Buying or Selling a Distressed Business? Key Legal Strategies for Managing Risk and Unlocking Value

In today’s high-interest, post-pandemic economy, distressed business sales are becoming increasingly common. From independently owned pharmacies and restaurants to franchise locations and retail operators, many business owners are struggling under the weight of SBA loans, rising costs, regulatory burdens, and reduced margins. As a result, more buyers are eyeing these opportunities as potential value plays. But these transactions come with real legal risk, especially when the sale is “underwater,” meaning liabilities exceed asset value. Whether you are a buyer looking to capitalize on discounted opportunities, or a seller seeking an exit from mounting obligations, understanding how to properly structure a distressed transaction is essential.

For sellers, the key objective is to exit cleanly, satisfying major obligations, protecting personal guarantees, and avoiding future exposure. This begins with choosing the right transaction structure. In most cases, an asset sale is preferable to a stock or membership interest sale. Asset sales allow the seller to transfer only selected assets (such as licenses, goodwill, inventory, or lease rights) while leaving behind corporate debts, tax liabilities, or lawsuits. They also tend to make the deal more attractive to buyers, who are naturally cautious about assuming undisclosed liabilities. That said, sellers must still obtain required consents from landlords, lenders, franchisors, or government regulators.

Many distressed businesses today carry significant SBA 7(a) loans or EIDL debt. These loans are often personally guaranteed and secured by all business assets. Sellers should be proactive in negotiating payoffs or settlements with lenders before closing and obtain formal payoff letters or lien releases. The same applies to state tax liens, vendor judgments, or past-due rent. A well-prepared seller package identifying these obligations and offering a roadmap for resolution can substantially improve buyer confidence and speed up the closing timeline. Crucially, the asset purchase agreement should clearly define what liabilities are being assumed by the buyer (if any) and what liabilities remain with the seller. Failing to do so often results in disputes or delayed closings.

From the buyer’s perspective, these deals can be extremely attractive but only when structured carefully. Buyers should conduct deep, targeted due diligence. In distressed situations, full records are rarely available, so public lien searches, tax warrant reviews, and direct communication with lenders or landlords often become necessary. This is especially important in regulated industries like pharmacy, where outstanding Board of Pharmacy violations, DEA issues, or PBM audits can have long-term operational consequences. Buyers should be wary of “silent liabilities” like unpaid payroll taxes, employee claims, or environmental violations that may not be obvious during the diligence phase.

The purchase agreement itself must include key protections. These include a schedule of assumed and excluded liabilities, indemnities for known risks, and, where appropriate, purchase price holdbacks or escrows to cover potential debts or delayed approvals. It is also important to address licensing, permitting, or contractual assignments that cannot be transferred without third-party consent.

When the business is truly underwater, clarity and transparency on both sides become essential. Buyers need assurance they will not be held responsible for undisclosed or unpaid obligations. Sellers must protect themselves from claims post-closing, especially if they are walking away from operations. The deal should allocate purchase price carefully to account for partial payoffs or negotiated settlements with lenders, tax authorities, or vendors. Both parties must agree in writing on how obligations will be treated, whether they are paid at closing, assumed by the buyer, or remain the responsibility of the seller.

Ultimately, distressed transactions offer unique opportunity but only when handled with clear legal planning, smart contract language, and practical business judgment. Whether you’re selling a pharmacy burdened by SBA debt or acquiring a retail business with operational upside but hidden liabilities, it’s critical to engage experienced counsel early in the process. Distressed doesn’t have to mean disorganized, but it often does if the right safeguards aren’t in place.

If you are exploring the sale or acquisition of a distressed business, the COMMERCIAL REAL ESTATE team at Pasricha & Patel, LLC can guide you through the process with insight, efficiency, and protection. Please contact Sandeep S. Chandi, Esq. for a confidential consultation.