Deal structures requirements for business sales

Deal structures requirements are the things that must exist or be obtained before each structure is available at all. An asset purchase needs consents. A share purchase needs a clean record of who owns the entity. A seller note needs something standing behind it. An earn-out needs a metric that can still be computed a year later.

This page lists what each one requires and what a party is asked to sign when it is used.

What to take away

Asset purchase

Requires: a complete schedule of what is being sold and what is not, down to the equipment, the trading name, the customer records and the stock; an assignment or novation for every contract and lease that moves; a transfer route for every license and permit, confirmed with the issuing body; consent from any counterparty whose agreement forbids assignment; a release of any lien or security registered over an asset being transferred; and an agreed allocation of the price across asset classes, which both sides report and which affects both sides' tax. For an applicable asset acquisition under IRC Section 1060, the buyer and seller report the allocation on IRS Form 8594. Search the relevant Secretary of State UCC records for liens, obtain payoff documentation, and require a UCC-3 termination statement for each released security interest. Confirm transfer or reissuance with the actual permit authority, such as a state health department or Alcoholic Beverage Control agency, and check state bulk-sale and tax-notice or clearance rules, including whether UCC Article 6 remains in force; assess employee obligations under the federal Worker Adjustment and Retraining Notification (WARN) Act and applicable state law.

Signed by: the seller, warranting they own what they are selling and that it is free of security; the buyer, assuming only the named liabilities.

Fails when: a lease or license cannot move and cannot be replaced. Find that out before the structure is agreed, not during diligence.

Share purchase

Requires: a clean record of who owns the entity and in what proportions, with every past transfer documented; evidence the entity is in good standing with its registry and that filings owed have been made, including a good-standing certificate from the Secretary of State or equivalent state office; a complete list of liabilities, including guarantees, off-balance-sheet obligations and disputes; identification of every agreement containing a change-of-control clause, because a share sale can trigger those even though nothing is being assigned; and a set of warranties the seller is actually willing to give. For an eligible corporate stock transaction, have tax advisers evaluate an IRC Section 338(h)(10) election, made on IRS Form 8023, or a separate IRC Section 336(e) election. When the selected election requires reporting a deemed asset allocation, confirm the use of IRS Form 8883.

Signed by: the seller, warranting the state of the entity, usually with a cap on liability and a period after which claims cannot be brought; the buyer, taking the entity as it stands.

Fails when: ownership of the entity cannot be evidenced, or a change-of-control clause gives a critical counterparty a veto nobody asked about.

Seller note

Requires: a written instrument setting out amount, installments, what happens on default and what accelerates it; a decision on security, and the registration of it; a decision on ranking, since a bank funding the purchase will generally require the seller to sit behind it as subordinated debt; a personal guarantee if the buyer is an entity with no other assets; and the lender's written consent to the whole arrangement, which is usually a condition of their own facility. For a secured note, specify the collateral and perfection steps under UCC Article 9, including filing a UCC-1 financing statement with the appropriate state filing office. Check existing UCC liens and document priority or subordination; require the secured party to file a UCC-3 termination statement when the debt is paid and the lien is released.

Signed by: the buyer, as borrower, and any guarantor; often a separate agreement between the seller and the bank setting out who is paid first.

Fails when: the note is agreed in principle at the price stage and the security and ranking are left to the lawyers, who then discover the lender will not permit what was promised. The acquisition financing page explains why the lender's requirements reach the seller this way.

Earn-out

Requires: a metric defined arithmetically, not by name; the accounting policies used to compute it fixed as they are at closing; exclusion of costs allocated from the buyer's wider operations; a written list of what the buyer must do, such as operating the business separately and keeping distinct records, and what they may not do without consent; the seller's right of access to the records and a defined period to object; an independent accounting expert identified by name in the agreement, with a selection process for any replacement; acceleration on a sale of the business or a change of control; and a measurement period short enough that the business is still recognizable at the end of it.

Signed by: both, and this is the clause where the drafting does the work. The deal structures page sets out why these disputes are structural rather than accidental.

Fails when: the acquired business is integrated into the buyer's operations and the metric can no longer be computed from anything.

Escrow or holdback

Requires: an escrow agent identified by legal name and capacity, such as a bank, trust company or independent commercial escrow agent, or an agreed retention mechanism; a written agreement setting out what claims may be made against it, who decides, and what happens to the balance; a release date; and clarity on whether the escrow is the buyer's only recourse or merely the first place they look. If arbitration will decide a release dispute, name the administrator—such as the American Arbitration Association (AAA) or JAMS—and specify the applicable rules in the agreement.

Signed by: buyer, seller and, where a third party holds the money, the agent. Where a dispute over release is possible, the parties often agree in advance to arbitration rather than a court.

Fails when: the release conditions are vague. Money held by someone else under an unclear condition tends to stay held. Vague release conditions are one of the nine seller preparation mistakes that look like sound decisions at the time.

Requirements that apply whatever the shape

Common questions