Buying an Existing Business

Buying an existing business can provide immediate access to customers, employees, equipment, contracts, brand recognition, cash flow, and operating systems. It can also expose the buyer to problems created years before the buyer arrived.

A business may look profitable while carrying hidden risks such as:

• Unpaid taxes;
• Unrecorded debt;
• Inflated revenue or understated expenses;
• Contracts that cannot be assigned;
• A lease that expires too soon or requires landlord consent;
• Misclassified employees or unpaid wages;
• Intellectual property owned by a founder or contractor rather than the business;
• Pending or threatened litigation;
• Licenses that will not transfer;
• Cybersecurity or privacy problems;
• Liens on essential assets;
• Customer concentration;
• Obsolete inventory;
• Environmental exposure;
• Deferred maintenance; or
• A purchase price based on earnings that cannot be verified.

The purpose of legal and financial due diligence is not simply to produce documents. It is to determine:

1. What the buyer is actually purchasing;
2. Whether the seller owns it and can transfer it;
3. Whether the business can legally and practically operate after closing;
4. Which liabilities may follow the buyer or remain in the acquired entity;
5. Whether the financial performance supports the price;
6. Which consents, clearances, and approvals are needed; and
7. How identified risks should affect structure, price, closing conditions, and post-closing protection.

This Codex provides a practical legal checklist for the acquisition process, including:

• Nondisclosure agreements, or NDAs;
• Letters of intent, or LOIs;
• Legal and operational due diligence;
• Financial review;
• Leases and real estate;
• Employees and benefits;
• Intellectual property, or IP;
• Litigation and compliance;
• Taxes;
• Closing; and
• Post-closing obligations.

This Codex focuses on privately held businesses under New York and related federal law. Every acquisition is different. Regulated industries, professional practices, franchises, automobile dealerships, health-care businesses, government contractors, cross-border transactions, bankruptcy sales, and businesses owning real estate require additional analysis.

Start with the Transaction Structure

Before diligence can be properly designed, the buyer should understand the proposed structure.

Asset purchase

In an asset purchase, the buyer purchases selected assets and assumes selected liabilities from the business entity. The agreement identifies purchased assets, excluded assets, assumed liabilities, and excluded liabilities.

A buyer may prefer this structure because it can select what it wants and seek to leave certain historical liabilities with the seller. But an asset purchase usually requires more transfers, assignments, consents, title work, and operational setup.

An asset buyer is not automatically protected from every prior liability. New York recognizes exceptions to the general rule against successor liability, including express or implied assumption, merger or de facto merger, mere continuation, and a transaction designed fraudulently to escape obligations. See Schumacher v. Richards Shear Co., Inc., 59 N.Y.2d 239 (1983).

Statutes governing taxes, employees, environmental matters, and other subjects may also impose liability despite contractual exclusions.

Stock or membership-interest purchase

In a stock purchase, the buyer purchases shares from a corporation’s shareholders. In an LLC transaction, the buyer may purchase membership interests from the members.

The entity remains in existence and generally keeps its assets, contracts, employees, tax history, and liabilities. This can simplify continuity, but the buyer acquires the economic risk of the entire entity—including unknown or undisclosed liabilities.

Why structure affects the checklist

The structure affects:

• Which party is the seller;
• What is transferred;
• Whether contracts must be assigned;
• Whether change-of-control consent is needed;
• Whether employees are rehired or remain employed;
• Whether licenses must be reissued;
• Whether New York’s bulk-sale procedure applies;
• How the purchase price is taxed and allocated;
• Whether the buyer receives a stepped-up basis in assets; and
• What due diligence and indemnity protections are necessary.

The business and tax structure should be evaluated before the LOI fixes expectations.

A Roadmap of the Acquisition Process

A typical private acquisition may proceed through these stages:

1. Initial discussions;
2. NDA;
3. Preliminary information exchange;
4. Valuation and financing analysis;
5. LOI or term sheet;
6. Due diligence;
7. Purchase-agreement negotiation;
8. Third-party consents and regulatory approvals;
9. Financing and closing preparation;
10. Closing;
11. Purchase-price adjustment and tax reporting; and
12. Post-closing integration and claims administration.

The stages overlap. For example, lease consent, licensing approval, financing, and tax clearance may need to begin before the purchase agreement is final.

1. The Nondisclosure Agreement

An NDA, also called a confidentiality agreement, is usually signed before the seller shares sensitive information.

The seller may disclose:

• Financial statements and tax returns;
• Customer and supplier identities;
• Pricing and margins;
• Employee information;
• Trade secrets and processes;
• Contracts;
• Product plans;
• Software and technical information;
• Litigation and compliance records; and
• The fact that the business may be for sale.

What the NDA should address

A well-drafted NDA may define:

• What information is confidential;
• Permitted use of the information;
• Who may receive it;
• The buyer’s responsibility for representatives;
• Security and storage requirements;
• Legally compelled disclosure;
• Return or destruction of information;
• Duration of obligations;
• Remedies for breach;
• No-contact restrictions;
• Non-solicitation provisions, if included and enforceable;
• Standstill provisions, where relevant;
• Privileged or regulated information;
• Residual information; and
• Governing law and dispute procedures.

Buyer concerns

The buyer should be able to share information with people who genuinely need it, such as:

• Attorneys;
• Accountants;
• Tax advisers;
• Financing sources;
• Insurers;
• Consultants;
• Potential equity partners; and
• Regulatory advisers.

The buyer should confirm that these people are covered by confidentiality duties and that the buyer is not accepting impractical liability for actions beyond its control.

The NDA should not prevent the buyer from using information already known, independently developed, publicly available through no breach, or lawfully received from another source.

Seller-contact restrictions

A seller often prohibits the buyer from contacting employees, customers, vendors, landlords, or regulators without permission. This protects the business from disruption, but it can limit diligence.

The parties should establish a process for necessary contacts, especially when:

• A landlord must consent;
• A critical customer relationship must be confirmed;
• Key employees must be retained;
• A license requires pre-closing approval; or
• Financing depends on third-party information.

Data-room security

The parties should use a controlled data room rather than informal email whenever practical. Access can be limited, tracked, revoked, and organized.

Highly sensitive material may require staged disclosure, redaction, clean-team procedures, or delayed access. Medical information, consumer data, export-controlled material, trade secrets, and privileged communications require special care.

An NDA does not mean the deal will happen

The NDA ordinarily protects information; it does not require either party to complete the acquisition. Any binding obligation to negotiate, maintain exclusivity, reimburse expenses, or proceed toward closing should be stated clearly.

2. The Letter of Intent

An LOI, sometimes called a term sheet, summarizes the proposed transaction before the parties negotiate the complete purchase agreement.

A good LOI creates alignment. A poor LOI can create false certainty or lock the buyer into a bad structure before diligence begins.

Common LOI terms

An LOI may address:

• Asset, stock, or membership-interest structure;
• Purchase price;
• Cash paid at closing;
• Seller financing;
• Earnout or contingent payments;
• Rollover equity;
• Debt-free, cash-free treatment;
• Working-capital target and adjustment;
• Included and excluded assets;
• Assumed and excluded liabilities;
• Real estate and lease treatment;
• Employee retention;
• Seller transition services;
• Noncompetition and nonsolicitation terms, subject to enforceability;
• Due-diligence scope and access;
• Financing;
• Regulatory and third-party approvals;
• Closing conditions;
• Target closing date;
• Indemnification concepts;
• Escrow or holdback;
• Exclusivity or no-shop period;
• Confidentiality;
• Expenses;
• Governing law; and
• Binding and nonbinding provisions.

Binding versus nonbinding

Most LOIs state that the acquisition itself is nonbinding until definitive agreements are signed. Certain provisions may be binding, including:

• Confidentiality;
• Exclusivity;
• Access and conduct during diligence;
• Public announcements;
• Expenses;
• Governing law;
• Dispute resolution; and
• No obligation to close.

Labels are not always decisive. The wording and conduct of the parties matter. The LOI should avoid language that unintentionally creates a duty to complete the transaction.

Exclusivity

An exclusivity provision prevents the seller from soliciting or negotiating competing transactions for a stated period.

The buyer should seek enough time to complete diligence, financing, drafting, consents, and approvals. The seller may seek milestones so the business is not tied up while the buyer delays.

Structure and tax should be considered now

The LOI should not treat deal structure as a minor drafting detail. A change from an asset deal to a stock deal can materially alter taxes, liabilities, consents, and value.

Before signing, the parties should model:

• Buyer and seller tax consequences;
• Purchase-price allocation;
• Working capital;
• Debt and transaction expenses;
• Real estate and transfer taxes;
• New York City taxes where applicable;
• Seller-note and earnout treatment; and
• Any Section 338 election in a qualifying stock purchase.

3. Due Diligence: What Is It For?

Due diligence is a structured investigation of the business. It should test the seller’s claims, identify risk, and verify that the buyer can operate the business after closing.

Diligence should answer five questions

1. Existence: Does the asset, contract, customer relationship, license, revenue stream, or right actually exist?
2. Ownership: Does the seller or target legally own it?
3. Transferability: Can it move to or remain with the buyer?
4. Condition: Is it legally, financially, and operationally sound?
5. Value: Does it support the proposed price and business plan?

Diligence is not merely a seller questionnaire

Documents should be cross-checked. Examples include:

• Revenue records against bank deposits and tax returns;
• Customer lists against contracts and accounts receivable;
• Employee lists against payroll and benefit records;
• Equipment lists against UCC searches and invoices;
• Intellectual-property schedules against public ownership records;
• Litigation schedules against court and agency records;
• Tax representations against returns, notices, and payment evidence; and
• Lease summaries against the actual lease and amendments.

Prioritize material issues

The buyer should identify early what could stop the deal, such as:

• A nontransferable license;
• A landlord refusing consent;
• A major customer with a termination right;
• Unreliable financial records;
• A tax lien;
• Ownership disputes;
• Inability to retain key employees;
• Material litigation;
• Missing IP ownership; or
• Inadequate financing.

These issues should be addressed before time is spent on lower-risk details.

4. Corporate, Ownership, and Authority Review

The buyer should confirm that the seller and target are properly organized and authorized to complete the transaction.

Review checklist

• Formation documents and amendments;
• Bylaws, Operating Agreement, or partnership agreement;
• Good-standing and status records;
• Foreign qualifications in other states;
• Board, shareholder, member, or manager minutes and consents;
• Stock ledger or membership-interest records;
• Options, warrants, phantom equity, and convertible instruments;
• Buy-sell and shareholder agreements;
• Voting trusts and proxies;
• Subsidiaries and affiliates;
• Related-party agreements;
• Assumed-name filings;
• Service-of-process information; and
• Required transaction approvals.

Why capitalization matters

In an equity purchase, the buyer must confirm that the sellers own all interests being sold and that no undisclosed person can claim ownership, conversion, repurchase, profit participation, or sale proceeds.

In an asset purchase, ownership remains important because assets may be held by an affiliate, founder, spouse, landlord, financing company, or separate real-estate entity rather than the seller.

New York public records

New York Department of State records can help verify entity name, status, assumed names, filing history, and service-of-process information. Public records are useful but do not replace review of internal governance and ownership records.

5. Financial Review

Legal diligence asks what obligations and rights exist. Financial diligence asks whether the business’s economic story is accurate and sustainable.

Core financial documents

The buyer may review:

• Three to five years of financial statements;
• Federal, state, and local tax returns;
• Current year-to-date statements;
• General ledger;
• Bank and credit-card statements;
• Accounts-receivable aging;
• Accounts-payable aging;
• Inventory records;
• Debt schedules;
• Payroll records;
• Capital-expenditure history;
• Budgets and forecasts;
• Customer and product profitability;
• Deferred revenue and customer deposits;
• Owner compensation and related-party expenses; and
• Reports provided to lenders or investors.

Verify quality of earnings

Quality of earnings considers whether reported earnings come from normal, repeatable operations rather than one-time events, aggressive accounting, delayed expenses, owner adjustments, or unsustainable customer activity.

Questions may include:

• Are revenues recurring?
• Were sales accelerated before the deal?
• Are expenses complete?
• Are personal expenses mixed with business expenses?
• Are owner wages below market?
• Are maintenance and capital expenditures deferred?
• Are margins consistent?
• Are receivables collectible?
• Is inventory usable and saleable?
• Are refunds, credits, warranties, or chargebacks adequately reserved?
• Does the company depend on one customer, supplier, or employee?

Reconcile records

Financial statements should be compared with:

• Tax returns;
• Bank deposits;
• Sales-tax returns;
• Payroll filings;
• Loan applications;
• Customer contracts;
• Merchant-processor statements; and
• Inventory counts.

Large unexplained differences require investigation.

Working capital

Many acquisitions use a working-capital adjustment so the business is delivered with a normal level of current operating assets and liabilities.

The agreement should define:

• Included accounts;
• Excluded accounts;
• Accounting principles;
• Historical practices;
• Target amount;
• Estimated closing statement;
• Post-closing true-up;
• Review rights;
• Dispute procedure; and
• Independent accountant process.

A sample calculation is often more useful than a broad definition.

Debt and debt-like items

“Debt-free” should be defined. Potential debt-like items include:

• Borrowed money;
• Accrued interest;
• Capital leases;
• Factored receivables;
• Deferred purchase price;
• Unpaid transaction bonuses;
• Related-party balances;
• Past-due payables;
• Tax liabilities;
• Customer deposits;
• Unfunded benefits; and
• Deferred maintenance obligations.

Buyer financing

The buyer should confirm financing before becoming unconditionally obligated to close. Financing diligence may require:

• Personal guarantees;
• Collateral;
• Appraisals;
• Lender due diligence;
• Subordination of seller financing;
• Equity contributions;
• Financial covenants;
• Life insurance; and
• Government-backed loan requirements.

Financing conditions should be addressed honestly in the LOI and purchase agreement.

6. Assets, Inventory, Equipment, and Liens

Confirm the assets exist and are sufficient

The buyer should identify every material asset needed to operate immediately after closing.

Review may include:

• Fixed-asset registers;
• Invoices and title documents;
• Serial numbers;
• Maintenance and repair history;
• Warranties;
• Inspection reports;
• Location and possession;
• Useful life and replacement needs;
• Leased versus owned status;
• Compliance and safety records; and
• Whether the asset is used by another entity.

Inventory

Inventory should be examined for:

• Physical quantity;
• Costing method;
• Obsolescence;
• Damage;
• Expiration;
• Consignment;
• Returns;
• Slow-moving items;
• Compliance with specifications; and
• Ownership and liens.

The agreement should state how inventory is counted and valued and who bears shrinkage between signing and closing.

Lien searches

The buyer may need:

• UCC searches;
• Federal and state tax-lien searches;
• Judgment searches;
• Real-property title searches;
• Vehicle-title searches;
• Intellectual-property assignment and security-interest searches; and
• Searches under current and former names.

Closing may require payoff letters, lien releases, UCC termination statements, mortgage satisfactions, and escrow.

7. Leases and Real Estate

The location may be essential to the business’s value. A buyer should review the actual lease—not merely a rent schedule or seller summary.

Lease review checklist

• Correct landlord, tenant, and premises;
• Original lease and every amendment;
• Current term and expiration date;
• Renewal and expansion options;
• Base rent and increases;
• Common-area, tax, insurance, and operating-expense charges;
• Security deposit or letter of credit;
• Permitted use;
• Exclusivity rights;
• Assignment restrictions;
• Change-of-control provisions;
• Landlord consent standard;
• Assignment or review fees;
• Personal guarantees;
• Maintenance and repair obligations;
• Alterations and restoration;
• Building code and accessibility issues;
• Environmental obligations;
• Insurance requirements;
• Casualty and condemnation;
• Subordination and lender provisions;
• Defaults and notices; and
• Surrender obligations.

Estoppel certificate

A buyer or lender may request an estoppel certificate from the landlord confirming matters such as:

• Lease validity;
• Current rent;
• Term;
• Security deposit;
• Amendments;
• Defaults;
• Options; and
• Outstanding obligations.

An estoppel can reveal disputes or side agreements not shown in the lease file.

Assignment versus change of control

In an asset purchase, the lease usually must be assigned to the buyer. In an equity purchase, the tenant entity remains the same, but the lease may treat a change of ownership as an assignment.

Landlord consent may require:

• Buyer financial statements;
• A new guaranty;
• Additional security;
• Cure of existing defaults;
• An amendment;
• An assignment fee; or
• Seller guarantor liability to continue.

The transaction should not close without a workable occupancy right.

Owned real estate

If real estate is included, review may include:

• Title commitment and exceptions;
• Survey;
• Zoning and permitted use;
• Certificates of occupancy;
• Environmental assessment;
• Property condition;
• Taxes and assessments;
• Leases and occupants;
• Easements and access;
• Utilities;
• Mortgage payoff;
• Transfer taxes; and
• Entity ownership of the property.

New York real-estate transfer tax may apply to qualifying conveyances. New York City may impose additional taxes. Entity-interest transfers can also require specialized transfer-tax analysis.

8. Employees, Independent Contractors, and Benefits

Employees often carry the business’s customer relationships, technical knowledge, operations, and goodwill. They can also represent significant historical liability.

Workforce diligence checklist

• Employee census and job titles;
• Compensation, bonuses, commissions, and benefits;
• Employment agreements;
• Offer letters;
• Handbooks and policies;
• Accrued vacation and paid time off;
• Payroll and time records;
• Exempt and nonexempt classifications;
• Independent-contractor classifications;
• Immigration and Form I-9 records;
• Restrictive covenants;
• Confidentiality and invention-assignment agreements;
• Discrimination, harassment, leave, accommodation, and retaliation claims;
• Workers’ compensation and unemployment claims;
• Union agreements and organizing activity;
• Benefit plans and retirement plans;
• Equity, phantom equity, or profit-sharing rights;
• Employee loans;
• Key-person dependency;
• Pending resignations; and
• Compliance audits or agency notices.

Asset purchase

The seller may terminate employees and the buyer may offer employment to selected individuals. The parties should determine:

• Who receives offers;
• When offers are delivered;
• Whether employment is contingent on closing;
• Whether compensation and benefits change;
• Whether prior service is credited;
• Who pays accrued leave, commissions, and bonuses;
• How payroll transitions;
• Who handles continuation coverage;
• Whether new I-9 verification is required;
• Whether restrictive covenants transfer or must be replaced; and
• Whether termination or layoff notices apply.

Equity purchase

Employees remain employed by the same entity, but change-in-control payments, benefit provisions, retention arrangements, equity vesting, executive rights, and planned layoffs require review.

WARN and New York requirements

Federal and New York laws may require advance notice of certain plant closings and mass layoffs. Federal WARN generally applies to covered employers and qualifying events and commonly uses a 60-day notice framework. See the Department of Labor’s WARN overview.

New York has its own WARN requirements, which may cover smaller employers or events than federal law. The buyer and seller should analyze responsibility before announcing or implementing workforce changes.

Independent contractors

Calling a worker an independent contractor does not control legal classification. Misclassification can create exposure for wages, overtime, payroll taxes, unemployment insurance, benefits, workers’ compensation, and penalties.

Key employees

If value depends on a founder, salesperson, technician, manager, or licensed professional, the buyer should address retention before closing through appropriate employment, consulting, incentive, confidentiality, and transition arrangements.

9. Intellectual Property and Digital Assets

A buyer should verify that the business owns or has enforceable rights to every material IP asset.

IP checklist

• Trademarks, trade names, and logos;
• Patents and applications;
• Copyrights;
• Software and source code;
• Websites and content;
• Domain names;
• Social-media accounts;
• Mobile applications;
• Customer databases;
• Trade secrets and know-how;
• Product designs and technical files;
• Telephone numbers and email domains;
• Inbound licenses;
• Outbound licenses;
• Open-source software;
• Employee and contractor assignments;
• Infringement claims; and
• Security interests or liens.

Chain of title

A registration in the business’s name is helpful but not conclusive. Review should trace ownership from creators and prior owners to the seller or target.

Common gaps include:

• A founder created the brand before forming the company;
• A contractor developed software without assigning copyright;
• A designer retained logo rights;
• An employee agreement lacks invention-assignment language;
• A trademark assignment omitted goodwill;
• An acquisition was never recorded; or
• A lender holds a security interest.

USPTO assignment records are useful for patent and trademark ownership diligence, but recordation is not a legal determination that an assignment is valid. Copyright transfers may be recorded with the U.S. Copyright Office, but recordation is voluntary. See the USPTO’s trademark ownership and assignment guidance and the Copyright Office’s recordation guidance.

Licenses

A business may rely on software, content, patents, music, photos, data, or technology licensed from third parties. The buyer should review:

• Scope;
• Territory;
• Duration;
• Fees;
• Assignment and change-of-control restrictions;
• Sublicensing;
• Exclusivity;
• Source-code access;
• Termination rights;
• Audit rights; and
• Post-termination obligations.

A buyer can acquire computers without acquiring the right to run the software installed on them.

Data privacy and cybersecurity

Customer and employee information may be regulated. Diligence should review:

• Privacy notices;
• Data-processing agreements;
• Security policies;
• Breach history;
• Incident-response plans;
• Cyber insurance;
• Vendor access;
• Retention and deletion;
• Payment-card compliance;
• Cross-border data; and
• Whether data may be transferred or used after closing.

Personal information is not always an unrestricted saleable asset.

10. Contracts, Customers, and Suppliers

The business’s value may depend more on contractual relationships than on physical assets.

Contract checklist

• Top customer contracts;
• Top supplier contracts;
• Distribution and dealership agreements;
• Franchise agreements;
• Purchase orders and backlog;
• Government contracts;
• Credit and merchant-processing agreements;
• Equipment leases;
• Software and technology agreements;
• Advertising and marketing agreements;
• Referral arrangements;
• Warranties and service commitments;
• Rebates and volume commitments;
• Exclusivity and requirements contracts;
• Most-favored-customer provisions;
• Noncompetition and nonsolicitation provisions;
• Assignment and change-of-control restrictions;
• Termination rights;
• Automatic renewals;
• Defaults and disputes; and
• Oral or informal arrangements.

Customer concentration

A profitable business may be risky if one customer can terminate on short notice. Review should identify:

• Percentage of revenue and profit by customer;
• Contract duration;
• Termination rights;
• Renewal history;
• Pricing pressure;
• Customer disputes;
• Change-of-control or assignment rights; and
• Whether the relationship belongs to the business or an individual seller.

Supplier dependency

The buyer should identify sole-source suppliers, minimum purchases, price escalation, lead times, quality problems, geographic risk, and whether supplier credit depends on the seller’s personal relationship or guaranty.

Consents

Create a consent schedule identifying:

• Required consent or notice;
• Responsible party;
• Submission materials;
• Deadline;
• Fees or conditions;
• Status; and
• Whether consent is a closing condition.

A transition workaround should not be used without confirming it is lawful and commercially practical.

11. Litigation, Claims, and Compliance

Litigation diligence should cover more than filed lawsuits.

Review checklist

• Pending lawsuits and arbitrations;
• Threatened claims and demand letters;
• Government investigations;
• Administrative proceedings;
• Customer complaints;
• Product or professional liability claims;
• Warranty claims and returns;
• Employment complaints;
• Intellectual-property disputes;
• Tax audits and assessments;
• Environmental matters;
• Insurance claims;
• Consent decrees and settlements;
• Judgments and liens;
• Internal investigations;
• Whistleblower complaints; and
• Attorney correspondence concerning material disputes.

Evaluate each matter

For each claim, determine:

• Parties;
• Allegations;
• Amount at issue;
• Procedural status;
• Counsel;
• Insurance coverage;
• Reserves;
• Likely outcome;
• Operational impact;
• Injunctive risk;
• Settlement obligations;
• Whether it follows the buyer; and
• Whether a special indemnity or escrow is needed.

Preserve privilege

Careless diligence disclosure can waive attorney-client privilege or work-product protection. Privileged documents should be identified and handled through appropriate agreements and procedures.

Regulatory compliance

Depending on the business, review may include:

• Professional licensing;
• Consumer protection;
• Advertising;
• Health and safety;
• Environmental law;
• Accessibility;
• Data privacy;
• Money transmission or lending;
• Import and export controls;
• Sanctions;
• Anti-bribery rules;
• Government contracts;
• Industry-specific recordkeeping; and
• Local permits.

Successor risk

An asset-purchase agreement may say that litigation remains with the seller, but a claimant or agency may assert successor liability. The buyer should evaluate structure, continuity, assumed obligations, post-closing conduct, and statutory rules—not just the contract label.

12. Insurance

Insurance diligence can reveal both risk and available recovery.

Review checklist

• General liability;
• Property;
• Product liability;
• Professional liability;
• Cyber coverage;
• Employment practices;
• Directors and officers coverage;
• Workers’ compensation;
• Automobile;
• Crime and fidelity;
• Environmental coverage;
• Business interruption;
• Umbrella or excess policies;
• Claims history;
• Deductibles and self-insured retentions; and
• Coverage notices and denials.

Claims-made policies

Professional, cyber, employment, and directors-and-officers policies may be claims-made. Coverage may depend on when a claim is made and reported. Tail or runoff coverage may be needed.

Asset versus equity purchase

An asset buyer usually needs new policies effective at closing. Historical policies may remain with the seller. In an equity purchase, policies may continue, but change-of-control provisions can convert coverage or require notice.

Insurance should be bound before the buyer begins operations.

13. Tax Diligence

Tax diligence should cover federal, state, and local obligations.

Review checklist

• Income and franchise tax returns;
• Sales and use tax returns;
• Payroll and withholding returns;
• Property taxes;
• Unemployment insurance;
• New York City business taxes;
• Information returns;
• Tax elections;
• Audits and notices;
• Payment plans;
• Tax liens;
• Nexus and multistate filings;
• Worker classification;
• Net operating losses and credits;
• Related-party transactions; and
• Tax-sharing agreements.

New York bulk-sale notice

When applicable to an asset purchase, New York generally requires the purchaser to submit Form AU-196.10 at least 10 days before taking possession of business assets or paying for them, whichever occurs first.

Failure to follow the procedure can expose the buyer to the seller’s unpaid sales and use taxes. The agreement should provide for notice, response, withholding, escrow, clearance, and seller indemnification. See New York’s official Buying a business guidance.

A pure stock purchase generally is not a bulk sale because the corporation’s assets do not transfer, but tax liabilities remain inside the acquired corporation.

Purchase-price allocation

In a qualifying asset acquisition, buyer and seller generally allocate consideration among asset classes and may be required to file IRS Form 8594 consistently. See IRS Form 8594 guidance.

Allocation affects:

• Buyer basis;
• Depreciation and amortization;
• Seller gain character;
• Depreciation recapture;
• Inventory income;
• Goodwill; and
• Later adjustments.

Stock-purchase elections

A qualifying corporate stock purchase may permit a Section 338 election, which can treat the target as having sold its assets for tax purposes. This is highly technical and deadline-sensitive. See IRS Form 8023 instructions.

EIN and taxpayer records

The buyer should determine whether the existing entity retains its Employer Identification Number or whether a new acquisition entity or restructuring requires a new EIN. The IRS explains common triggers at When to get a new EIN.

Tax indemnity and control

The agreement should address:

• Pre-closing and post-closing taxes;
• Straddle periods;
• Return preparation;
• Tax elections;
• Audits and contests;
• Refunds;
• Cooperation;
• Record retention;
• Purchase-price adjustments; and
• Indemnification.

Tax clearance does not replace comprehensive tax diligence.

14. Licenses and Permits

A buyer should create a complete schedule of federal, state, county, and municipal licenses and permits.

For each item, determine:

• Issuing agency;
• Holder;
• Location;
• Expiration date;
• Good standing;
• Transferability;
• Assignment or change-of-control requirements;
• Ownership and character requirements;
• Bonding or insurance requirements;
• Inspection status;
• Application lead time;
• Fees;
• Pending violations; and
• Whether operations may continue while approval is pending.

An asset purchase may require a new application. An equity purchase may preserve the license holder but still trigger a change-of-control filing or approval.

Do not assume that filing an entity document with the New York Department of State authorizes regulated operations.

15. Environmental and Property-Condition Review

Environmental liability can arise from owned or leased property, waste disposal, tanks, chemicals, products, or earlier operations.

Diligence may include:

• Environmental questionnaires;
• Phase I environmental site assessment;
• Tank and spill records;
• Hazardous-material inventories;
• Waste manifests;
• Permits;
• Asbestos, lead, mold, or vapor issues;
• Prior uses;
• Regulatory notices;
• Remediation obligations;
• Indemnities; and
• Environmental insurance.

Contractual allocation may not prevent government enforcement or third-party claims.

16. The Purchase Agreement

The purchase agreement translates diligence and business terms into enforceable obligations.

Core provisions

• Parties and transaction structure;
• Purchased assets or equity interests;
• Excluded assets;
• Assumed and excluded liabilities;
• Purchase price;
• Escrow, holdback, seller note, and earnout;
• Working-capital and other adjustments;
• Closing mechanics;
• Representations and warranties;
• Pre-closing covenants;
• Closing conditions;
• Termination rights;
• Indemnification;
• Tax provisions;
• Restrictive covenants;
• Confidentiality and announcements;
• Dispute resolution; and
• Governing law.

Representations and warranties

The buyer may seek representations concerning:

• Organization and authority;
• Ownership and capitalization;
• Financial statements;
• Absence of undisclosed liabilities;
• Taxes;
• Assets and title;
• Contracts;
• Leases;
• Intellectual property;
• Employees and benefits;
• Litigation;
• Compliance;
• Licenses;
• Environmental matters;
• Privacy and cybersecurity;
• Insurance;
• Customers and suppliers;
• Brokers; and
• Changes since a specified date.

Disclosure schedules qualify those representations. They should be reviewed with the same care as the agreement.

Diligence does not necessarily waive protection

The agreement should address whether the buyer’s investigation or knowledge affects its right to rely on representations and seek indemnification. The answer depends on the negotiated language and applicable law.

Indemnification

The parties may negotiate:

• Covered losses;
• Survival periods;
• Basket or deductible;
• Cap;
• Special indemnities;
• Fundamental representations;
• Tax claims;
• Fraud;
• Escrow;
• Claims procedure;
• Defense control;
• Insurance and mitigation;
• Setoff; and
• Exclusive remedies.

Known problems are often addressed through a specific covenant, closing condition, price reduction, escrow, or special indemnity rather than a general representation.

17. Preparing for Closing

Closing preparation should begin well before the closing date.

Buyer readiness checklist

• Acquisition entity formed and organized;
• Financing documents final;
• Equity funds available;
• Bank accounts established;
• Insurance bound;
• Payroll and benefits ready;
• Licenses effective;
• Lease rights secured;
• Critical consents obtained;
• IT and cybersecurity transition planned;
• Employees and customers communication plan approved;
• Tax registrations complete;
• Bulk-sale notice handled;
• Closing funds flow approved;
• Post-closing authority and signers designated; and
• Day-one operating checklist complete.

Seller deliverables may include

• Executed purchase agreement;
• Bill of sale;
• Assignment and assumption agreement;
• IP assignments;
• Lease assignment or landlord consent;
• Stock powers or interest assignments;
• Certificates representing equity;
• Corporate approvals;
• Officer certificates;
• Good-standing certificates;
• Lien releases;
• Payoff letters;
• Escrow agreement;
• Restrictive-covenant agreement;
• Employment or consulting agreement;
• Transition-services agreement;
• Tax forms;
• Books, records, credentials, keys, and access codes; and
• Evidence of required approvals.

Buyer deliverables may include

• Purchase price;
• Assumption documents;
• Financing documents;
• Organizational approvals;
• Escrow funding;
• Seller note;
• Employment or consulting agreements;
• Guaranties;
• Insurance evidence; and
• Required certificates.

Funds flow

A closing funds-flow statement should show every payment, including:

• Seller proceeds;
• Debt payoff;
• Escrow;
• Holdback;
• Broker fees;
• Legal and accounting fees;
• Taxes and filing fees;
• Employee or transaction bonuses;
• Working-capital estimate; and
• Other deductions or payments.

Names, wire instructions, and amounts should be verified independently to reduce wire-fraud risk.

18. Closing

Closing is the legal and financial completion of the transaction. It may occur physically, electronically, or through escrow.

At closing, confirm

• All documents are final and signed;
• Required approvals and consents are effective;
• Closing conditions are satisfied or knowingly waived;
• Funds have been received;
• Debt and liens are being released;
• Ownership documents are delivered;
• Asset possession and control transfer;
• Insurance and licenses are effective;
• Employee transition is implemented;
• Access credentials and records are delivered;
• Public or customer communications are coordinated; and
• Filing responsibilities are assigned.

Do not confuse signing with closing

Some transactions sign and close simultaneously. Others sign first and close after financing, consents, or regulatory approvals. During the interim, covenants restrict how the seller operates the business.

The buyer should monitor unusual payments, new contracts, employee departures, customer losses, inventory changes, and other events between signing and closing.

19. Post-Closing Obligations

Closing does not end the transaction. Many obligations begin at closing.

Immediate operational tasks

• Update bank authority and payment systems;
• Transfer keys, credentials, domains, phone numbers, and accounts;
• Implement payroll and benefits;
• Notify employees, customers, suppliers, landlords, and regulators as planned;
• Confirm permits, insurance, and tax registrations;
• Update websites, invoices, signage, and legal names;
• Secure books, records, and personal data;
• Confirm inventory and asset possession;
• Implement approval and cybersecurity controls; and
• Separate seller access where appropriate.

Purchase-price adjustment

The buyer may prepare a final closing statement for:

• Cash;
• Debt;
• Working capital;
• Transaction expenses;
• Inventory;
• Accounts receivable; or
• Other agreed adjustments.

Deadlines for delivery, objection, document access, expert determination, and final payment should be calendared.

Earnouts and seller notes

The buyer should establish reporting and accounting systems that track earnout metrics. The parties should follow agreed operating covenants, information rights, and dispute procedures.

Seller-note payments, interest, covenants, and collateral requirements should be calendared.

Tax filings

Post-closing tasks may include:

• Form 8594;
• Section 338 filings;
• Final or short-period returns;
• Sales-tax and payroll filings;
• New York unemployment-insurance transfer reporting;
• Transfer-tax filings;
• Responsible-party updates;
• Information returns;
• Tax elections; and
• Cooperation with audits.

New York employers must address reporting of a transfer of all or part of a business for unemployment-insurance purposes. See the New York Department of Labor’s business transfer guidance.

Indemnity and escrow

Calendar:

• Representation survival dates;
• Escrow release dates;
• Notice deadlines;
• Tax claim periods;
• Insurance reporting deadlines;
• Earnout periods; and
• Restrictive-covenant terms.

Potential claims should be investigated and noticed promptly in the form required by the agreement.

Integration

The buyer should implement an integration plan covering:

• Governance;
• Accounting;
• Human resources;
• Benefits;
• Customer service;
• Vendor management;
• Cybersecurity;
• Privacy;
• Insurance;
• Compliance;
• Branding;
• Record retention; and
• Culture.

Poor integration can destroy value even when the legal closing is flawless.

Red Flags That Deserve Immediate Attention

A buyer should slow down when:

• The seller will not provide tax returns or bank records;
• Financial statements do not reconcile;
• Revenue depends heavily on one customer;
• Key contracts are oral or terminable at will;
• The lease expires soon or landlord consent is uncertain;
• Licenses are personal to the seller;
• Employees or contractors created IP without assignments;
• Payroll practices appear informal;
• The seller uses large numbers of “independent contractors” performing employee-like roles;
• Cash sales are poorly documented;
• Sales-tax or payroll-tax filings are missing;
• UCC, judgment, or tax liens appear;
• Litigation or agency inquiries were omitted from disclosures;
• Inventory cannot be counted or is obsolete;
• The seller pressures the buyer to skip bulk-sale notice;
• Customer deposits or gift-card obligations are unclear;
• Related-party transactions are undocumented;
• Personal and business expenses are commingled;
• The seller refuses reasonable representations or escrow;
• The price depends on an unrealistic earnout; or
• The buyer cannot explain how the business will operate on the first day after closing.

A red flag does not always require abandoning the deal. It may require more diligence, a different structure, lower price, stronger closing condition, escrow, special indemnity, insurance, or a deliberate decision not to proceed.

Common Misunderstandings

“The seller signed an NDA, so everything disclosed is accurate.”

An NDA protects information. It does not verify it.

“The LOI is nonbinding, so its terms do not matter.”

The LOI shapes expectations, leverage, exclusivity, and drafting. Some provisions may be binding.

“An asset purchase prevents all old liabilities from following the buyer.”

No. Successor-liability doctrines and specific statutes may impose exposure.

“A stock purchase is easier because nothing needs consent.”

No. Change-of-control clauses, loans, licenses, franchises, and regulations may require notice or approval.

“The accountant reviewed the numbers, so legal diligence is unnecessary.”

Financial and legal diligence answer different questions. Both are important.

“If the business is profitable, the lease is acceptable.”

A short term, prohibited use, landlord consent problem, restoration duty, or personal guaranty can materially affect value.

“Employees automatically transfer.”

The answer depends on the structure and applicable employment, benefit, immigration, union, and notice rules.

“A trademark registration proves the business owns all its IP.”

No. Software, content, trade secrets, domains, contractor work, licenses, and chain-of-title issues require separate review.

“No lawsuit appears in the seller’s county, so there is no litigation risk.”

Claims may exist in other courts, arbitration, agencies, demand letters, or threatened disputes.

“Tax clearance means there are no tax risks.”

Clearance may cover only particular taxes or procedures. Comprehensive tax diligence remains necessary.

“Closing is the finish line.”

Post-closing adjustments, filings, integration, earnouts, indemnity periods, and transition duties may continue for years.

Master Buyer Checklist

Before the LOI

• Identify asset versus equity structure.
• Sign an appropriate NDA.
• Review preliminary financial and operating information.
• Identify licenses, lease, key contracts, and major customers.
• Consider tax structure and financing.
• Identify deal-breakers and required approvals.

LOI stage

• Define price and payment form.
• Address working capital, cash, debt, and expenses.
• Define included assets and liabilities at a high level.
• Address exclusivity and diligence access.
• Identify financing and regulatory conditions.
• Distinguish binding and nonbinding terms.
• Address employees, real estate, seller transition, and restrictive covenants.

Due diligence

• Corporate and ownership records.
• Financial statements and tax returns.
• Bank records and quality of earnings.
• Assets, inventory, equipment, and liens.
• Leases and real estate.
• Employees, contractors, payroll, and benefits.
• Intellectual property and digital assets.
• Customer, vendor, and other contracts.
• Litigation, claims, and compliance.
• Insurance.
• Taxes.
• Licenses and permits.
• Environmental and property condition.
• Privacy and cybersecurity.

Documentation and pre-closing

• Negotiate purchase agreement and disclosure schedules.
• Obtain organizational approvals.
• Obtain contract, lease, lender, and regulatory consents.
• Complete bulk-sale notice when applicable.
• Secure financing.
• Obtain payoff letters and lien releases.
• Finalize employment and transition agreements.
• Bind insurance.
• Establish payroll, banking, tax, and IT systems.
• Prepare closing checklist and funds flow.

Closing

• Confirm conditions are satisfied.
• Verify signatures and authority.
• Verify wiring instructions independently.
• Fund purchase price, escrow, and payoffs.
• Deliver ownership and transfer documents.
• Transfer possession, records, credentials, and control.
• Confirm licenses, lease rights, insurance, and employees are ready.

Post-closing

• Implement operational transition.
• Deliver final purchase-price calculation.
• Complete tax and regulatory filings.
• Record IP and other assignments.
• Update entity and service information.
• Monitor earnout and seller-note obligations.
• Calendar escrow, indemnity, and representation deadlines.
• Preserve records and privilege.
• Track consents or transfers not completed at closing.
• Conduct a post-closing compliance review.

Questions to Discuss with CorwinLaw and Your Other Advisers

1. Should the transaction be structured as an asset purchase or equity purchase?
2. What information should be protected by the NDA?
3. Which LOI terms should be binding?
4. What diligence is material for this industry and business?
5. Do the financial records support the price?
6. Is the lease transferable and long enough to support the investment?
7. Which employees are essential, and what liabilities may exist?
8. Does the seller own all necessary IP and data rights?
9. What litigation, regulatory, tax, and lien risks exist?
10. Which contracts, permits, and licenses require consent?
11. Does New York’s bulk-sale procedure apply?
12. How should the purchase price and working capital be calculated?
13. What representations, indemnities, escrows, and insurance are appropriate?
14. What must be completed before closing?
15. What must happen on the first day after closing?

For assistance planning, investigating, negotiating, documenting, or closing the purchase of an existing business, 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 buying a business depend on the parties, transaction structure, target entity, tax classification, assets, liabilities, locations, contracts, employees, permits, financing, and negotiated 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.

A business acquisition should be coordinated with qualified tax, accounting, financial, insurance, environmental, employment, and industry-specific professionals as appropriate. CorwinLaw can assist with the New York legal structure, NDA, LOI, due diligence, negotiation, purchase documentation, consents, closing, and post-closing legal obligations and can coordinate with the client’s other advisers.

Last reviewed: August 2026.

The CorwinLaw Codex

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