Unfortunately, working in the business may conflict with the seller s retirement plans. For that reason and others, the seller s position improves dramatically if the buyer secures the purchase money promissory note with assets outside of the business being sold, assets such as real estate property, or the assets of another business. While getting this security may represent the most difficult part of the sale negotiation, the availability of outside security can often make the difference between collection and profitless litigation for the business seller. If a buyer fails to turn a profit in the business due to lack of experience or other factors, the buyer will search for a way to cut or eliminate losses. One such way is to file a lawsuit against the seller to recover the purchase price, plus damages.
Attorneys fees can wipe out the seller s profits even where the seller wins the lawsuit.
Careful drafting of the purchase agreement, along with requiring a due diligence investigation of the business by the buyer, is the best way to minimize this type of risk. Another risk to consider is the exposure the seller faces from creditors of the business and the federal and state taxing authorities. These risks are most easily managed if the business being sold is incorporated, and if the sale is accomplished by a sale of stock. This type of sale transfers all of the business liabilities, known or unknown, to the buyer. In addition, a seller who transfers stock, rather than assets, often receives a more favorable tax treatment through capital gains.