In a real estate purchase, the key concerns include title, the physical condition of the property, and the status of any leases. When buying a business, the primary legal concern is liability. An operating business may have exposure to warranty and defective product claims, breach of contract claims, and tort claims. Thus, liability risks will play a key role in determining the structure of the transaction, as different structures present different levels of exposure.

The principal structuring alternatives for small businesses are (A) sale of assets, and (B) sale of the operating entity.

• In a sale of assets, the buyer buys only the physical assets of the business, which would normally include trade fixtures, inventory, and the owner’s interest as tenant under a lease (if the business premises are leased). For premises that are owned by the seller, the deal would normally involve a purchase of the real estate as well, unless the parties are entering into a lease as part of the deal. The deal will also typically include intangibles such as accounts receivable, contract rights, and goodwill. When the sale consists only of assets, there is a higher likelihood that any liabilities of the business will not attach to the buyer. (However, if the buyer is buying essentially all of the assets of the business, there is a much greater risk that liabilities will follow.)
• Instead of buying assets, the buyer may purchase all or a majority of the interests in the operating entity. If the buyer is acquiring less than 100% of the ownership interests, the appropriate entity agreement must be carefully tailored to ensure that the buyer gets the full control it expects, and that mechanisms are in place to deal efficiently with disputes. In this situation, the buyer is buying the entire business, which of necessity includes all of its liabilities.

Once the basic deal structure has been determined, there are a host of other issues to address and negotiate, such as:

• The allocation of the purchase price among the assets being purchased, which will normally have tax consequences.
• Negotiation of the terms of any seller financing, as well as the terms of any earn-out provisions that may be part of the deal.
• Tax clearances will normally have to be obtained.
• If there are employee benefits or employees are being terminated, additional ancillary issues will be raised.
• If the entity is being acquired rather than just assets, there may be securities laws compliance requirements.
• Tax and accounting issues underlie many aspects of the deal, and we’re always happy to work with a client’s accountant or tax advisor in structuring and consummating the transaction.