Overview of deal structures when selling a business – part ii (liabilities)
B Y T R E V O R C R O W
W W W . B I Z T A X B U Z Z . C O M
Overview of Deal Structures When
Selling a Business – PART II
This is Part II of a two- part series of posts about deal
structures that business owners use when selling a
business. This post focuses on another big factor to
consider when deciding between an asset sale and a
stock sale: the transfer of liabilities.
NOTE: Throughout this post I refer to stock
generically as the representation of ownership
interests in the business, but the same concepts
apply if you’re dealing with membership interests in
Liability Factors. Similar to the tax factors, an asset sale
is generally a better structure for the buyer to minimize
With an asset sale the buyer can pick and choose the
assets to buy and what, if any, liabilities to assume from
With an asset sale the buyer does not become responsible
for liabilities and debts that the buyer does not
This structure avoids the potential for purchasing
unknown or contingent liabilities, which can come in the
form of tax liabilities, environmental liabilities, and
It’s important to note that there is a doctrine of
successor liability, which I will discuss in a separate
post, that provides a narrow exception to the rule
that the buyer only becomes responsible for the
liabilities it specifically assumes in an asset sale.
However, this is a narrow exception that typically
will not apply.
Liability Factors. From the seller’s point of view, the best
way to reduce risk is to provide complete and accurate
disclosure to the buyer and to carefully review all
representations and warranties in conjunction with the
disclosure schedules to make sure they are accurate.
In other words, structuring the deal as an asset sale or a
stock sale does not provide much benefit to the seller
either way from a liability standpoint.
The standards of liability between the two will be slightly
different because there are statutory securities fraud
implications in stock sales, which you can read about
here, but the seller’s best way to avoid liability is still to
provide complete disclosure and review the reps and
warranties in the purchase agreement for accuracy.
With a stock sale, the target entity (now owned by the
buyer) will remain liable for all liabilities including any
unknown and contingent liabilities.
Thus, a stock sale is usually less attractive to a buyer
from a liability perspective.
A buyer may reduce the risk of unknown liabilities
through indemnification provisions in the stock purchase
However, unless the stock purchase agreement provides
for a certain amount of the purchase price to be held in
escrow for a period of time to pay for any unknown (or
undisclosed) liabilities, collecting from the seller may be
difficult after the sale.
Make it a point to discuss the deal structure early in
the sale process as this decision can have serious
implications on liabilities and taxes to the parties.