How a transaction is structured affects taxes, liability, and risk allocation for both parties. Understanding common structures helps sellers evaluate offers and negotiate effectively.
Primary Transaction Types
Asset Purchase
In an asset purchase, the buyer acquires specified assets (customer relationships, equipment, contracts, goodwill) and assumes designated liabilities. The selling entity continues to exist and retains any non-transferred assets and liabilities.
Advantages
- Buyer can select specific assets/liabilities
- Step-up in tax basis for buyer
- Cleaner separation from seller's history
- Easier to exclude unwanted items
Considerations
- May require third-party consents for contract transfers
- More complex documentation
- Seller may face double taxation (corporate + individual)
- Some assets difficult to transfer (licenses, permits)
Most common for: Smaller transactions, situations with complex liability history, or when buyer wants specific assets only.
Stock/Equity Purchase
In a stock purchase, the buyer acquires the ownership interests (stock or membership interests) of the selling company. The company continues to exist with all its assets, liabilities, contracts, and history intact—just with new owners.
Advantages
- Simpler transfer—company stays intact
- Contracts generally transfer automatically
- Licenses and permits may transfer with entity
- Often faster to execute
- Generally better tax treatment for sellers
Considerations
- Buyer assumes ALL liabilities, known and unknown
- No step-up in tax basis for buyer
- Historical issues travel with the company
- More extensive due diligence required
Most common for: Larger transactions, clean companies with limited liability concerns, or when contract/license transfer is difficult.
Purchase Price Components
Cash at Closing
The portion of purchase price paid in cash at closing. Sellers generally prefer maximum cash at closing to reduce risk and provide immediate liquidity.
- Typical range: 60-90% of total consideration
- Factors affecting percentage: Buyer financing, seller negotiating leverage, deal risk
Earnout Provisions
Earnouts tie a portion of the purchase price to post-closing performance, typically measured by revenue, EBITDA, or customer retention over 1-3 years.
Common Earnout Structures
- Revenue-based: Percentage of revenue above threshold paid as earnout
- EBITDA-based: Multiple of EBITDA above baseline paid to seller
- Customer retention: Payments tied to retention of specific customers or revenue
- Hybrid: Combination of metrics with weighted allocation
Seller considerations for earnouts:
- Ensure metrics are clearly defined and objectively measurable
- Understand who controls operations during earnout period
- Include accounting dispute resolution mechanisms
- Consider caps, floors, and acceleration provisions
- Earnouts work best when seller maintains operational involvement
Seller Financing
Seller financing involves the seller providing a loan to the buyer to fund part of the purchase price. This can help bridge financing gaps and demonstrate seller confidence.
- Typical range: 10-30% of purchase price
- Terms: Usually 3-5 years, with interest rates of 5-8%
- Security: Often subordinated to senior debt, may be secured by acquired assets
- Seller considerations: Credit risk on buyer, subordination terms, personal guarantees
Escrow/Holdback
A portion of the purchase price held in escrow to secure the seller's indemnification obligations. Released over time if no claims arise.
- Typical range: 10-15% of purchase price
- Duration: 12-24 months post-closing
- Purpose: Covers breaches of representations, undisclosed liabilities
Transition Arrangements
Most title company transactions include some form of post-closing involvement by the seller. These arrangements help ensure continuity and protect the buyer's investment.
Employment/Consulting Agreements
Sellers commonly remain engaged for 12-36 months post-closing. Terms range from full operational roles to limited consulting arrangements.
| Arrangement | Duration | Typical Role |
|---|
| Full Employment | 2-3 years | Day-to-day operations, customer relationships |
| Part-time/Transition | 12-18 months | Customer introductions, knowledge transfer |
| Consulting | 6-12 months | As-needed availability for questions |
| Clean Break | 30-90 days | Minimal transition support only |
Non-Compete Agreements
Buyers typically require sellers to agree not to compete in the title insurance business for a specified period and geography post-closing.
- Typical duration: 3-5 years
- Geographic scope: Markets where the company operates, sometimes broader
- Enforceability: Varies by state; must be reasonable in scope
Non-Solicitation Agreements
Separate from non-competes, these prevent sellers from:
- Soliciting employees to leave the acquired company
- Soliciting customers to move their business elsewhere
- Typically 2-5 years in duration
Tax Considerations
Transaction structure significantly impacts tax treatment. While detailed tax planning requires professional advice, sellers should understand basic concepts:
Asset Sale Tax Treatment
- Purchase price allocated among asset categories (equipment, goodwill, covenants not to compete, etc.)
- Different allocations taxed at different rates
- C-corporations face potential double taxation (corporate level + shareholder level)
- S-corporations and LLCs generally pass through to owners
Stock Sale Tax Treatment
- Generally treated as capital gain at shareholder level
- No corporate-level tax (gain passes through to shareholders)
- Typically more favorable for sellers of C-corporations
- Section 338(h)(10) elections can provide asset-sale treatment with stock-sale mechanics
Installment Sales
- Seller financing and earnouts may qualify for installment sale treatment
- Allows deferral of gain recognition until payments received
- Complex rules apply—professional guidance essential
Important: Tax implications vary significantly based on entity structure, individual circumstances, and applicable state law. This overview is for educational purposes only. Consult qualified tax professionals before making decisions.