Free business purchase agreement template

Asset sale or equity sale: the choice that drives everything

Almost every other term follows from this. In an asset sale, the buyer picks which assets it wants and which liabilities it will take, and everything else stays with the seller and its entity. In an equity sale, the buyer buys the company itself, and the company arrives with everything attached, including liabilities nobody has discovered yet. Buyers generally prefer asset sales, for two reasons that reinforce each other. They can leave the unknown liabilities behind, and they generally get a stepped-up tax basis in the assets they buy, which increases depreciation and amortization deductions afterwards. Sellers generally prefer equity sales, because gain on the sale of stock is capital in nature and taxed at the preferential long-term capital gains rate, and because they get a clean exit rather than a shell entity and a pile of retained obligations. The tension is sharpest when the seller is a C corporation, where an asset sale can be taxed twice: once at the entity level on the gain, and again when the proceeds are distributed to shareholders. That single fact drives a great deal of negotiation. One tax point most templates miss: in an asset sale the IRS treats each asset as sold separately, so the character of the gain differs asset by asset. Capital assets produce capital gain, while inventory produces ordinary income. That is why the allocation in the next section is not an afterthought.

• Asset sale: buyer chooses assets and liabilities, gets a basis step-up, but must individually assign every contract and lease, which means chasing third-party consents.
• Equity sale: simpler mechanically, since the entity keeps its contracts and licences, but the buyer inherits the liabilities.
• Watch the change-of-control clause: an equity sale avoids assignment consents, but many contracts are triggered by a change of ownership anyway.
• These are strong tendencies, not rules. Deals get restructured around them with tax elections, so take advice rather than assuming.

Purchase price allocation and IRS Form 8594

When a group of assets making up a trade or business changes hands, the price has to be allocated across the assets, and both sides report it. Under the tax code's applicable asset acquisition rules, the buyer and the seller each generally file IRS Form 8594 with their own tax returns. The allocation runs sequentially through seven asset classes using the residual method, starting with cash and deposit accounts in Class I and ending with goodwill and going-concern value in Class VII. In between sit marketable securities, accounts receivable, inventory, tangible property such as equipment and buildings, and intangibles other than goodwill. Here is the part worth understanding before you sign. If the buyer and seller agree in writing on the allocation, that agreement is binding on both of them, unless the IRS determines the allocation is not appropriate. So the allocation binds the parties to each other, but it does not bind the IRS. That cuts two ways. It means you can and should settle the allocation in the agreement rather than discovering at tax time that each side reported something different. It also means agreeing on a number that does not reflect economic reality protects nobody. The two sides have opposing incentives here, since allocating more to inventory or equipment versus goodwill changes the character of the seller's gain and the buyer's future deductions, so expect it to be negotiated and get your own tax advice.

Does the buyer inherit the seller's debts?

This is the question that sends people looking for this document, and the general rule is reassuring: when a buyer purchases assets, the seller's liabilities do not automatically come along. But the exceptions are where buyers get hurt, and there are four standard ones. A buyer can be stuck with the seller's liabilities where it expressly or impliedly agreed to assume them, where the transaction amounts to a de facto merger, where the buyer is a mere continuation of the seller, or where the deal was a fraudulent attempt to escape the liabilities. The de facto merger analysis is fact-heavy, and courts look at whether the enterprise continued with the same management, staff, location, and operations, whether the seller's owners took buyer stock, whether the seller wound up and dissolved promptly afterwards, and whether the buyer assumed the obligations needed to keep the business running. Two further exceptions apply in a minority of states. Some, including California and New Jersey, recognise a product-line exception that can attach liability where a buyer acquires a manufacturer's assets and carries on essentially the same product line. Some apply a broader continuity-of-enterprise test focused on whether the business kept going rather than on corporate formalities. And be aware that successor liability is not one doctrine but many: employment, environmental, tax, and benefits regimes each apply their own, often broader, successor tests. The practical takeaways are to buy assets rather than equity where you can, name the assumed liabilities narrowly and exhaustively, and back it with indemnity and escrow rather than trusting the label on the document.

Bulk sales and tax clearance: the step buyers skip

There is an old body of law designed to stop a business owner selling everything and disappearing before paying creditors. The large majority of states repealed their version of it, but it has not gone away everywhere, and something arguably more dangerous replaced it. California still has a bulk sales law in its Commercial Code. It applies where the seller's principal business is selling inventory from stock or operating a restaurant, and it has dollar collars: it does not apply where the net value of the assets is under $10,000, or over $5,000,000. That ceiling means most substantial deals fall outside it, while exactly the small restaurant and retail purchases this template serves fall inside. A small number of other jurisdictions may retain a version, so check the specific state rather than assuming repeal. The bigger modern trap is state tax clearance, which survives in states that repealed the old bulk sales rules, and which can make a buyer personally liable for the seller's unpaid sales taxes.

• New York: the purchaser files Form AU-196.10 with the Department of Taxation and Finance by registered mail at least 10 days before paying for or taking possession of the assets. A purchaser who does not comply can be held liable for the seller's unpaid sales and use taxes, capped at the greater of the purchase price or the fair market value of what was acquired. If the department does not respond within five days of a properly filed notice, the purchaser cannot be held liable.
• New Jersey: the Division of Taxation must receive Form C-9600 with a copy of the contract at least 10 business days before closing. Closing before that period runs, without an escrow assigned, is a violation and leaves the purchaser responsible for the seller's tax obligation. If the Division does not respond within 10 business days, the purchaser is not liable.
• The pattern is the same in both: a short pre-closing notice window, and personal exposure for the buyer who misses it. Build the filing into your closing checklist, not your post-closing one.

Due diligence, and what the seller has to tell you

Due diligence is the period where the buyer opens the books and confirms the business is what it was described to be. Sign a confidentiality agreement before it starts, because the seller is about to hand over customer lists, financials, and contracts to someone who may walk away. Expect to review at least financial statements and tax returns for the last three years, the customer and supplier concentration, the lease and any assignment restrictions, employee terms and any accrued liabilities, litigation and claim history, licences and permits, and the intellectual property including whether the business actually owns its name and domain. Two structural pieces of the agreement carry the results of that work. The representations and warranties are the seller's formal statements about the business, and the disclosure schedule is where the seller lists the exceptions to them. A representation with a well-drafted disclosure schedule is worth far more than a longer list of promises with no schedule, because the exceptions are where the real information lives. If diligence turns up something material, you have three options and should pick deliberately: reprice the deal, carve the problem into a specific indemnity with its own escrow, or walk. This template gives the buyer a clean walk-away right up to the diligence deadline, which is the leverage that makes the other two options available.

Indemnification: baskets, caps, survival, and escrow

Indemnification is how the parties allocate the cost of things turning out to be untrue, and it has a standard architecture worth understanding because it is almost entirely negotiable convention rather than law. Survival is how long the representations stay actionable after closing. A basket is a threshold below which no claim can be made, and it comes in two flavours that matter: with a deductible basket the seller pays only the amount above the threshold, while with a tipping basket, crossing the threshold makes the whole amount recoverable from the first dollar. A cap is the ceiling on total liability, usually with carve-outs for fraud and for fundamental representations such as title, authority, and taxes. Escrow or a holdback keeps part of the price available so the buyer is not chasing a seller who has already spent the money. For a sense of where the market sits, the American Bar Association's 2025 study of private-target deals, covering 139 agreements signed in 2024 and early 2025, found a median survival period of 12 months, deductible baskets in 67% of deals with a basket, most baskets set at or below 1% of transaction value, and a separate escrow for purchase-price adjustments in 58% of deals. It also found representation and warranty insurance, where an insurer rather than the seller backs the reps, referenced in 63% of deals, up from 29% in the 2016-17 study. One important caveat: that study covers deals from $25 million to $900 million. If you are buying a $400,000 business, you are not in that sample, and your deal will be simpler, with a larger relative escrow and no insurance. Use the numbers as a map of the negotiation, not a benchmark for your deal.

Earn-outs, and a 2026 case that should change how you draft one

An earn-out defers part of the price and ties it to the business hitting targets after closing. It is the standard bridge when buyer and seller cannot agree on value, though its use has been falling; the ABA study found earn-outs in 18% of deals, down from 26%. It is also the single most litigated provision in acquisition agreements, and the dispute is nearly always the same: the seller says the buyer ran the business in a way that made the target unreachable, and the buyer says it was never obliged to chase it. Sellers have traditionally hoped the implied covenant of good faith and fair dealing would fill that gap. A January 2026 Delaware Supreme Court decision, arising from Johnson and Johnson's acquisition of Auris Health with up to $2.35 billion in milestone earn-outs, makes clear how thin that hope is. The court held that where the agreement specified a particular regulatory pathway and that pathway later became unavailable, the buyer was not obliged to pursue the alternative, reasoning that the risk was foreseeable and had been allocated by the contract, so there was no gap for the implied covenant to fill. It is worth reading the whole result rather than that one holding, though, because the case cut both ways: the court also upheld a finding that the buyer had fraudulently induced the sellers on a separate milestone by presenting its achievement as near-certain while knowing of a patient death and an open regulatory investigation, and the sellers still recovered substantial damages. The lesson for a seller is not that earn-out claims fail. It is that the reliable claim was fraud, which requires proving what the buyer knew and concealed, while the good-faith argument on the drafted milestone failed. Read that as drafting instruction. If you are the seller, do not rely on good faith. Write the efforts standard explicitly, name the alternatives if a milestone route closes, specify who controls the business during the earn-out period, and list the actions that would breach it, such as cutting the budget, reassigning the sales team, or launching a competing product. If you are the buyer, understand that silence is not neutral; it just means the written words govern.

The seller's non-compete, and why it survives where employee non-competes do not

A buyer paying for goodwill needs the seller not to reopen across the street, and this is one of the few settings where non-competes remain reliably enforceable. Even states that ban employee non-competes carve out covenants given in connection with the sale of a business. California is the striking example: it voids employment non-competes no matter how narrowly drafted, yet a separate provision expressly permits someone selling the goodwill of a business, or all of their ownership interest, to agree not to carry on a similar business within a specified geographic area where the business was carried on, so long as the buyer continues to run a like business there. Minnesota's ban has a sale-of-business exception, and so does Wyoming's newer one. But the carve-out is narrow and its elements are real. In California the sale must involve goodwill or all of the owner's interest, the restriction must be tied to the area where the business actually operated, and the buyer has to keep operating there. Miss an element and you fall back to the general rule that voids the covenant. The reasonableness limits also survive everywhere: duration, geography, and the scope of restricted activity must all be no broader than protecting the goodwill requires. Draft it as what it is, part of the price of the goodwill, and tie it to where the business actually traded. If you also need restrictions on the seller's staff after they join you, that is a different document and a much harder legal question.

Consents, licences, and employees: what closing actually requires

Three practical items derail more small-business closings than the price ever does. Consents come first: in an asset sale, contracts and leases must be individually assigned, and most contain anti-assignment clauses, so the landlord and key suppliers effectively hold a veto. Start the consent process early, because the landlord is usually the long pole. Licences and permits are the second, and the misconception is widespread: in an asset purchase, most licences do not simply transfer with the business, and the buyer has to apply in its own name. Liquor licensing is the classic example, where what people call a transfer is often a fresh application, and the timeline can be long enough to dictate the closing date. Confirm the position with the relevant regulator before you commit to a date. Employees are the third. In an asset sale the seller's employment ends and the buyer decides who to rehire, on its own terms, which means the seller must settle wages, accrued vacation, and payroll taxes through closing. If enough jobs are affected, federal law requiring 60 days' advance notice of a covered plant closing or mass layoff can be triggered, and whether the seller or the buyer must give it turns on whether the loss falls before or after the sale date, and on whether the business genuinely transferred as a going concern rather than being sold off as assets. Note that courts have held the parties cannot simply contract around that allocation, so an indemnity in your agreement does not cure a missed notice. Several states also have their own versions with lower thresholds and longer notice periods than the federal rule.

Do you need an antitrust filing?

Almost certainly not, but it is worth knowing the line. Deals above a size threshold require a premerger notification filing with the Federal Trade Commission and the Department of Justice and a waiting period, normally 30 days, before closing. The thresholds adjust every year based on economic data. As of February 17, 2026 the size-of-transaction threshold is $133.9 million, with a size-of-person test that is waived entirely for transactions of $535.5 million or more, and filing fees that start at $35,000 and rise with deal size. If you are buying a local business, you are nowhere near this, and you can move on. If you are near the threshold, note two things: the number changes every January or February, so check the current figure rather than this page, and the notification form itself was substantially expanded in February 2025, so preparation takes considerably longer than it used to.

Common mistakes to avoid

Business sales go wrong in a predictable set of ways.

• Choosing the structure by habit rather than by analysis, and inheriting liabilities in an equity deal that an asset deal would have left behind.
• Writing assumed liabilities loosely, so the carefully drawn line between the parties turns into an argument.
• Leaving the price allocation to the accountants after closing, when the parties' incentives are opposite and the agreed allocation binds them both.
• Missing a state bulk sales or tax clearance filing and inheriting the seller's unpaid sales tax personally.
• Taking representations without a disclosure schedule, which is where the useful information actually sits.
• Agreeing an earn-out without specifying who runs the business during it and what standard of effort applies.
• Leaving landlord and supplier consents until the last fortnight, then closing late or without them.
• Assuming the licences come with the business.
• Drafting the seller's non-compete like an employee non-compete instead of a sale-of-goodwill covenant tied to where the business traded.

Use this with a lawyer

We say this rarely, and mean it here. This template is a solid, well-organised starting point, and using it will make your first conversation with a lawyer shorter and cheaper because you will arrive with the structure, the schedules, and the commercial terms already thought through. But buying a business is the transaction where do-it-yourself goes wrong most expensively, because the failure mode is not a rejected form, it is discovering a liability, a missing consent, or a tax result after you own it and the seller has been paid. At minimum get advice on the structure choice and its tax consequences, the disclosure schedule and indemnity limits, and any state filing your deal triggers. Have your accountant look at the allocation before you sign, not after.