opportunity to negotiate how they will be handled before ownership changes hands.
How Does California Law Impose Successor Liability on Buyers?
Purchase agreements are not the only source of liability allocation. California imposes two statutory withholding obligations on buyers that exist independent of contract terms, and courts have held that structuring a deal as an asset purchase does not avoid them:
- Sales and use tax. Under California Revenue and Taxation Code section 6811, a buyer must withhold enough of the purchase price to cover any unpaid sales or use tax owed by the seller, until the seller produces a tax clearance certificate from the California Department of Tax and Fee Administration. A buyer who fails to withhold can become personally liable for the unpaid tax, up to the purchase price.
- Payroll and unemployment insurance contributions. Under California Unemployment Insurance Code section 1731, a buyer of a practice with employees must similarly withhold funds sufficient to cover any unpaid contributions owed to the Employment Development Department, until the seller obtains a clearance certificate. Noncompliance carries the same type of personal liability.
Buyers can request clearance certificates from both agencies before closing. Doing so, rather than relying solely on representations in the purchase agreement, is generally the most reliable way to avoid inheriting these specific obligations.
How Does the Purchase Agreement Allocate Liability?
Outside of these statutory withholding requirements, the purchase agreement plays a central role in determining which obligations remain with the seller and which responsibilities the buyer accepts. Rather than relying on assumptions, the agreement should clearly define the allocation of liabilities.
Many purchase agreements distinguish between assumed liabilities and excluded liabilities. Assumed liabilities are obligations the buyer has agreed to take on as part of the transaction. Excluded liabilities generally remain the seller’s responsibility after closing, subject to the statutory exceptions described above.
The agreement may also include representations and warranties regarding the condition of the practice, as well as indemnification provisions that establish how certain claims will be handled if problems arise after the sale.
Because these provisions directly affect the parties’ rights and responsibilities, careful review before signing is an important part of the acquisition process.
Why Does Due Diligence Matter?
Due diligence gives buyers the opportunity to verify information about the practice before committing to the purchase. While financial performance often receives significant attention, legal and operational issues deserve equal consideration.
Reviewing contracts, financial records, employment matters, lease documents, and regulatory information can help buyers identify concerns that may not be immediately apparent during preliminary negotiations.
Due diligence also allows buyers to ask questions and request clarification before finalizing the transaction. If significant issues are identified, the parties may negotiate revised terms, adjust the purchase price, or allocate responsibility through the purchase agreement.
Rather than slowing the transaction, thorough due diligence often helps create greater confidence in the deal.
How Can Buyers Reduce the Risk of Unexpected Liabilities?
No transaction is completely risk-free, but buyers can take several steps to reduce the likelihood of unexpected obligations after closing, such as:
- Conducting comprehensive financial and legal due diligence
- Reviewing the purchase agreement carefully before signing
- Requesting tax clearance certificates from the California Department of Tax and Fee Administration and the Employment Development Department before closing
- Evaluating contracts, leases, and employment agreements
- Coordinating with legal, financial, and lending advisors throughout the transaction
- Addressing unresolved issues before ownership transfers
A proactive approach helps buyers better understand the practice and make informed decisions throughout the acquisition process.
Know What You’re Buying Before You Close
Purchasing a dental practice involves more than evaluating production numbers and patient volume. Understanding how existing liabilities are addressed in the transaction, and which obligations can transfer by operation of law, can be just as important to the acquisition’s long-term success. If you are purchasing a dental practice in Los Angeles, contact Polished Legal to evaluate how potential liabilities may affect your transaction.
