Asset sale or ownership sale
Most small business sales take one of two forms:
- Asset purchase. The buyer buys selected assets, such as equipment, inventory, customer lists, and the business name. The buyer usually takes on only the debts and contracts it agrees to take.
- Stock or membership interest purchase. The buyer buys the ownership of the company itself. The company stays the same legal entity, with all its contracts, history, and debts, including ones no one knew about.
Buyers often prefer asset deals because they limit unknown debts. Sellers often prefer ownership sales for simplicity and tax reasons. The tax effects can be very different, so both sides should involve an accountant early.
Some deals mix the two. For example, a buyer may buy the assets of an operating company while the seller keeps the real estate and leases it to the buyer. Whatever the structure, the documents should say exactly what is being sold and what is not.
The usual steps
- Confidentiality agreement. Before sharing financial records, the seller usually asks the buyer to sign a non-disclosure agreement.
- Letter of intent. A short document sets out the main terms, such as price, structure, and timeline. Most terms in a letter of intent are not binding, but some, such as confidentiality, may be. Read it carefully before signing.
- Due diligence. The buyer investigates the business.
- Purchase agreement. The detailed contract that controls the deal.
- Closing. Money and documents change hands, and ownership transfers.
- Transition. The seller may help with the handoff for a period, under agreed terms.
Due diligence checklist for buyers
A buyer should look closely at:
- Financial statements, tax returns, and bank records
- Customer and vendor contracts, and whether they can be transferred
- The lease, and whether the landlord must approve a new tenant
- Business licenses and permits
- Employees, pay practices, and any employment agreements
- Liens on business property and any pending or threatened lawsuits
- Unpaid taxes
- Trademarks, websites, social media accounts, and phone numbers
Surprises found before closing can be negotiated. Surprises found after closing often lead to disputes.
A buyer should also talk with the business’s key customers and employees, with the seller’s permission, and confirm that the seller actually owns what is being sold.
Key terms in the purchase agreement
- Price and payment. Cash at closing, payments over time, or seller financing, and what security the seller receives.
- What is included. A clear list of assets, and which debts and contracts the buyer takes on.
- Promises and statements. What the seller states about the business, such as its finances and legal compliance, and what happens if a statement turns out to be untrue.
- Indemnification. Who pays if a covered problem appears after closing, with any limits.
- Holdback or escrow. Part of the price may be held back for a time to cover claims.
- Non-competition. Whether the seller may open a competing business, and for how long and where.
- Conditions to closing. Financing, landlord approval, license transfers, and other steps that must happen first.
Non-compete agreements in a business sale
North Carolina law requires an agreement not to compete to be in writing and signed by the person who agrees not to compete. Courts also look at whether the limits on time and area are reasonable, so a non-compete that goes further than needed may not be enforced as written.
Both sides should agree on the exact scope before closing, in plain words.
Tips for sellers
- Organize your records before you go to market.
- Fix known problems, such as expired licenses or unclear ownership of assets.
- Share sensitive information only after a confidentiality agreement is signed.
- Think about whether you will finance part of the price, and what security you will need.
- Ask for a realistic plan for your role after the sale.
If a disagreement arises after closing, the purchase agreement will usually control how it is resolved. Our firm also handles business disputes and litigation.
Fees and next steps
We explain our fee in writing before you hire us. We tell clients the hard truth about the risks in a deal.
Call (336) 281-2008 or request a consultation online. Bring any letter of intent, draft agreement, and recent financial statements. Hablamos español.
This page is general information about North Carolina law, not legal advice. Every case is different, and no lawyer can promise a result.
Questions people ask us
Is it better to buy a business's assets or its stock?
It depends on the deal. Asset purchases often limit unknown debts for the buyer, while ownership sales can be simpler and may have tax advantages for the seller. Talk with both a lawyer and an accountant before deciding.
Is a letter of intent binding?
Usually most of it is not, but some terms, such as confidentiality or an exclusive negotiating period, may be binding. Read it carefully, and have a lawyer review it before you sign.
Can a seller agree not to compete after selling a business in NC?
It can. North Carolina law requires the agreement to be in writing and signed by the seller who agrees not to compete. Courts also look at whether the limits on time and area are reasonable.
What happens if the buyer finds a problem after closing?
The purchase agreement usually controls. It may provide for indemnification, a holdback, or other remedies. If the dispute cannot be worked out, it may lead to litigation or another process the agreement requires.