Key Takeaways

• Structure comes first. An asset sale and a stock sale produce different tax bills and different exposure to the seller’s old debts.
• Get advice before you sign the letter of intent. Terms agreed there are hard to change later.
• Pennsylvania, New Jersey and New York each require a filing with the state tax authority before a business’s assets are sold in bulk. A buyer who skips it can become liable for the seller’s unpaid taxes.
• Attorney Michael A. Siddons holds an LL.M. in Taxation. The tax side of the deal is part of the legal work, not an afterthought.

Asset Sale or Stock Sale

In an asset sale, the buyer purchases the equipment, inventory, customer lists, name and goodwill, and the seller keeps the company itself and, in general, its liabilities. In a stock or membership-interest sale, the buyer purchases the company, with everything it owns and everything it owes.

Buyers usually prefer an asset sale. It limits the debts they take on and lets them depreciate what they bought at its new cost. Sellers often prefer a stock sale, which is simpler and is usually taxed as capital gain. In an asset sale, how the price is allocated among equipment, goodwill, a non-compete and other items changes the tax for both sides, and both sides report the allocation to the IRS. If they agree on it in writing, that agreement binds them both. These points are negotiated, and they are worth real money.

The Steps in a Sale

• Confidentiality agreement. Signed before any financial information changes hands.
• Letter of intent. Sets the price, the structure, what is included, the timetable and whether the seller may talk to other buyers.
• Due diligence. The buyer examines the financial statements, tax returns, contracts, leases, licenses, employees, equipment, litigation and liens.
• Purchase agreement. The binding contract. It contains the seller’s promises about the business, the remedies if those promises prove untrue, and the conditions for closing.
• Financing and third-party consents. Bank or SBA loan approval, landlord consent to assign the lease, and transfer of licenses and key contracts.
• Closing and transition. Money and documents change hands, and the seller typically stays for a period to hand over customers and operations.

Terms That Decide Who Bears the Risk

• Representations and warranties. The seller’s statements about the finances, taxes, contracts and legal compliance of the business.
• Indemnification. What the seller must pay if those statements prove false, with any caps, deductibles and time limits.
• Escrow or holdback. Part of the price held back to cover claims after closing.
• Earnout. Part of the price paid later if the business hits agreed targets. Earnouts are a common source of disputes and need precise drafting.
• Seller financing. A note from the buyer, the security for it and what happens on default.
• Non-compete and non-solicitation. Limits on the seller opening a competing business or taking customers and employees.
• Employment or consulting agreement. The seller’s role and pay after closing.

Taxes and State Filings

Tax drives the net result of a sale. The choice of structure, the price allocation, an installment sale and the treatment of a non-compete or consulting payment all change what the seller keeps and what the buyer can deduct. A corporation taxed as a C corporation faces a second layer of tax on an asset sale that other entities do not.

State law adds its own requirements. When a business sells its assets in bulk, Pennsylvania, New Jersey and New York each require advance notice to the state tax authority or a tax clearance certificate. In Pennsylvania a business must give the Department of Revenue ten days’ notice before it completes a sale of 51% or more of its assets. In New Jersey and New York the buyer must give notice at least 10 days before paying or taking possession. New Jersey’s Division of Taxation asks to receive it at least 10 business days before closing. If the filing is not made, the buyer can be held liable for state taxes the seller left unpaid. In New York that means the seller’s unpaid sales and use tax. In Pennsylvania and New Jersey it reaches other state taxes as well. We handle these filings as part of the transaction.

For Sellers

Prepare before you go to market. Buyers pay more for a business with clean books, written contracts, a transferable lease and no unresolved tax or legal problems. We review your company the way a buyer’s lawyer will, fix what can be fixed, and structure the sale to reduce the tax on the proceeds. If the business has debts it cannot pay, a sale can sometimes be combined with a restructuring. See our Subchapter V page.

For Buyers

You are buying the future cash flow of the business, and you need to know it is real. We direct the due diligence, search for liens and judgments, review the lease and the key contracts, and negotiate protections in the purchase agreement. If you are borrowing to buy, we work with your lender on its requirements and review the personal guarantee you will be asked to sign.

What Our Firm Does

• Advise on structure and tax before the letter of intent is signed.
• Draft and negotiate the confidentiality agreement, letter of intent and purchase agreement.
• Conduct or respond to due diligence.
• Search for liens, judgments and tax debts.
• Prepare the state bulk sale filings and obtain clearance.
• Draft the note, security agreement, non-compete and employment or consulting agreements.
• Handle the closing.

Who We Help

• Owners planning retirement or an exit.
• Buyers acquiring their first business or adding to an existing one.
• Partners buying out a co-owner.
• Family businesses passing ownership to the next generation.

Frequently Asked Questions

When should I bring in a lawyer?

Before you sign a letter of intent. Price, structure and exclusivity are usually fixed at that point, and it is difficult to reopen them later.

Is a business broker enough?

A broker finds the buyer and helps set the price. A broker does not draft the purchase agreement, advise on tax or protect you from liability after closing. The two roles are different and both have a place.

What happens to the business’s debts?

In an asset sale, the seller generally keeps them and pays them from the sale proceeds, although tax debts and some other obligations can follow the assets if the required filings are not made. In a stock sale, the debts stay with the company the buyer now owns.

How long does a sale take?

A straightforward sale of a small business often takes two to four months from the letter of intent to closing. Bank or SBA financing, landlord consent and license transfers are the usual causes of delay.

Can the seller open a competing business afterward?

Only if the agreement allows it. A non-compete given as part of the sale of a business is generally enforceable if it is reasonable in time and geography.

Start With the Structure

Email msiddons@siddonslaw.com and tell us whether you are buying or selling, the type of business and where the deal stands. We will reply with what we need to see.