Asset or stock? The choice shapes everything.

This is a third-party transaction, distinct from a buy-sell

This page covers buying or selling a business to or from an outside party — distinct from the internal owner buyouts governed by a buy-sell agreement. The mechanics, the risks, and the documents are different. Here the central work is structuring the deal, verifying what is being bought, and allocating the risk of the unknown between buyer and seller.

Asset deal or equity deal — the decision that shapes everything

Almost every purchase or sale comes down to one structural fork. In an asset purchase, the buyer acquires specified assets and assumes specified liabilities, leaving the rest behind with the seller's entity — buyers generally prefer this for the liability protection and improved tax basis, cherry-picking contracts, equipment, and intellectual property while leaving historical debts behind. In a stock or membership-interest purchase, the buyer acquires the entity itself and everything in it, including unknown liabilities, pending claims, and unfiled tax exposure — sellers generally prefer this for a cleaner exit and often more favorable capital-gains treatment. The choice affects price, taxes, contracts, employees, and risk, and it is the first thing to get right. I guide clients through this decision drawing on years as in-house counsel to private-equity-backed companies, where it was routine work.

Due diligence: where the real value and risk live

The purchase agreement reflects what diligence uncovers. For a buyer, diligence means examining financials, contracts, leases, litigation, intellectual property, employment classifications, tax filings, UCC liens, and regulatory standing — and pricing, restructuring, or walking based on what is found. It routinely surfaces structural liabilities like misclassified contractors, unassigned IP, or unfiled multi-state sales tax. For a seller, diligence preparation means getting the house in order before the buyer's lawyers find the problems first. Deals that collapse late, or close and then breed litigation, are almost always the ones where diligence was rushed.

Escrow, holdbacks, and earn-outs: getting paid and staying protected

Price is rarely a single number paid at closing. Escrows and holdbacks — commonly 10–20% of the price held by a neutral agent for 12 to 24 months — cover problems that surface after closing, letting a buyer recover for an undisclosed liability without suing. Earn-outs tie part of the price to the business's future performance against defined metrics, bridging the gap between what a seller believes the business is worth and what a buyer will pay today. Each mechanism allocates risk and is heavily negotiated; getting the payment structure right is what protects a seller from non-collection and a buyer from overpaying for performance that never materializes.

Successor liability, reps and warranties, and indemnification

A buyer can inherit a seller's problems even in an asset deal, through successor-liability doctrines, bulk-sales rules, and unpaid-tax exposure — Illinois tax-clearance and bulk-sale steps cut off trailing state tax liens. The risk-allocation engine of the deal is the representations and warranties: the seller's binding statements about the company's finances, compliance, and assets, paired with indemnification that defines the consequences of a breach. Those indemnities are negotiated with baskets (a deductible the buyer must reach before claiming) and caps (a ceiling on the seller's exposure, often a percentage of price), protecting both sides from post-closing volatility. A carefully prepared disclosure schedule is what keeps a seller's honest representation from becoming a breach.

Counsel who has been on the principal's side of the table

I have served as in-house and chief legal officer to private-equity-backed companies, where buying and selling businesses was the work, not the exception. A transaction handled here is structured by someone who has run diligence, negotiated purchase agreements, and lived with the terms after closing — the perspective a buyer or seller needs when the other side has experienced counsel of its own.

What usually goes wrong

On the buy side, the recurring disaster is the buyer who structures an equity deal without adequate diligence or indemnification and inherits an invisible liability — unpaid taxes, a pending claim, a broken contract. On the sell side, it is the seller who signs broad, unqualified representations without a careful disclosure schedule, then faces indemnification claims when ordinary facts turn out otherwise. Across both, it is treating the letter of intent as a formality: the LOI quietly sets the price, structure, and exclusivity everyone fights to change later, and signing one without counsel is signing away leverage. A related trap is assuming key contracts and leases transfer automatically — many contain anti-assignment or change-of-control clauses requiring the counterparty's consent.

Related

• Buy-Sell Agreements →
• Business Contract Drafting & Review →
• Startups & Private Equity Counsel →