Asset purchase or equity purchase

In an asset purchase, the buyer buys certain things the business owns. That can include equipment, inventory, customer lists, the trade name and contracts. The seller’s company stays behind. The buyer picks which debts, if any, it takes on. Most small-business sales are done this way.

In an equity purchase, the buyer buys the ownership itself. That means the stock of a corporation or the member shares of an LLC. The company does not change. Its contracts, permits and history stay with it. So do debts the buyer did not know about. The buyer’s protection comes from the seller’s written promises, a duty to cover losses, and money held back at closing.

The choice affects taxes on both sides. In an asset deal, federal tax law (26 U.S.C. § 1060) requires the price to be split among the assets. If buyer and seller agree on that split in writing, it binds both of them. The only exception is if the IRS decides the split is not proper. The split affects the buyer’s tax write-offs and the seller’s tax on the gain. So it gets negotiated. Your CPA should be part of that talk.

Missouri’s sales-tax clearance rule

Missouri law (RSMo 144.150) covers a buyer who buys a business or its stock of goods. The buyer must hold back enough of the price to cover the seller’s unpaid sales taxes, interest and penalties. The buyer keeps holding it until the seller shows proof. That proof is a receipt showing the tax is paid, or a certificate from the Director of Revenue saying no tax is due.

If the buyer does not hold the money back, the law makes the buyer “personally liable.” That covers the taxes, interest, additions and penalties from the old owner’s time running the business. The no-tax-due certificate is good for 120 days after it is issued. Time it to match your closing date.

There is an exception for a buyer who gets a business through a creditor’s collection action. In a normal sale between owners, the buyer should make the certificate a condition of closing.

Due diligence: what the buyer checks

Due diligence is the buyer’s homework before closing. It usually covers:

• Financial statements and tax returns, checked against bank records.
• Company records: formation papers, the operating agreement or bylaws, ownership records, and good standing with the Secretary of State.
• Key contracts. Watch for terms that need the other party’s OK before the contract can move to a new owner.
• The lease for each location, and whether the landlord must approve a transfer. See commercial leases.
• Employees, contractors, benefit plans and any deals with key staff.
• Lawsuits, liens and judgments, whether filed or only threatened.
• Licenses and permits, and whether they transfer.
• Intellectual property: who owns the name, the website, the software and the customer data.

Sellers should run the same list before putting the business up for sale. Problems found early can be fixed. Problems a buyer finds turn into price cuts.

The documents, in order

1. Confidentiality agreement. Signed before the seller opens the books. Missouri law also enforces reasonable written promises between the two businesses not to recruit or hire each other’s employees. That can cover the talks and a reasonable time after.
2. Letter of intent. Sets out the price, the deal type, the timeline, and a period when the seller talks only to this buyer. Most terms are not binding. Confidentiality and that exclusive period usually are.
3. Purchase agreement. The seller’s promises about the business, what must happen before closing, who covers losses found later, the limits on those claims, money held back, and the seller’s promise not to compete.
4. Supporting documents. A bill of sale and the transfer of contracts and the lease. A transition services agreement. A note and security agreement if the seller finances part of the price. Any job or consulting deal for the seller.
5. Closing. Money, signatures, the no-tax-due certificate, needed approvals, and payoff letters for any liens.

How the firm handles your deal

Harjot Singh Padda, JD, represents either the buyer or the seller. He never represents both in the same deal. Mr. Padda works with your CPA, lender and broker. He keeps a closing checklist everyone can see. And he drafts or reviews each document in the order above.

Sometimes, after closing, a buyer says the books or the business were misrepresented. That is a lawsuit matter. See fraud and misrepresentation claims and business litigation.

Common questions

Related reading

• Business succession planning
• Commercial leases
• Contract drafting and review
• Business litigation