Are You Buying or Selling a Business?

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Ways to Structure the Deal

There are two ways to buy a business: asset purchase and stock purchase. From the seller’s perspective, the two terms are called asset sale and stock sale. The two sets of terms are two sides of the same coin. They mean the same thing but carry different legal implications for buyers and sellers:

  • Asset purchase/sale: buyers buy all or some of the target company’s assets but do not obtain ownership of the company’s securities.
  • Stock purchase/sale: buyers buy securities of the target company and hence obtain its ownership; the target company may not need to take any action on its part.

The primary differences between the two methods lie in taxes and liabilities. Your role in the transaction will determine which method is optimal. Generally, buyers would want an asset purchase for its tax benefits as well as to avoid assumption of the selling company’s liabilities; sellers would want a stock purchase for its ease of process and the ability to transfer liabilities.

General Steps

Buying or selling a business is a complicated process. Regulations abound, and the tasks essential to each transaction vary. Talk to our lawyers to find out how to do it right.

  • Determine the price of the business
  • Find a proper buyer or seller
  • Negotiate details
  • Execute sale contracts
  • Closing and make filings with governing agencies

In the early stage of negotiation, it would be beneficial for the two parties to lay out basic terms of the transaction in a letter of intent. To structure a purchase/sale transaction correctly will involve consideration of a number of factors, including:

  • How will liabilities of the target company shift or stay
  • Does the purchase/sale trigger any tax consequences
  • The mandatory regulatory filings in the specific type of business
  • Change of control in licenses, permits or regulatory approvals
  • Level of legal due diligence needed
  • Legal protection in contracts


There is no right way to determine the value of a business. Three common methods used are a determination through: (1) market value, (2) net asset value, or (3) investment value. And the common factors used for determinations include: history of profits and cash flow, costs and expenses, value of similar businesses, growth potential, risk of litigation, condition of the company’s assets, business model, etc. Each factor weighs differently in different types of business. To prepare for valuation, sellers should organize the financial records of a business (e.g., balance sheets, notes or mortgages, corporate books, etc.) for an accurate determination.
Purchase price allocation is an application of accounting done in an asset sale for tax purposes. Unless the asset purchase is non-taxable, buyers and sellers need to negotiate a way to allocate the total purchase price among the various assets acquired. As a rule of thumb, allocating a high value to assets that depreciate quickly will allow buyers to take larger depreciation deductions. However, the sellers will not agree to that allocation as they have interests opposing to the buyers. Negotiation is therefore the important in purchase price allocation.
Non-compete agreements. No buyers would like to buy a company and see the seller start a comparable business nearby. Therefore, buyers who plan to continue operation in the same trade typically would want sellers to sign a non-compete agreement.
At a minimum, buyers need to know whether the existing lease allows transfer and, if alcohol is involved, whether the seller has a good liquor license to transfer. Additionally, buyers need to look out for unpaid wages, unpaid sales tax, and health code violations.
The benefits of hiring an attorney is multi-fold. Armed with the right legal help, you will be able to (1) comply fully with the law, (2) save taxes, and (3) ferret out potential legal risks before a transaction consummates. Most importantly, a well-conceived contract can help minimize liabilities and save you money in the long-term.

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