Business buyers enter into asset purchase sales to avoid taking on the liabilities and debts of the seller. In Iowa, asset purchase buyers may be surprised to learn that under many circumstances the buyer will have successor liability with respect to the seller’s reserve account for the purposes of unemployment. This means the buyer inherits the unemployment history of the seller, good or bad, and is essentially responsible for unemployment benefits to employees, even if those employees were terminated just prior to the buyer taking over.

Seem strange? Well, it runs against the typical notion that purchasing business via an asset purchase and setting up a new business entity as a buyer insulates you from the liability of the seller. But, the Iowa Administrative Rules read:

Whenever any employing unit in any manner succeeds to or acquires from an employer either the organization,trade or business or substantially all the assets thereof, and continues such organization, trade or business such employing unit shall notify the department for the purpose of accomplishing the transfer or the reserve account of the predecessor employer to the successor employing unit. Such notification must be in writing on Form 60-0126, Report to Determine Liability, and include the name and address of the predecessor, the date of acquisition, and the name and address of the successor. When such notice has been received or in the absence of the notice when necessary information establishing that the acquisition occurred has been received by the department, the actual contribution and benefit experience and taxable payrolls of the predecessor shall be transferred to the successor employing unit for determining its rate of contribution, Thereafter, benefits chargeable because of employment for such transferred organization, trade or business shall be charged to the account of the successor.

So if you are purchasing a business from a seller, be sure to check out the seller’s unemployment compensation history, even if you are setting up a new corporation and buying only the assets of the business. If the history is poor, you may want to use this as a negotiating chip in determining the purchase price. You will also want to make sure all unemployment debts have been paid by the seller so that you are not hit with a surprise bill as soon as you take over.

You should consult your business attorney and/or accountant regarding these and other matters when entering into an asset purchase of a business.