A business purchase agreement should spell out the structure of the deal (asset or stock), the price and how it gets adjusted at closing, what the seller is promising about the business, what happens if those promises turn out to be false, how and when the buyer pays, the conditions each side must satisfy before closing, and the administrative steps that follow. The structural choice drives everything else, so what should be in a business purchase agreement depends first on whether you are buying the company’s assets or its ownership interest.
Deal Structure: Asset or Stock Purchase
The first clause of substance identifies what the buyer is actually acquiring. In an asset purchase, the buyer picks which assets to take and which liabilities to leave with the seller. In a stock purchase, the buyer takes the entire entity, every obligation included.
Buyers almost always prefer asset purchases. You get a stepped-up tax basis equal to what you paid, which produces larger depreciation and amortization deductions going forward. You can also take the equipment and customer list and leave the old lawsuit behind. Sellers, especially those operating C-corporations, tend to prefer stock sales, because a stock sale usually produces capital gains for shareholders and avoids the double taxation that hits C-corporations in asset deals.
When the parties want a stock sale for legal purposes but asset-sale tax treatment, a joint election under Section 338(h)(10) of the Internal Revenue Code can bridge the gap in certain consolidated-group and S-corporation situations.1Office of the Law Revision Counsel. 26 U.S. Code 338 – Certain Stock Purchases Treated as Asset Acquisitions The election is irrevocable, so both sides should model the tax outcome before signing.
Purchase Price, Allocation, and Adjustments
The price clause states the headline number, but two mechanical provisions determine what the parties actually report and pay.
The first is purchase price allocation. In any asset purchase, Section 1060 of the Internal Revenue Code requires the total price to be split among the assets being acquired. If the buyer and seller agree in writing on the split, that allocation binds both of them on their tax returns unless the IRS determines it is inappropriate.2Office of the Law Revision Counsel. 26 USC 1060 – Special Allocation Rules for Certain Asset Acquisitions Buyer and seller interests collide here: the buyer wants more allocated to assets that depreciate or amortize quickly, while the seller wants more in categories taxed at capital gains rates. Both parties then report the agreed numbers on IRS Form 8594, filed with their returns for the year of the sale.3Internal Revenue Service. Instructions for Form 8594 – Asset Acquisition Statement Under Section 1060
The second is the working capital adjustment. The headline price assumes the business will arrive at closing with a normal level of operating funds. If the seller drains the bank account or lets inventory run thin, the buyer should not pay the same number. A typical clause sets a target working capital figure based on the average of the last six to twelve months. The buyer pays an estimate at closing, then within 60 to 90 days delivers a final calculation using actual closing-date financials. A shortfall is owed to the buyer dollar-for-dollar; an overage is owed to the seller. The clause should name an independent accountant whose decision binds both sides if they cannot agree on the final figure.
Representations, Warranties, and Covenants
Representations and warranties are factual statements the seller makes about the business, and the buyer relies on them to decide whether to close. A standard seller rep package covers clear title to the assets, accurate financial statements, no undisclosed liabilities or pending lawsuits, compliance with applicable laws, no key customers signaling departure, and corporate authority to complete the sale. If any of these is false, the indemnification provisions below are triggered.
The buyer makes a narrower set of reps: that the buying entity is properly organized, has authority and financing to close, and will not violate any existing obligations by signing.
Covenants are promises about future behavior rather than statements of present fact. The most common seller covenant is a non-compete preventing the seller from opening a rival business within a defined area for a set number of years. Courts evaluate these under a reasonableness standard, weighing geographic scope, duration, and activity restricted against the buyer’s legitimate interest in what was purchased. Non-competes tied to the sale of a business are generally enforced more readily than employment non-competes, but overly broad restrictions can still be struck down or judicially narrowed.
When physical inventory is part of the sale, UCC Article 2 governs the transfer, and the agreement should include provisions consistent with its requirements, including warranties of title and risk-of-loss allocation during the transition.
Indemnification Terms
Indemnification is the safety net for problems discovered after closing. The seller typically agrees to reimburse the buyer for losses from breached representations, undisclosed liabilities, or pre-closing tax obligations. The buyer indemnifies the seller for anything that goes wrong with the business after the handoff.
Three numbers govern how indemnification works in practice:
- Basket. A threshold the buyer’s losses must exceed before indemnification kicks in. In most deals over $10 million, the basket runs between 0.5% and 1% of the purchase price. It functions either as a true deductible (the buyer absorbs the basket and recovers only amounts above it) or as a tipping basket (once crossed, the buyer recovers from the first dollar).
- Cap. The ceiling on the seller’s total indemnification exposure. The median cap is roughly 10% of the transaction value for general representation and warranty breaches. Fundamental representations, such as ownership of the assets and tax obligations, often carry a higher cap, sometimes equal to the full purchase price.
- Survival period. How long after closing the buyer can bring a claim. General representations and warranties typically survive 12 to 18 months. Fundamental representations and tax covenants often survive longer, sometimes indefinitely.
To back these promises, many agreements require the buyer to deposit 10% to 20% of the purchase price into escrow at closing. The holdback sits there until the survival period expires or pending claims are resolved. Without an escrow, your only remedy is suing a former owner who may have already spent the proceeds.
Payment Terms
How and when the buyer pays belongs in its own clause, because the structure affects tax treatment for both sides.
Lump Sum
The simplest arrangement. The buyer wires the full price at closing, and the seller recognizes the full gain in the year of sale. This works when the buyer has cash or committed financing in hand.
Seller Financing
When the buyer cannot obtain full third-party financing, the seller carries a promissory note for part of the price. Common structures include fully amortizing payments over three to ten years, interest-only payments with a balloon at the end, or graduated payments that grow with cash flow. Some deals tie a portion of payments to the business’s actual revenue or earnings after closing.
Two tax rules shape seller-financed deals. The seller reports gain under the installment method, recognizing income proportionally as payments arrive rather than all at once, though the seller can elect out on their return to recognize the full gain immediately.4Office of the Law Revision Counsel. 26 USC 453 – Installment Method And the interest rate on the note must meet or exceed the applicable federal rate (AFR) published monthly by the IRS. For January 2026, the mid-term AFR is 3.81% and the long-term rate is 4.63%.5Internal Revenue Service. Revenue Ruling 2026-2 – Applicable Federal Rates A rate below the AFR triggers imputed interest, which creates phantom income for the seller and reduces the buyer’s basis. The rate must also comply with state usury limits.
Earnouts
When the parties cannot agree on value, an earnout bridges the gap. The buyer pays a base price at closing and commits to additional payments if the business hits specified revenue or earnings targets during a defined post-closing period. Earnouts create friction, because the seller no longer controls operations yet the payout depends on the buyer’s decisions. The clause needs to address who sets the budget, whether the buyer can merge operations with another business, and how earnout calculations are audited.
Due Diligence and Closing Conditions
Before signing, the buyer investigates the business during a due diligence period that typically lasts 30 to 90 days. The agreement (or an earlier letter of intent) gives the buyer access to financial records, contracts, employee files, and operational data. A well-drafted due diligence clause works as a contingency: if the buyer finds problems within the window, they can terminate, sometimes for any reason and sometimes only for specified deficiencies.
The documents reviewed during this phase become the factual backbone of the agreement and its schedules. At minimum, the buyer should see three years of tax returns, balance sheets, and profit-and-loss statements; a detailed asset inventory with condition and value; any commercial lease (noting that most require landlord consent to assign); documentation of trademarks, patents, copyrights, and trade secrets; UCC lien searches showing which creditors hold security interests in the equipment or receivables; and a certificate of good standing from the Secretary of State. Outstanding liens must be satisfied at or before closing, or the buyer risks purchasing assets a creditor can repossess.
A letter of intent often precedes formal due diligence. The letter is generally non-binding on the deal terms, but confidentiality and exclusivity provisions within it are typically binding on both parties.
One boundary condition belongs in larger agreements. If the transaction exceeds the Hart-Scott-Rodino threshold ($126.4 million for 2025, adjusted annually for changes in gross national product), both parties must file a pre-merger notification with the FTC and DOJ and observe a waiting period before closing.6Federal Trade Commission. New HSR Thresholds and Filing Fees for 2025 Closing early can trigger civil penalties, so the agreement should condition closing on satisfaction of HSR requirements.
Signing and Closing Mechanics
The signature block should identify a representative with actual authority under the entity’s operating agreement or corporate bylaws. A signature from someone without authority can make the entire agreement voidable. Digital signing platforms produce a timestamped record that simplifies later disputes about execution.
Closing typically happens at a title company, attorney’s office, or through escrow. The buyer wires the price less any seller-financed portion and the escrow holdback. The seller delivers the bill of sale, assignments of contracts, keys, vehicle titles, and internal records. If real property is included, a deed transfer is recorded with the county. An escrow agent can hold all funds and documents until every closing condition is confirmed, releasing everything simultaneously so neither side is left exposed.
Both parties should keep original signed copies. The buyer will need the signed agreement, bill of sale, and all schedules for tax filings, lender requirements, and future disputes.
Post-Closing Obligations
The agreement should obligate the parties to complete several administrative steps after closing. These finalize the transfer and protect the buyer from inheriting the seller’s problems.
Both parties file Form 8594 with their income tax returns for the year of the sale, reporting the agreed purchase price allocation.3Internal Revenue Service. Instructions for Form 8594 – Asset Acquisition Statement Under Section 1060 The new owner notifies the state department of revenue about the change in ownership to update sales tax accounts, withholding accounts, and other state registrations.
Successor liability deserves its own clause. Even in an asset purchase where the buyer did not assume the seller’s debts, state rules can hold the buyer responsible for the seller’s unpaid taxes when the transaction amounts to a de facto merger, when the buyer is essentially a continuation of the seller’s business, or when the structure was designed to evade obligations. Many states require the buyer to notify the state tax authority before closing and obtain a tax clearance certificate. Skipping this can leave you personally liable for the seller’s unpaid sales and use taxes regardless of how the agreement allocates liability, because state tax rules override private contract provisions.
If the seller had secured creditors, a UCC-3 amendment should terminate the old financing statements and clear the public record. Business licenses, health permits, liquor licenses, and professional certifications must be transferred or reissued in the new owner’s name through the relevant agencies. Failing to update licenses can result in fines or forced closure even when operations continue unchanged.
A handful of states still maintain bulk sales laws requiring the buyer to notify the seller’s creditors or the state tax authority before paying for business assets outside the ordinary course. Most states have repealed UCC Article 6, but those that retain some version can impose personal liability on a buyer who closes without proper notice. Check your state’s statute before closing, because the consequences of skipping this step fall entirely on the buyer.