Q: I am thinking of acquiring a tour operator that is for sale because the owner would like to get out from under the financial burden of fulfilling clients’ future travel credits. It looks like the seller spent a lot of the client deposits on its own operating expenses during the pandemic, leaving no easy way to fund all the future trips. Nevertheless, the company has a good name in the industry, a good client list and lots of useful supplier contacts, so an acquisition may be worthwhile. However, if it turns out that I cannot afford to pay the obligations, I may be forced simply to close the company. In that case, could I have any personal liability for the company’s obligations? If so, what can I do to avoid such personal liability?

A: First, the buyer should be a new legal entity, such as a new corporation or limited liability company (LLC), for the sole purpose of acquiring the tour operator’s assets. If you form the entity in a state other than the seller’s headquarters state, be sure to register the new entity as an out-of-state corporation or LLC. 

Be sure to follow all required legal formalities, such as adopting bylaws for the corporation, issuing stock, opening a bank account and keeping the new entity’s money separate from your other business. Having a valid legal entity will protect you from personal liability for all claims, except as explained below.

Second, be sure to avoid what are called “fraudulent transfers” under the Uniform Fraudulent Transfer Act in effect in all states. Under the act, if you transfer any of the tour operator’s assets to the new entity, you could be liable if you do so:

a) with actual intent to hinder, delay or defraud creditors, including clients.
b) without the operator’s receipt of “reasonably equivalent value” in exchange for the sale.
c) when the operator was insolvent.

Since c) is obviously already the case and since a) is somewhat subjective, the key factor is b). To overcome any claim under the act, you need to be able to prove that the operator received “reasonably equivalent value.”

The quoted term generally means fair market value. You can prove fair market value of any travel business by getting a professional evaluation before the acquisition. Taking on future travel credits and other debts would be equivalent to payment, so it should be fairly easy to meet your burden of proof even if the seller did not get to take home any part of the purchase price.

After the acquisition, you would have to put in fresh money to cover the difference between the cash on hand and what you will have to pay for future trips that use credits. You would have to have these resources already on hand, as it would be tough to raise money for an insolvent tour operator.

Finally, be sure to work with a knowledgeable attorney to structure the deal so that you are protected. 

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