How to check a business for liens before you buy it

To check a business for liens before you buy it, search the public records under the seller's exact legal name: the state's UCC financing statements and any recorded tax lien notices. A lender's security interest generally follows the collateral into your hands unless the lender agreed to release it. A UCC filing stays effective for five years unless the lender continues it. The search tells you what to pay off at closing.

Why does a lien matter if you are only buying the assets?

Because the lien is attached to the asset, not only to the seller. Texas Business and Commerce Code Section 9.315(a)(1) says a security interest "continues in collateral notwithstanding sale, lease, license, exchange, or other disposition thereof unless the secured party authorized the disposition free of the security interest or agricultural lien." Texas adopted the uniform Article 9 of the Uniform Commercial Code, and other states use their own versions of the same rule, so check the law of the seller's state with counsel.

In plain terms, if the seller borrowed against the equipment, the vehicles or the inventory, and the lender did not agree to let them go free, the lender may still have a claim on them after closing. The statute has exceptions, and whether one applies to your deal is a question for your attorney. The buyer's job is to find the claims before signing and to decide who pays them off.

An asset sale does not change this. The due diligence checklist lists "liens and security interests" under legal matters and "liens will be released or addressed" among the closing conditions. This article is the working method for that line.

What does a UCC search show, and what does it miss?

A UCC search shows the financing statements filed against a debtor's name. The Texas Secretary of State describes the filing as a public notice that lets a creditor tell other creditors which of a debtor's assets are collateral. A financing statement names the secured party and describes the collateral. It does not tell you how much is still owed.

Three rules decide whether your search finds the right records.

1. Use the exact registered name. For a registered organization, Section 9.503(a)(1) requires the name stated on the public organic record most recently filed with or issued by the state where the entity was organized. Copy the name from the formation record, not from the sign on the door or the listing.
2. Know the safe harbor. Section 9.506(b) calls a filing that fails to give the debtor's name correctly "seriously misleading." Section 9.506(c) says that if a search under the correct name, using the filing office's standard search logic, would still turn the filing up, the name does not make it seriously misleading. Search the correct name and read every close result.
3. Check the date. Under Section 9.515(a), a filed financing statement "is effective for a period of five years after the date of filing," and under Section 9.515(c) it lapses unless a continuation statement is filed before the lapse. A continuation statement can be filed only within six months before the five-year period ends (Section 9.515(d)), so a filing in its last six months may be about to be continued. A lapsed filing does not mean the debt is paid. Section 9.515(c) does say that when a security interest becomes unperfected on lapse, it "is deemed never to have been perfected as against a purchaser of the collateral for value." Whether that helps a buyer depends on the facts, so take it to counsel, and still ask the lender for a payoff letter.

In Texas the Secretary of State lists a search report at $15.00 per debtor on its UCC fee schedule. Fees change, so confirm the current schedule when you order. As a practical step, also search the seller's former names and any assumed names the business used, and ask counsel whether county records matter in the seller's state. Those are precautions, not statutory requirements.

Which tax lien records should a buyer check?

Check federal tax lien notices, because the lien can reach everything the seller owns. The IRS explains that a federal tax lien "is the government's legal claim against your property when you neglect or fail to pay a tax debt." It arises after the IRS assesses the liability, sends a Notice and Demand for Payment and the taxpayer does not pay in time. The IRS files a public Notice of Federal Tax Lien to alert creditors, and the lien attaches to current property and property acquired later.

Where the notice is filed depends on the debtor. Under Texas Property Code Section 14.002, notices on real property go to the county clerk of the county where the property sits. Notices on personal property of a corporation or partnership whose principal executive office is in Texas go to the Secretary of State. For other persons, the notice goes to the county clerk of the county where the person resides. A sole proprietor's business assets are therefore tracked differently from a corporation's.

A clean search is evidence, not proof. The IRS describes the lien as arising when the steps above are complete, and the public notice follows. Ask the seller to show the status of the business's tax accounts through their accountant, and have your tax adviser review it. Other state and local tax claims have their own rules and are outside this article.

A worked example of a lien search

The numbers below are fictional. They are an illustrative asset purchase, not a client and not a benchmark.

An illustrative buyer agrees to a $400,000 price for the assets of a small service company. A UCC search under the company's exact registered name returns two financing statements.

Filing A is still inside its five years, so treat it as effective. Filing B is past its five-year date. That does not clear the van. Either the lender filed a continuation, or the filing lapsed and the debt may still exist, so the buyer asks for the payoff letter anyway.

The payoffs total $153,000. At closing the buyer pays $400,000, and $153,000 of it goes straight to the two lenders under their payoff letters. The seller receives $247,000 before any other adjustment. If the seller had expected $400,000 in hand, the buyer found that out before signing, and the price conversation happens while there is still time to have it.

How do you clear a lien at closing?

Get a written payoff letter from each secured party and pay it from the purchase price at closing. Each letter should state the payoff amount, a per-day figure after the quote date, and that the lender will release its lien on payment. The price in the purchase agreement should show these payoffs as deductions, so no one is surprised at the table.

Then confirm the release. Under Texas Business and Commerce Code Section 9.513(c), a secured party must, within 20 days after receiving an authenticated demand from the debtor, send or file a termination statement when the statute's conditions are met. Have counsel make the termination filing a closing deliverable instead of waiting on the demand. For a federal tax lien, the IRS says it releases the lien within 30 days after the tax debt is paid. Run a second search after the filings should have posted, and keep the results with the closing file.

If the seller will also carry a note, the lien question runs the other way: the seller will ask for collateral, and your own seller financing terms decide the lien position. The broader view of what a purchase does and does not transfer is in the benefits and risks guide.

Use the free Business Buyer Due Diligence Kit to track the lien search, the payoff letters and the releases next to the rest of your document requests. None of this is legal or tax advice. Your attorney should review the search results and the closing documents.