Asset Purchase vs. Stock Purchase

Buying or selling a business is rarely as simple as agreeing on a price. One of the first major decisions is what the buyer will purchase.

In a typical private-company transaction, the parties often choose between:

• An asset purchase, in which the buyer acquires specified assets and assumes specified liabilities from the business; and
• A stock purchase, in which the buyer acquires the ownership shares of the corporation that operates the business.

For an LLC, the comparable ownership transaction is usually called a membership-interest purchase rather than a stock purchase. Many of the same concepts apply, but LLC tax classification and the Operating Agreement can materially affect the analysis.

Deal structure can determine:

• Which assets and liabilities move to the buyer;
• Whether contracts, leases, permits, and accounts must be assigned;
• Whether third-party consents are required;
• Which employees remain employed and by whom;
• How the purchase price is taxed;
• Whether the buyer receives a new tax basis in business assets;
• How easily operations can continue after closing;
• Whether historical claims remain with the seller or follow the acquired company;
• Which government notices, clearances, and transfer taxes apply; and
• What representations, escrows, indemnities, and closing documents are needed.

Neither structure is automatically better. Buyers often begin by preferring an asset purchase, while sellers often begin by preferring a stock purchase. But tax status, contracts, licenses, liabilities, financing, real estate, employees, and negotiating leverage may lead to a different result.

This Codex explains, in plain English:

• What an asset purchase and stock purchase are;
• The main advantages and disadvantages of each structure;
• How liabilities, contracts, employees, and permits are handled;
• Why tax treatment can drive the negotiation;
• New York’s bulk-sale notice procedure;
• Successor-liability risks;
• Purchase-price adjustments and allocation;
• Due diligence, closing documents, and post-closing obligations; and
• Practical questions for buyers and sellers.

This Codex focuses on privately held businesses under New York and related federal law. Public-company acquisitions, regulated industries, bankruptcy sales, cross-border transactions, securities offerings, and tax-free reorganizations involve additional rules.

The Basic Difference

Asset purchase

In an asset purchase, the buyer purchases selected assets from the entity that owns the business. The seller remains the same corporation, LLC, or other entity after the closing unless it later dissolves, merges, or takes another action.

The agreement identifies:

• Purchased assets that will transfer;
• Excluded assets that the seller will keep;
• Assumed liabilities that the buyer agrees to pay or perform; and
• Excluded liabilities that remain with the seller.

The buyer may form a new corporation or LLC to acquire and operate the assets.

Stock purchase

In a stock purchase, the buyer purchases shares from the corporation’s shareholders. The corporation itself continues to own the same assets, owe the same liabilities, employ the same employees, and remain party to the same contracts—subject to change-of-control provisions, law, and the transaction documents.

The identity of the corporation generally does not change. Its owners change.

Membership-interest purchase

If the target is an LLC, the buyer may purchase some or all of the members’ ownership interests. The LLC remains the business owner, but the membership and control change.

An LLC interest purchase can resemble a stock purchase legally while receiving different federal tax treatment depending on the number of members, tax classification, and transaction structure. It should not be assumed that every equity purchase is taxed like a corporate stock sale.

Quick Comparison

This table is only a starting point. The final result depends on the entity, tax elections, agreements, regulatory setting, and transaction facts.

How an Asset Purchase Works

An asset purchase is built around selection. The parties must decide exactly what transfers and what does not.

Common purchased assets

Purchased assets may include:

• Inventory;
• Equipment, machinery, furniture, and vehicles;
• Accounts receivable;
• Cash or specified deposits;
• Real estate or leasehold interests;
• Customer and vendor contracts;
• Purchase orders and backlog;
• Intellectual property;
• Trade names, trademarks, domain names, websites, telephone numbers, and social-media accounts;
• Software, databases, files, and business records;
• Permits and licenses to the extent transferable;
• Prepaid expenses;
• Claims against third parties;
• Goodwill and going-concern value; and
• Other specifically identified rights.

A phrase such as “all assets used in the business” may be too vague by itself. Schedules, title records, intellectual-property registrations, contract lists, and physical inventories help define the deal.

Common excluded assets

The seller may retain:

• Cash and bank accounts;
• Tax refunds;
• Insurance policies and claims;
• Corporate records unrelated to operations;
• Rights under the purchase agreement;
• Certain receivables;
• Personal property of owners;
• Specified intellectual property;
• Employee-benefit-plan assets;
• Related-party claims; and
• Other assets identified on an exclusion schedule.

Excluded assets should be listed carefully. If an item is necessary to operate the business after closing, leaving it behind may disrupt operations.

Assumed liabilities

A buyer may agree to assume liabilities such as:

• Obligations arising after closing under assigned contracts;
• Customer deposits or credits;
• Gift cards or warranties;
• Specified trade payables;
• Accrued paid time off;
• Equipment leases;
• Assumed debt;
• Certain taxes allocated to post-closing periods; or
• Other negotiated obligations.

The agreement should distinguish between performing a contract after closing and assuming responsibility for the seller’s earlier breach of that contract.

Excluded liabilities

A buyer commonly seeks to exclude:

• Pre-closing taxes;
• Pre-closing employee claims;
• Seller debt not expressly assumed;
• Litigation and investigations;
• Product or service claims arising from pre-closing conduct;
• Environmental liabilities;
• Related-party obligations;
• Transaction expenses;
• Benefit-plan liabilities;
• Broker or finder fees; and
• Liabilities arising from excluded assets or the seller’s failure to comply with law.

An exclusion in the purchase agreement allocates responsibility between buyer and seller. It does not necessarily prevent a creditor, agency, employee, customer, or court from asserting liability against the buyer under a statute or successor-liability doctrine.

How a Stock Purchase Works

In a stock purchase, the buyer acquires the shareholders’ ownership interests. The corporation remains intact.

What remains with the corporation

Unless separately changed, the corporation generally keeps:

• Its assets;
• Its legal name and employer identification number;
• Its contracts;
• Its receivables and payables;
• Its employees;
• Its litigation;
• Its tax history;
• Its permits and licenses;
• Its insurance history;
• Its intellectual property; and
• Its known and unknown liabilities.

This continuity can simplify the closing, but it also means the buyer acquires the economic risk of the company’s past.

Change-of-control restrictions

A stock purchase does not transfer a contract from one entity to another, but a contract may still require notice or consent if ownership or control changes.

Change-of-control provisions frequently appear in:

• Credit agreements;
• Commercial leases;
• Franchise and dealer agreements;
• Government contracts;
• Software and intellectual-property licenses;
• Distribution agreements;
• Customer contracts;
• Insurance policies;
• Equity incentive plans; and
• Professional or regulatory approvals.

A buyer should not assume that a stock transaction avoids all consent requirements.

Shares and ownership records

The buyer must confirm that sellers own the shares they claim to sell and that the shares are:

• Validly issued;
• Fully paid as required;
• Free of undisclosed liens;
• Not subject to options, warrants, conversion rights, or transfer restrictions; and
• Properly reflected in the stock ledger and capitalization records.

Closely held companies often have incomplete stock records. Resolving capitalization before signing or closing can be essential.

Why Buyers Often Prefer Asset Purchases

A buyer may prefer an asset purchase because it can:

• Select the assets it wants;
• Exclude unwanted assets;
• Define the liabilities it will assume;
• Avoid acquiring the seller entity’s full historical record;
• Obtain a new tax basis in acquired assets;
• Depreciate or amortize qualifying stepped-up basis;
• Leave behind unwanted owners, equity rights, and governance arrangements;
• Use a newly formed acquisition entity; and
• Structure the business differently after closing.

These benefits are not absolute. Successor liability, taxes, liens, employee obligations, bulk-sale rules, fraudulent-transfer law, environmental law, and other statutes can impose obligations despite contractual exclusions.

Why Sellers Often Prefer Stock Purchases

A seller may prefer a stock purchase because it can:

• Transfer the entire business in one ownership transaction;
• Reduce the number of individual assignments;
• Preserve the company’s contracts and operating history;
• Avoid leaving an empty entity that must collect proceeds, satisfy liabilities, and wind down;
• Obtain capital-gain treatment on stock in many cases;
• Avoid some corporate-level tax consequences of an asset sale;
• Transfer working capital and operations with less interruption; and
• Place the company’s continuing liabilities under the buyer’s ownership, subject to indemnity negotiations.

A stock seller may still remain responsible through representations, indemnification, escrow, guarantees, fraud claims, tax obligations, or statutes. The sale does not erase personal misconduct or obligations expressly retained by the seller.

Why a Buyer Might Accept a Stock Purchase

A stock purchase may be practical when:

• Critical contracts are difficult or impossible to assign;
• Licenses or permits are tied to the existing entity;
• The business depends on uninterrupted operations;
• Numerous customer, vendor, or employee relationships would be difficult to transfer;
• Real estate, vehicles, or intellectual property would require extensive transfer work;
• The buyer is satisfied with diligence and contractual protections;
• Tax elections can produce an acceptable result;
• The seller has enough leverage to require it; or
• The target has a clean, well-documented history.

The buyer may address inherited risk through diligence, price, escrow, holdback, representation-and-warranty insurance, special indemnities, covenants, and closing conditions.

Liabilities and Successor Liability

Asset purchase: the general concept

An asset buyer ordinarily attempts to assume only specified liabilities. Under New York law, a corporation acquiring another corporation’s assets is generally not responsible for the seller’s tort liabilities merely because it purchased the assets.

But New York recognizes important exceptions. A buyer may face predecessor liability if it:

1. Expressly or impliedly assumes the liability;
2. Participates in a consolidation or merger, including circumstances treated as a de facto merger;
3. Is a mere continuation of the seller; or
4. Enters a transaction structured fraudulently to escape obligations.

The New York Court of Appeals described these principles in Schumacher v. Richards Shear Co., Inc., 59 N.Y.2d 239 (1983). The case also illustrates that a buyer’s own post-closing conduct and relationships can create independent duties even when predecessor liability is not imposed.

Other sources of asset-buyer exposure

Liability may also arise under subject-specific law, including:

• New York sales-tax bulk-sale rules;
• Labor, wage, and employment statutes;
• Environmental law;
• Product-liability law;
• Employee-benefit law;
• Tax liens and trust-fund taxes;
• Fraudulent-transfer law;
• Collective-bargaining obligations;
• Contract assumption or course of conduct;
• Continuation of warranties, service, or customer obligations; and
• Federal or state regulatory programs.

A sentence in the agreement stating that the buyer assumes no other liabilities is important between the parties, but it is not a universal defense against third parties.

Stock purchase: liabilities remain in the entity

In a stock purchase, the target corporation remains responsible for its liabilities. Because the buyer owns the corporation after closing, those liabilities reduce the value of what the buyer acquired.

They may include:

• Unpaid taxes;
• Wage-and-hour claims;
• Discrimination or harassment claims;
• Litigation;
• Product or professional claims;
• Data-security incidents;
• Environmental problems;
• Contract defaults;
• Improper distributions;
• Regulatory violations;
• Employee-benefit liabilities;
• Unrecorded debt;
• Related-party obligations; and
• Fraud or misconduct by prior management.

A liability need not appear on a balance sheet to be real.

Contracts, Leases, and Third-Party Consents

Asset purchase

Contracts usually must be assigned to the buyer. The buyer may also need to assume post-closing obligations under an assignment-and-assumption agreement.

Many contracts prohibit assignment without consent. Some say an attempted assignment is void; others give the counterparty a termination right or create a breach.

The parties should identify:

• Which contracts will transfer;
• Whether consent is legally and contractually required;
• Who will request consent;
• Whether consent is a signing or closing condition;
• Whether fees, guarantees, deposits, or amendments are required;
• What happens if consent is not obtained; and
• Whether a temporary subcontract, agency, collection, or transition arrangement is lawful and practical.

Stock purchase

Contracts remain with the same entity, but change-of-control provisions may still apply. Some contracts define a transfer of a majority of voting power as an assignment.

A contract review should therefore cover both:

• Assignment restrictions; and
• Change-of-control restrictions.

Commercial leases

Landlord consent can become a major deal issue. A landlord may request:

• Updated financial information;
• A new guaranty;
• Increased security;
• Cure of defaults;
• An assignment fee;
• A lease amendment; or
• Release or continuation of the seller’s guaranty.

The buyer should also review rent, escalation, term, renewal options, permitted use, maintenance, casualty, insurance, environmental, and restoration obligations.

Licenses, Permits, and Regulatory Approvals

Licenses and permits should never be assumed to transfer automatically.

In an asset purchase, the buyer may need to:

• Apply for a new license;
• Obtain approval to transfer or amend an existing license;
• Satisfy ownership, experience, character, capitalization, or location requirements;
• Complete inspections;
• Post bonds;
• Obtain municipal approvals; or
• Delay closing or operations until approval is effective.

In a stock purchase, the license remains with the entity, but a change in ownership, officers, directors, managers, or control may require notice, approval, fingerprints, background review, or reissuance.

Regulated businesses may include:

• Professional practices;
• Automobile dealers and franchised businesses;
• Health-care providers;
• Restaurants and liquor licensees;
• Financial and insurance businesses;
• Transportation businesses;
• Government contractors;
• Child-care and education providers;
• Home-improvement businesses;
• Cannabis businesses;
• Environmental facilities; and
• Businesses holding local permits.

Regulatory timing should be incorporated into the transaction schedule and closing conditions.

Employees and Employee Benefits

Asset purchase

In many asset purchases, the seller terminates employees at or before closing and the buyer offers employment to selected individuals. This raises questions about:

• Offer letters and screening;
• Continuity of compensation and benefits;
• Accrued vacation and paid time off;
• Bonuses and commissions;
• Payroll transition;
• Restrictive covenants and confidentiality;
• Immigration authorization;
• Workers’ compensation;
• Unemployment insurance;
• WARN Act and state notice obligations;
• Union contracts;
• Benefit-plan termination or transition;
• COBRA or continuation coverage;
• Employee loans or equity; and
• Liability for pre-closing wage and classification violations.

The buyer should avoid promising “continuous employment” or preservation of seniority and benefits unless that result has been intentionally negotiated and documented.

Stock purchase

Employees generally remain employed by the same corporation. Even so, the transaction may trigger:

• Change-in-control payments;
• Retention bonuses;
• Equity vesting;
• Benefit-plan issues;
• Executive termination rights;
• New payroll or benefits administration;
• Employee notices;
• Union bargaining obligations; or
• Integration decisions after closing.

Historical employment liabilities remain inside the acquired entity.

New York unemployment insurance

New York requires notice concerning certain transfers of all or part of a business, and a transaction may affect unemployment-insurance accounts, rates, and reporting. The parties should coordinate with payroll and tax advisers rather than assume a new acquisition entity begins with no inherited consequences.

New York’s Bulk-Sale Notice

New York’s sales-tax bulk-sale procedure is one of the most important asset-purchase requirements.

What is a bulk sale?

A bulk sale generally involves a sale, transfer, or assignment of business assets outside the seller’s ordinary course of business by a person required to collect New York sales tax.

The rule can apply even when:

• The seller says all sales taxes were paid;
• The parties are related;
• The assets are transferred for little or no cash;
• Only part of a business is sold; or
• The transaction itself does not look like a retail sale.

Buyer’s notice

The purchaser generally must notify the New York State Department of Taxation and Finance at least 10 days before taking possession of the assets or paying the seller, whichever occurs first. Notice is made using Form AU-196.10.

The Department explains the procedure in its official Bulk Sales guidance.

Why it matters

If the buyer does not comply, New York may hold the buyer responsible for the seller’s unpaid sales and use taxes, subject to the governing rules. The potential exposure may be significant even if the purchase agreement says the seller retains all taxes.

After notice, the Department may issue:

• A release allowing payment to proceed;
• A notice of claim requiring funds to be withheld; or
• Another response based on audit or review.

The purchase agreement should address:

• Who files the notice;
• When it will be filed;
• Whether the buyer may close before receiving a release;
• How much will be escrowed;
• Who controls communications with the Department;
• How tax claims are paid or challenged; and
• Whether the seller indemnifies the buyer.

Stock purchase distinction

New York’s official guidance states that purchasing all issued and outstanding stock is not itself a bulk sale because the corporation’s assets are not transferred. This does not mean a stock buyer is free from the company’s sales-tax liabilities; those liabilities remain in the acquired corporation.

Tax Treatment: Why Structure Can Change the Economics

Tax consequences should be analyzed before the parties sign a letter of intent. Waiting until the definitive agreement may leave one side unable to achieve the expected after-tax result.

Asset-Sale Tax Concepts

The IRS treats the sale of a business’s assets as the sale of separate assets rather than one indivisible item. Gain or loss is calculated by asset category. See IRS: Sale of a business.

Buyer’s basis

The buyer generally receives a cost basis in purchased assets based on the allocated purchase price. That basis may support future depreciation or amortization deductions for qualifying assets.

This “step-up” is a common reason buyers prefer asset purchases.

Seller’s character of gain

The seller’s tax result may differ by asset:

• Inventory may produce ordinary income;
• Depreciated property may create recapture;
• Receivables may produce ordinary income;
• Certain real property or equipment may receive mixed treatment;
• Goodwill and qualifying intangibles may produce capital gain in some circumstances; and
• Noncompetition payments may receive different treatment from goodwill.

The labels in the purchase agreement do not alone control tax treatment. The allocation should be supportable and coordinated by both parties.

Corporate-level tax

If a C corporation sells assets, the corporation may recognize gain. Distributing the remaining proceeds to shareholders may create a second tax layer. This is a major reason C corporation shareholders may strongly prefer a stock sale.

S corporations, LLCs, and partnerships have different rules, but an asset sale can still produce ordinary income, recapture, entity-level tax in special circumstances, and basis issues.

Stock-Sale Tax Concepts

A shareholder’s stock is generally a capital asset, and gain on a stock sale is often capital gain. Exceptions and special rules can apply.

Buyer’s outside basis

The buyer generally receives tax basis in the acquired stock. In a plain corporate stock purchase, the corporation’s basis in its own assets generally does not automatically increase merely because its stock changed hands.

This may leave the buyer with:

• Limited future depreciation or amortization deductions;
• Embedded gain in company assets; and
• A mismatch between the amount paid for stock and the target’s inside asset basis.

Special elections

Certain qualifying stock purchases may use a federal Section 338 election to treat the target as if it sold and repurchased its assets for tax purposes. The IRS uses Form 8023 for Section 338 elections.

These elections are highly technical. They can create a basis step-up for the buyer while imposing deemed asset-sale tax consequences on the target or sellers. Availability and desirability depend on the target’s tax status, seller type, purchase percentage, elections, and state treatment.

Purchase-Price Allocation

In a qualifying asset acquisition, the buyer and seller generally allocate consideration among asset classes using the residual method and report the allocation on IRS Form 8594. See Instructions for Form 8594.

Why the parties may disagree

A buyer may prefer more value allocated to assets that generate faster deductions. A seller may prefer allocations producing capital gain and less depreciation recapture or ordinary income.

Negotiated categories may include:

• Cash;
• Receivables;
• Inventory;
• Equipment and other tangible property;
• Real estate;
• Identifiable intangible assets;
• Restrictive covenants;
• Customer relationships;
• Trademarks and trade names;
• Goodwill; and
• Going-concern value.

Good drafting practices

The agreement should address:

• The initial allocation;
• Who prepares the allocation schedule;
• A deadline for agreement;
• Consistent tax reporting;
• Treatment of assumed liabilities and transaction costs;
• Adjustments caused by working-capital or indemnity payments; and
• What happens if a tax authority challenges the allocation.

The parties should not casually assign values without tax and valuation input.

Installment Payments, Earnouts, and Seller Financing

Payment over time does not automatically defer all tax.

Installment rules may not apply to:

• Inventory gain;
• Depreciation recapture;
• Certain publicly traded securities;
• Interest; or
• Other excluded items.

Earnouts create additional issues concerning valuation, allocation, employment compensation, interest, reporting, and post-closing control. Seller notes create credit risk and require terms addressing security, subordination, defaults, guarantees, and remedies.

The IRS discusses general installment rules in Publication 537. Transaction-specific advice is essential.

Real Estate, Personal Property, and Transfer Costs

If the business owns real estate, an asset purchase may require a deed, title review, survey, environmental diligence, lender payoff, and real-estate transfer-tax filings. New York generally imposes real-estate transfer tax on qualifying conveyances, and New York City may impose additional taxes.

A stock purchase does not directly convey the corporation’s real estate, but transfer taxes or approvals may still apply under rules addressing controlling-interest transfers, entity ownership changes, regulated property, or financing.

Other transfer costs may include:

• Vehicle title and registration fees;
• Mortgage recording tax;
• UCC filing and termination fees;
• Lease assignment charges;
• Permit and license fees;
• Franchise or dealer transfer fees;
• Sales or use tax on particular assets;
• Recording fees; and
• Lender consent or payoff charges.

The parties should identify these costs and allocate responsibility in the agreement.

Intellectual Property and Digital Assets

Asset purchase

The agreement should specifically transfer the intellectual property needed to operate the business, including:

• Registered and unregistered trademarks;
• Trade names;
• Copyrights;
• Patents and applications;
• Software and source code;
• Websites and content;
• Domain names;
• Social-media accounts;
• Telephone numbers;
• Customer databases;
• Trade secrets;
• Inventions;
• Designs;
• Licenses; and
• Rights against infringers.

Ownership should be verified. Founders, employees, agencies, developers, photographers, and contractors may have created materials without signing valid assignments.

Third-party licenses may be nontransferable. A buyer may acquire a business’s hardware and data without acquiring the legal right to use essential software.

Stock purchase

The entity continues to own its intellectual property, but diligence is still essential. The buyer inherits defects in ownership, open-source software issues, privacy violations, infringement claims, and license restrictions.

Privacy and cybersecurity

Customer data cannot always be treated as an ordinary asset. Privacy notices, contracts, industry rules, consent requirements, data localization, cybersecurity incidents, and legal restrictions can affect whether and how personal information transfers.

Due Diligence

Due diligence is the process of verifying the business before the buyer becomes legally and economically committed.

Corporate and ownership diligence

Review may include:

• Formation and governing documents;
• Good-standing records;
• Ownership ledger and capitalization;
• Options, warrants, convertible instruments, and equity promises;
• Minutes and approvals;
• Subsidiaries and affiliates;
• Related-party transactions;
• Foreign qualifications; and
• Beneficial-ownership and regulatory filings.

Financial diligence

Review may include:

• Financial statements;
• Tax returns;
• Bank statements;
• Accounts receivable and payable;
• Inventory;
• Debt;
• Working capital;
• Revenue concentration;
• Deferred revenue;
• Customer deposits;
• Capital expenditures;
• Cash flow;
• Owner expenses; and
• Quality of earnings.

Contract diligence

Review may include:

• Customer and vendor contracts;
• Leases;
• Loans and security agreements;
• Franchise or dealer agreements;
• Licenses;
• Government contracts;
• Warranties;
• Exclusivity obligations;
• Most-favored-customer clauses;
• Noncompetition provisions;
• Assignment and change-of-control clauses; and
• Defaults or disputes.

Liability and compliance diligence

Review may include:

• Litigation and threatened claims;
• Tax audits and liabilities;
• Employment practices;
• Independent-contractor classifications;
• Wage-and-hour compliance;
• Benefits and retirement plans;
• Environmental matters;
• Product and service claims;
• Insurance coverage and claims history;
• Data privacy and cybersecurity;
• Professional and industry regulation;
• Sanctions and anti-corruption compliance; and
• Government notices or investigations.

Asset-specific diligence

An asset buyer should confirm title, condition, location, liens, assignability, useful life, and sufficiency of each material asset. A stock buyer should perform the same review because the target’s ownership defects remain after closing.

Liens and Debt Payoff

Purchased assets may be subject to liens even if the seller promises to deliver them free and clear.

Diligence may include:

• UCC searches;
• Tax-lien searches;
• Judgment searches;
• Mortgage and title searches;
• Vehicle-title searches;
• Intellectual-property security interests;
• Equipment-finance records; and
• Searches under the seller’s current and former legal names.

Closing often requires payoff letters, lien releases, UCC termination statements, mortgage satisfactions, and escrow arrangements.

In a stock purchase, debt may remain in the target. The transaction may trigger change-of-control defaults or mandatory repayment. The buyer must decide which debt will be paid, refinanced, assumed economically, or remain outstanding.

The Letter of Intent

A letter of intent, or LOI, usually outlines major proposed terms before the parties invest heavily in diligence and drafting.

It may address:

• Asset versus stock structure;
• Headline price;
• Cash, note, rollover equity, and earnout components;
• Debt-free, cash-free assumptions;
• Working-capital adjustment;
• Included and excluded assets;
• Assumed and excluded liabilities;
• Employment or consulting arrangements;
• Restrictive covenants;
• Diligence access;
• Confidentiality;
• Exclusivity or no-shop period;
• Financing;
• Regulatory approvals;
• Target closing date;
• Conditions to closing;
• Expense allocation; and
• Which provisions are binding.

Most business terms in an LOI are intended to be nonbinding, while confidentiality, exclusivity, access, expenses, governing law, and similar provisions may be binding. Ambiguous language can create disputes.

The LOI should not postpone all tax and structural analysis. Once a price and structure are announced, changing them can be commercially difficult.

The Purchase Agreement

The definitive purchase agreement is the central transaction document.

Description of the deal

It identifies:

• The parties;
• The purchased assets or equity interests;
• Excluded assets;
• Assumed and excluded liabilities;
• Purchase price and payment mechanics;
• Closing date and effective time; and
• Conditions that must be satisfied.

Representations and warranties

The seller may make statements concerning:

• Organization and authority;
• Capitalization and ownership;
• Financial statements;
• Absence of undisclosed liabilities;
• Taxes;
• Contracts;
• Title to assets;
• Intellectual property;
• Employees and benefits;
• Litigation;
• Compliance with law;
• Licenses;
• Environmental matters;
• Customers and suppliers;
• Insurance;
• Data privacy and cybersecurity;
• Brokers; and
• Changes since a specified date.

An asset deal may focus representations on transferred assets and assumed operations. A stock deal usually requires broader company-wide representations because the buyer acquires the entire entity.

Covenants

Covenants may govern:

• Operation before closing;
• Access to information;
• Third-party consents;
• Regulatory filings;
• Employee communications;
• Tax returns and audits;
• Confidentiality;
• Public announcements;
• Transition assistance;
• Noncompetition and nonsolicitation, to the extent enforceable;
• Record retention;
• Accounts receivable;
• Insurance claims; and
• Post-closing cooperation.

Closing conditions

Conditions may include:

• Accuracy of representations;
• Performance of covenants;
• Required consents;
• No injunction or legal prohibition;
• Regulatory approval;
• Financing;
• Delivery of closing documents;
• Lien releases;
• Employment or restrictive-covenant agreements;
• Minimum working capital;
• No specified material adverse event; and
• New York bulk-sale compliance.

Purchase-Price Mechanics

The headline price may not equal the final amount paid.

Cash-free, debt-free transactions

Many deals assume the seller keeps cash and delivers the business free of debt. The agreement must define cash and debt carefully.

Debt-like items may include:

• Borrowed money;
• Accrued interest;
• Capital leases;
• Unpaid transaction bonuses;
• Deferred purchase price;
• Tax liabilities;
• Overdue payables;
• Customer deposits;
• Factored receivables;
• Related-party amounts; and
• Unfunded benefit obligations.

Working-capital adjustment

The parties may set a target level of working capital needed to operate the business. After closing, estimated figures are compared with final closing figures, and the price is adjusted.

Disputes often arise from:

• Inconsistent accounting methods;
• Changes in reserves;
• Accelerated collections;
• Delayed payments;
• Inventory valuation;
• Deferred revenue;
• Customer credits;
• Seasonality; and
• Whether an item is working capital, debt, or a transaction expense.

The agreement should include a sample calculation and specify accounting principles, historical practices, dispute procedures, and an independent accountant’s role.

Earnouts

An earnout pays additional consideration if the business meets specified post-closing targets.

Earnouts can bridge a valuation gap, but they are a frequent source of disputes. The agreement should address:

• Revenue, earnings, customer, or milestone definitions;
• Accounting methods;
• Buyer control of the business;
• Required or prohibited operating actions;
• Allocation of shared expenses;
• Acquisitions or divestitures;
• Seller access to records;
• Acceleration events;
• Employment termination;
• Dispute resolution; and
• Tax treatment.

A simple phrase such as “10% of profits for three years” is rarely sufficient.

Indemnification and Risk Allocation

Indemnification allocates responsibility when losses arise after closing.

Common seller indemnities

A seller may indemnify for:

• Breach of representations or covenants;
• Excluded liabilities;
• Pre-closing taxes;
• Pre-closing employee claims;
• Specified litigation;
• Environmental matters;
• Broker claims;
• Fraud; and
• Other identified risks.

Common buyer indemnities

A buyer may indemnify for:

• Assumed liabilities;
• Post-closing operation of the business;
• Buyer covenant breaches; and
• Use of transferred assets after closing.

Limits and procedures

The agreement may include:

• A survival period;
• A deductible or basket;
• A cap;
• Special caps for particular matters;
• An escrow or holdback;
• Exclusive-remedy provisions;
• Materiality rules;
• Knowledge qualifiers;
• Procedures for third-party claims;
• Control of defense and settlement;
• Mitigation and insurance provisions; and
• Treatment of consequential, punitive, multiple, or lost-profit damages.

Fraud, fundamental representations, taxes, and specified liabilities may receive different treatment.

Representations and warranty insurance

Some transactions use insurance to cover certain representation breaches. Coverage has exclusions, retention amounts, underwriting requirements, and claim procedures. It does not replace diligence and generally does not cover every known or excluded risk.

Escrow, Holdback, and Seller Notes

A buyer may seek security for post-closing claims through:

• Third-party escrow;
• Holdback from the purchase price;
• Setoff against a seller note or earnout;
• Personal or entity guarantees;
• Security interests; or
• Representation-and-warranty insurance.

The seller should evaluate how long funds can be withheld, who controls release, whether claims suspend distribution, and whether setoff rights are broad or limited.

A seller note makes the seller a creditor of the buyer. Its value depends on creditworthiness, collateral, priority, covenants, guarantees, and enforcement rights—not merely its stated principal amount.

Approvals and Fiduciary Considerations

The transaction may require approval by:

• A corporation’s board of directors;
• Shareholders;
• LLC members or managers;
• Partners;
• Lenders;
• Landlords;
• Franchisors;
• Government agencies;
• Professional licensing authorities; or
• Other contract counterparties.

A sale of all or substantially all assets may require different organizational approval from a sale in the ordinary course. Governing documents and applicable law should be reviewed early.

Directors, managers, controlling owners, and fiduciaries should consider duties, conflicts, process, disclosure, related-party interests, and fairness. Minority-owner rights may be important in closely held entities.

What Happens to the Seller After an Asset Sale?

The seller entity does not disappear merely because it sold its operating assets.

It may need to:

• Collect the purchase price and receivables;
• Pay creditors and transaction expenses;
• Resolve taxes and audits;
• Maintain insurance;
• Enforce a seller note or earnout;
• Handle indemnity claims;
• Retain required records;
• Change its name;
• Comply with restrictive covenants;
• Distribute proceeds lawfully;
• Dissolve and wind up; and
• File final tax and regulatory returns.

Distributing all proceeds immediately can leave the seller unable to satisfy retained liabilities or indemnification obligations. Corporate, LLC, tax, fraudulent-transfer, creditor, and dissolution rules should be considered.

What Happens After a Stock Purchase?

The target continues, but ownership transition still requires implementation.

Post-closing actions may include:

• Replacing directors, managers, and officers;
• Updating bank authority;
• Changing registered and service addresses;
• Notifying insurers, lenders, and regulators;
• Integrating payroll, benefits, accounting, and information systems;
• Confirming change-of-control consents;
• Updating tax elections and filings;
• Protecting privileged and confidential records;
• Implementing new governance and approval policies;
• Addressing related-party arrangements; and
• Monitoring indemnity and escrow deadlines.

The buyer should preserve the target’s separate existence unless and until a deliberate merger, conversion, dissolution, or integration plan is implemented.

Common Misunderstandings

“An asset buyer never inherits old liabilities.”

Incorrect. The agreement can exclude liabilities between the parties, but successor-liability doctrines and specific statutes may still impose exposure.

“A stock purchase requires no assignments or consents.”

Incorrect. Change-of-control clauses, licenses, loans, franchises, leases, and regulatory rules may require notice or consent.

“The highest purchase price is always the best offer.”

Not necessarily. Structure, taxes, working-capital adjustments, earnout risk, escrow, financing, assumed liabilities, and certainty of closing can materially change value.

“The buyer can rely on the seller’s financial statements.”

Financial statements are one diligence source. They may not disclose legal claims, tax exposure, deferred obligations, customer concentration, off-balance-sheet commitments, or poor-quality earnings.

“A contract says the buyer assumes no liabilities, so third parties are bound.”

Not necessarily. Third parties that did not sign the agreement may rely on statutes, successor-liability doctrines, liens, or other law.

“Stock-sale proceeds are always capital gain.”

Not always. Entity type, holding period, elections, payments for services or restrictive covenants, installment rules, special tax provisions, and transaction facts can alter treatment.

“The buyer gets a tax write-off for the entire purchase price.”

No. Tax basis must be allocated, and deductions may arise over different periods or not at all. A plain stock purchase generally does not automatically step up the target’s asset basis.

“Licenses transfer with the business.”

Often they do not. Even a stock transaction may require regulatory approval for a change in control.

“Employees automatically go with the business.”

The result depends on structure, employment arrangements, law, collective bargaining, benefits, and buyer decisions.

“Signing the LOI means the deal is done.”

An LOI usually leaves diligence, definitive documentation, approvals, financing, and closing conditions unresolved. Some provisions may be binding even when the acquisition itself is not.

Buyer’s Practical Checklist

Before signing or closing, a buyer should consider:

• Are we buying assets, stock, or LLC interests?
• Why is this structure preferable after tax and liability analysis?
• Which assets are essential to operate on day one?
• Are any essential assets owned by founders, affiliates, landlords, or contractors?
• Which liabilities will be assumed?
• Which liabilities may follow by statute or successor-liability doctrine?
• Have we completed tax, lien, litigation, employment, environmental, privacy, and regulatory diligence?
• Are financial statements and earnings reliable?
• What working capital must be delivered?
• Which contracts require assignment or change-of-control consent?
• Will leases, permits, licenses, franchises, and insurance remain effective?
• Who owns the intellectual property and digital assets?
• Are employees being retained, rehired, or terminated?
• Are wage, benefit, WARN, union, and unemployment-insurance issues addressed?
• Has New York bulk-sale notice been filed when applicable?
• Are tax clearances, payoff letters, and lien releases required?
• How is purchase price allocated?
• Is a Section 338 election available or desirable?
• Are escrows, holdbacks, guarantees, or insurance sufficient?
• Is financing committed and compatible with closing conditions?
• What must happen immediately after closing?

Seller’s Practical Checklist

A seller should consider:

• What is the after-tax value of an asset deal versus an equity deal?
• Who owns the assets or equity being sold?
• Are corporate, shareholder, member, lender, or regulatory approvals required?
• Are ownership and capitalization records complete?
• Which liabilities will remain after closing?
• Can retained liabilities be paid after distributions?
• Which contracts, leases, and permits require consent?
• Are taxes, payroll, sales tax, licenses, and entity filings current?
• Are there undisclosed disputes, employee claims, or compliance problems?
• Can liens be released at closing?
• Is the purchase-price allocation acceptable?
• How will working capital, debt, cash, and transaction expenses be calculated?
• Is any earnout objectively measurable and within the seller’s ability to monitor?
• Is a seller note adequately secured?
• What representations are being made, and for how long?
• What indemnity cap, basket, escrow, and survival periods apply?
• Are restrictive covenants reasonable and enforceable?
• Will the seller or owners provide transition services?
• What happens to employees and benefit plans?
• What records and insurance must be retained?
• Will the seller entity dissolve, remain active, or conduct another business?

Which Structure Is Better?

There is no universal answer.

An asset purchase may be more attractive when

• The buyer wants only part of the business;
• Historical liabilities are significant or uncertain;
• A basis step-up has substantial value;
• Unwanted contracts, locations, or employees can be left behind;
• The seller’s entity has ownership or governance problems;
• The buyer wants to use a clean acquisition entity; or
• The transferred assets can be assigned without excessive disruption.

A stock purchase may be more attractive when

• Critical contracts are difficult to assign;
• Licenses are tied to the existing entity;
• Operational continuity is essential;
• The company has a clean history;
• The seller’s tax cost from an asset sale would be prohibitive;
• The buyer can manage inherited risk through diligence and protection; or
• The transaction involves a business whose value depends on maintaining the same legal entity.

A hybrid or alternative structure may be considered

Some transactions use:

• A stock purchase with a Section 338 election;
• A purchase of selected subsidiaries;
• A pre-closing reorganization;
• A merger;
• An equity rollover;
• A carve-out asset purchase;
• A contribution followed by an interest purchase;
• A joint venture; or
• A staged purchase with options or earnouts.

Alternative structures can solve one problem while creating another. They require coordinated legal, tax, accounting, and regulatory analysis.

Questions to Discuss with CorwinLaw and Your Tax Adviser

Useful questions include:

1. What exactly is the buyer acquiring?
2. Which structure produces the best realistic after-tax result for each side?
3. Which liabilities can be excluded by contract, and which may follow by law?
4. Which contracts, leases, licenses, and permits need consent or approval?
5. Does New York’s bulk-sale procedure apply?
6. How should the purchase price be allocated?
7. Is a Section 338 election available or desirable?
8. How will debt, cash, working capital, and transaction expenses affect price?
9. What diligence is needed before signing and closing?
10. Which representations, indemnities, escrows, and holdbacks are appropriate?
11. How will employees, benefits, payroll, and restrictive covenants be handled?
12. What liens, tax claims, or regulatory issues must be cleared?
13. What transition assistance is needed after closing?
14. What happens to the seller entity after an asset sale?
15. What integration steps are needed after an equity purchase?

For assistance planning, negotiating, documenting, or closing a business acquisition or sale, contact CorwinLaw at www.corwinlaw.net.

Important Legal and Tax Notice

This Codex is provided by CorwinLaw, www.corwinlaw.net, for general educational and informational purposes only. It is not legal, tax, accounting, valuation, investment, or financial advice. It does not address every transaction structure, industry, tax rule, regulatory requirement, or factual circumstance.

The legal and tax consequences of an asset purchase, stock purchase, or membership-interest purchase depend on the parties, target entity, tax classification, assets, liabilities, locations, contracts, employees, permits, financing, and transaction terms. Laws, forms, fees, deadlines, interpretations, and procedures may change.

Reading this Codex, visiting a website, or contacting CorwinLaw does not create an attorney-client relationship. An attorney-client relationship should arise only through a written engagement agreement accepted by CorwinLaw and the client. Do not send confidential or time-sensitive information unless and until CorwinLaw confirms that it represents you in the matter.

Transaction structure should be coordinated with a qualified tax professional, accountant, and other advisers appropriate to the business. CorwinLaw can assist with the New York legal structure, due diligence, negotiation, purchase documentation, governance, contracts, consents, and closing process and can coordinate with the client’s other advisers where appropriate.

Last reviewed: August 2026.

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