Bottom Line: 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.

1. Overview of Deal Structures When Selling a Business – PART II
(Liabilities) | BizTaxBuzz by Trevor Crow
biztaxbuzz.com/bizlaw/overview-deal-structures-selling-business-part-ii-liabilities/
8thSeptemberOverview of Deal Structures When Selling a
Business – PART II (Liabilities)
Posted by Trevor Crow
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 a LLC.
Asset Sales
Liability Factors. Similar to the tax factors, an asset sale is generally a better structure for the buyer to minimize potential
liabilities. With an asset sale the buyer can pick and choose the assets to buy and what, if any, liabilities to assume
from the seller. With an asset sale the buyer does not become responsible for liabilities and debts that the buyer does
not specifically assume. This structure avoids the potential for purchasing unknown or contingent liabilities, which can
come in the form of tax liabilities, environmental liabilities, and many others.
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.
Stock Sales
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 agreement. 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.

2. Bottom Line: 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.