(Published in the Idaho Business Review, August, 2008)

Too-Good-to-be-True Bargains?  Maybe

 As the construction industry feels the effects of the weakening real estate market, opportunities exist for strong construction companies to acquire assets at favorable prices. Everything from tools, equipment, supplies, vehicles, contracts, projects, and entire construction companies are presently offered for sale in Idaho at historically low prices.  Caution should be exercised to ensure you get what you pay for.

           When undertaking to buy an entire company, it is critical to remember that in addition to acquiring the assets of a company, you are also acquiring potential liabilities.  These can range from business loans, lines of credit, and contingent liabilities.  Any purchase agreement should contain warranties that all liabilities have been fully disclosed.  However, if the party making the warranty is insolvent, you may have little recourse in the event the warranties are inaccurate.  In addition, contingent liabilities may be difficult to quantify.  Liabilities related to negligent construction, potential breaches of contract, and warranty claims may be difficult to estimate.  For that reason, it is generally advisable to structure the transaction as a pure asset sale, rather than a sale of the business as going concern.

           The first rule of buying an asset is to make sure the seller actually owns the entirety of the asset offered for sale.  When buying real estate (a partially completed spec. home for example) the best method is to acquire title insurance. The title commitment will list the owner and any secured creditors who claim an interest in the property.  Additional endorsements are available to ensure the property is free from mechanic’s lien claims.

 With titled vehicles, title insurance is not available, but a search can be made with the Department of Motor Vehicles to determine ownership and a list of secured creditors.  With most other personal property ownership is almost impossible to confirm, but secured creditors can be determined by examining UCC filings with the Secretary of State (generally in the home state of the selling party).  In the case of certain property attached to real property, security interests are filed with the county recorder where the real property is located.

Where the property is owned by a corporation, LLC, or other legal entity, steps should be taken to confirm the authority of the individual acting on behalf of the seller.  When the entity is liquidating its business, or the transaction is significant, steps should be taken to have all owners of the entity approve the transaction.

In all cases, insist that the conveyance document contain warranties of ownership. Always insist that all secured parties are paid off at closing and execute releases.  Also ensure the party executing the deed, the title transfer, or the bill of sale matches the owner of record. Finally, make certain the deed or title transfer is filed appropriately. Failure to record a deed or properly transfer title to a vehicle to your name may result in having to surrender the property to the trustee in a bankruptcy. While you will likely have a claim in bankruptcy for the purchase price, it will be an unsecured claim, with little chance of full payment.

When acquiring construction contracts buyers need to do a great deal of due diligence.  The buyer should examine all subcontracts and seek confirmation from all subcontractors that there are no pending change orders which have not been approved by the owner.  The buyer should also ensure that all suppliers have been paid and that the work has complied with the plans and specifications, as well as the schedule, for the project.  Keep in mind the other party to the contract (and/or subcontracts) may have to approve the assignment of the contract.  A written consent to the assignment should be obtained, preferably along with an acknowledgement from the owner that the work to date has complied with the contract.

Human resources can also be acquired during a down cycle.  As is always the case, references should be checked to ensure you are not acquiring someone else’s problems.  While skilled employees may be available, it is usually the marginal performers who are the first to be laid off.  Keep in mind that many employees with specialized skills may be subject to non-compete agreements.  Make sure your interview process uncovers any such limitations.  Encouraging an employee to violate non-compete provisions may expose the new employer to liability.

Finally, while bargains exist in the market today, if a deal looks too good to be true, it probably is.  Bargain-basement prices should be a red flag and require heightened due diligence.  Keep in mind that transactions below market value may be challenged by the seller’s creditors under state and bankruptcy law.