Our last column on mergers, acquisitions
and consolidations resulted in a number of reader questions. One of the
questions was whether new customer numbers should be established when a
change in ownership occurs.
It is recommended that new customer numbers
be created whenever there is a change in the legal entity. A change in the
legal entity of the business will affect not only who is responsible for
payment but also may change the element of risk. A change in legal entity
creates a new business. Therefore, a new credit application should always be
required of the new business and analysis of credit and risk should be
For example, in a proprietorship there is
only one owner. The owner of the business is solely responsible for the
debts he or she incurs while operating the business. If Reginald Black is
the proprietor of LMN Appliance, Reginald Black personally owes the debt of
LMN Appliance. If Reginald sells LMN Appliance to Sherry Bettencourt, unless
there is an agreement to the contrary, Reginald is responsible for the debts
of LMN Appliance until the date of sale to Sherry.
If the customer number for LMN Appliance is not changed after the
sale to Sherry then the debts of Reginald and Sherry become commingled as
well as payments and credits. This can prove frustrating later when trying
to sort out whether Reginald or Sherry owes or is owed payment and/or
The same is true of partnerships. In a
general partnership agreement, all of the general partners are responsible
for the debts of the partnership. A general partner who leaves the
partnership is generally only responsible for the debts of the partnership
incurred prior to their departure. By not creating a new customer number
when the ownership of the partnership changes, we allow for confusion to
exist when determining what monies are owed by whom.
As discussed in the previous column one
corporation acquiring another corporation may or may not acquire the
liabilities of the acquired corporation. This is usually determined by the
agreement that identifies the acquisition as a purchase, merger or
consolidation. If the corporation has not acquired the debts of the other
then establishing a new customer number also provides for separating old
from new debt.
Every credit policy should contain a
statement as to when customer numbers are assigned, inactivated and purged.
Inactivated customer numbers should be purged annually and customer numbers
should be inactivated whenever one of the following occurs:
changes legal entity
sent to collection agency
written off to bad debt
has not purchased within six months
I wish you well
information is provided as information only and not legal advice.
Legal advice should be obtained from a competent, licensed attorney,
in good standing with the state bar association.