Glossary - Escrow, Legal, Tax
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A
Advertising Injury
Advertising injury coverage is part of commercial general liability insurance. It protects a business against claims like stolen ideas, invasion of privacy, libel, slander, or copyright infringement tied to its advertising.
Asset Allocation
When a business is sold as an asset sale, the IRS generally requires both buyer and seller to allocate the sale price across asset classes on Form 8594, since each class is typically taxed differently. Buyer and seller aren't required to agree on the allocation, though many tax advisors recommend matching it to reduce audit risk.
Why it matters: Allocation tends to be a negotiation, not a formality — sellers often prefer more of the price allocated to goodwill (capital-gains treatment), while buyers often prefer more allocated to inventory and equipment (faster ordinary-income deductions). Tax treatment can also depend on entity type and deal structure. This is a decision to make with a tax professional, not a DIY judgment call.
Asset classes (IRS Form 8594) — general framework, current as of ~2024-2025:
Classes VI and VII generally get the same 15-year amortization treatment for the buyer under current rules. If the buyer is indifferent between them, more can often be allocated to goodwill — which tends to favor the seller — though the buyer's attorney may still push for a higher non-compete allocation.
This entry describes the general Form 8594 framework as commonly applied in recent years; specific class definitions and tax treatment can change. Confirm current rules and your specific allocation strategy with a CPA or tax attorney before finalizing any deal — this is educational background, not tax advice.
| Class | Description | Seller preference | Buyer preference |
|---|---|---|---|
| I | Cash & equivalents | Neutral | Neutral |
| II | Securities | Neutral | Neutral |
| III | Accounts receivable | Neutral | Neutral |
| IV | Inventory | Lower allocation | Higher allocation (ordinary income deduction) |
| V | Other tangible assets (real estate, FF&E, vehicles) | Lower allocation | Higher allocation (depreciation) |
| VI | Covenants not to compete & other intangibles | Case-by-case | Case-by-case |
| VII | Goodwill & going concern value | Higher allocation (capital gains) | Lower allocation, unless indifferent |
B
Bill of Sale
A legal document that transfers ownership of property in exchange for payment. It's most familiar from vehicle sales but applies to equipment, firearms, animals, electronics, and other personal property too — not real estate, which requires a purchase agreement and deed instead.
Why it matters: In a business sale, a bill of sale isn't a substitute for a purchase agreement — it's used alongside one to formally transfer specific assets.
A bill of sale typically includes: names and contact information of the parties, a description and condition of the item(s), price, payment method, date, signatures, and warranty terms (or an "as-is" designation).
Buy-Sell Agreement
A contract between co-owners of a business that governs what happens to an owner's stake if they leave — who can buy it, and at what price. Despite the name, it has little to do with selling the company to an outside buyer; it's really a buyout agreement between the existing owners.
Why it matters: Without one, a departing owner (due to retirement, disability, divorce, or death) could transfer their share to anyone, disrupting the remaining owners. A well-drafted agreement also protects the business in a divorce: it can require a former spouse who receives an ownership interest in the settlement to sell it back to the company or co-owners at a price set by a valuation method spelled out in the agreement.
C
Closing Statement
A closing document that records the final details of a transaction — price and every fee settled at closing. "Closing statement" and "settlement statement" mean the same thing and are used interchangeably.
Fees it may cover include: escrow fees, title fees, lender fees, transfer or prorated taxes, utility payments, commissions, legal and professional fees, inspection or contractor fees, lien payoffs, loan disbursements, lease-related payments, insurance payments, and franchise fees. Closing statements are usually prepared by an escrow agent or attorney. A closing that doesn't involve real estate or financing can be much simpler.
See also: Settlement Statement.
Co-op
A cooperative ("co-op") is a business owned and controlled by its members, who pool resources to get results none of them could achieve alone. In some co-ops, only current or past customers own the business, with ownership tied to purchase volume or equity contribution. In others, employee-owners don't need to be customers at all — it's simply an employee-ownership structure.
Why it matters: A co-op is a meaningfully different structure from an Employee Stock Ownership Plan (ESOP), though both center on employee ownership — see the ESOP entry for a side-by-side comparison.
D
Deemed Asset Sale
See Hybrid Asset-Stock Sale — a transaction structured as a stock sale but taxed as an asset sale under IRC 338(h)(10).
E
E&O Insurance (Errors and Omissions Insurance)
See Professional Liability Insurance (General Business category — not in this batch). E&O insurance protects a business or professional against claims of negligence, mistakes, or failure to perform professional duties.
Employee Stock Ownership Plan (ESOP)
A federally regulated employee benefit plan that gives employees ownership in the company by allocating shares from a trust. ESOPs exist across industries — marketing, manufacturing, distribution, construction, engineering, food, retail, and healthcare among them. Notable examples include Publix, Herman Miller, WinCo Foods, and Clif Bar (20% ESOP-owned, sold to Mondelez for $2.9B — yielding $580M split among 1,300 ESOP participants).
Why it matters: Selling to an ESOP or worker co-op lets the seller keep considerable control over the exit, including the option to stay on as an employee-owner. Most ESOPs need at least 15-20 employees for the tax benefit to justify the administrative cost; a cooperative structure may be more realistic for very small businesses.
ESOP vs. Co-op:
| ESOP | Co-op | |
|---|---|---|
| Ownership structure | Shares held in a trust on employees' behalf | Direct member ownership |
| Voting rights | Often limited/pass-through | Typically one member, one vote |
| Eligibility | Employees, per plan rules | Members (often customers or employees) |
| Dividends | Distributed per share allocation | Distributed per membership terms |
| Taxes | Significant federal tax incentives | Fewer specialized tax incentives |
| Financing | Often uses leveraged buyout structure | Typically simpler, less debt-driven |
Errors and Omissions Insurance (E&O Insurance)
See Professional Liability Insurance (General Business category — not in this batch). Same coverage as E&O Insurance above.
Escrow
A legal arrangement where an asset — cash, securities, or similar — is held by a neutral third party (the escrow agent) until a contractual condition is satisfied. Used in both real estate and business transactions.
Escrow Holdback
Funds held back at closing until a post-closing condition is met. The holdback can come from funds already in escrow or from additional funds collected before closing.
Common reasons for a holdback: repairs the parties agreed to complete after closing, or a tax clearance certificate that needs to be obtained and confirmed after closing.
Escrowee
The third-party escrow holder. Depending on the state, an escrowee may need to be licensed and cannot be a party to the transaction itself. In a real estate or business-for-sale deal, the escrowee is often part of or affiliated with a title company, real estate attorney, or lender.
ESOP
See Employee Stock Ownership Plan.
Exclusion from Capital Gains Upon Sale of a C-Corp
See Qualified Small Business Stock (QSBS) — the tax provision that lets qualifying C-corp shareholders exclude some or all capital gains from a sale.
F
Fully Executed
A document is "fully executed" once every party has signed it, making it a binding legal contract.
H
Hybrid Asset-Stock Sale
Also called a Deemed Asset Sale. Under IRC 338(h)(10), certain transactions can potentially be structured as a stock sale but taxed as an asset sale — an approach some deals use to give buyer and seller each a tax treatment they'd otherwise have to trade off against each other. In concept: the seller sells stock (potentially getting capital-gains treatment); the buyer treats it as an asset purchase (potentially getting depreciation benefits, and picking up contracts that might not otherwise transfer in a straight asset sale).
Mechanically, this generally involves the seller selling shares to the buyer, then selling assets to the buyer, then the buyer redeeming the shares — though exact mechanics and eligibility depend on entity type and deal specifics.
This is a sophisticated structure, not a default option. It requires real tax and legal investment to execute correctly, and is typically only relevant for larger deals with significant physical assets — not a typical Main Street transaction. Treat this entry as a starting point for a conversation with your CPA and M&A attorney, not a recommendation to pursue it. (Reflects IRC 338(h)(10) mechanics as generally applied in recent years — confirm current treatment before relying on it.)
I
Indemnity
Protection against a loss, financial burden, or legal liability. In insurance, it means the insurer pays for a covered loss instead of you. In M&A, an indemnity clause in the purchase agreement spells out how one party compensates the other for specific losses arising from the deal.
Intellectual Property (IP)
Intangible assets that are creations of the mind — patents, trademarks, copyrights, trade secrets, designs, and other proprietary work.
Why it matters: IP is often under-valued by owners and over-scrutinized by buyers during due diligence — undocumented or unprotected IP can become a sticking point in a sale.
IRC 1202
See Qualified Small Business Stock (QSBS) — the tax code section that defines the exclusion.
IRC 338(h)(10)
See Hybrid Asset-Stock Sale — the tax code section that allows a stock sale to be taxed as an asset sale.
M
M&A Attorney
An attorney who specializes in mergers and acquisitions.
Why it matters: Matching attorney expertise to deal size matters. M&A attorneys built for large transactions are often a poor fit for Main Street business sales, and small-business transaction attorneys aren't usually equipped for larger M&A deals. A mismatch between the buyer's and seller's attorneys — one working at each end of that spectrum — can slow a deal down or kill it.
M&A attorneys typically need experience in: corporate and deal structures, financing, stock vs. asset sales, private equity, intellectual property, joint venture and licensing agreements, reps and warranties, due diligence, and closings.
N
NDA
See Non-Disclosure Agreement.
Non-Compete Agreement
A clause, often in an employment contract, that stops someone from working for a competitor — typically limited by time, industry, and/or geography.
Why it matters: Enforceability varies significantly by state for employer-employee non-competes — some states restrict or ban them outright (California is the clearest example). Non-competes tied to the sale of a business, however, are treated differently: they're generally enforceable in all 50 states, including California, even where employment non-competes are restricted — though the enforceable length still varies by state. In a business sale, it's common for the seller to be restricted from competing for roughly 3-5 years within the business's market geography, subject to what's reasonable in that state.
Federal rulemaking here has moved around: a proposed FTC rule for a nationwide ban on employer non-competes was blocked by a federal court in late 2024, and the FTC formally withdrew that rule in early 2026 — so there is currently no federal ban, and the FTC now pursues individual non-compete agreements case by case rather than through a blanket rule. This is a fast-moving area at both the federal and state level — confirm current status with an employment or M&A attorney before relying on any non-compete provision. (Current as of early 2026; worth rechecking given how much this has shifted recently.)
Non-Disclosure Agreement (NDA)
A legal contract that binds a party receiving confidential information to keep it confidential. Like most contracts, it defines the parties, the length of the agreement, and the scope of what's covered (and excluded).
NDAs can be unilateral (only one party's information is protected), bilateral (both parties'), or multilateral (all parties' in a multi-party deal).
Why it matters: In business sales, a seller typically requires an NDA from prospective buyers before releasing sensitive information — including, often, the identity of the business itself.
P
Promissory Note
A legal document containing a promise to repay a debt — used for everything from car loans to business loans. It may or may not be secured by collateral, may or may not bear interest, and can be repaid in installments or as a lump sum.
Purchase Agreement
The binding agreement between buyer and seller that sets the terms of the sale.
Why it matters: How this document fits into the deal timeline differs by size. Larger transactions are often preceded by a Letter of Intent (LOI) — sometimes preceded by an Indication of Interest (IOI) — with due diligence happening after the LOI is signed; that means the gap between a fully executed purchase agreement and closing can be short. Smaller deals skip the IOI/LOI step, so the purchase agreement itself covers the due diligence period, and closing can take weeks to months depending on complexity, the number of advisors involved, and whether third-party financing is part of the deal.
Earnest money deposits are typical on smaller deals; larger deals (financial buyers pursuing businesses with roughly $1M+ adjusted EBITDA) typically skip earnest money and use the IOI/LOI/purchase agreement sequence instead. An asset purchase uses an asset purchase agreement; a stock purchase uses a stock purchase agreement — business brokers typically provide the former, M&A attorneys the latter.
Q
Qualified Small Business Stock (QSBS)
Under IRC Section 1202, a qualified C-corporation shareholder can potentially exclude some or all of their taxable gain from selling QSBS. The exact thresholds now depend heavily on when the stock was acquired, since a 2025 federal tax law (the "One Big Beautiful Bill Act") materially expanded this benefit for newer stock.
Why it matters: This is one of the more significant tax breaks available to founders and early shareholders of qualifying C-corps at exit — but the requirements are specific, the rules just changed, and getting it wrong is costly. Eligibility should be confirmed with a tax professional well before a sale, not at closing.
General framework (confirm current figures before relying on any of this):
- For stock acquired before July 4, 2025: exclusion generally capped at the greater of $10M ($5M if married filing separately) or 10x original investment; generally requires a 5-year hold for any exclusion; corporation's aggregate gross assets generally capped at $50M at issuance.
- For stock acquired after July 4, 2025: exclusion cap generally increased to $15M (indexed for inflation starting 2027); the asset cap generally increased to $75M; and a tiered exclusion became available starting at a 3-year hold (roughly 50%), rising to 75% at 4 years and 100% at 5 years, rather than an all-or-nothing 5-year requirement.
- Other core requirements generally still apply either way: stock issued by a domestic C-corp, received at original issue (not a secondary purchase), and the corporation using at least 80% of its assets in an active trade or business (most professional services, finance, and hospitality businesses don't qualify).
This is a genuinely complicated, recently-changed area of tax law with real money at stake — treat the figures above as a starting point, not tax advice. Confirm current thresholds, your stock's acquisition date, and your specific eligibility with a tax professional before relying on any of this. (Reflects the law as of 2025-2026, following the One Big Beautiful Bill Act; verify current status given this area continues to evolve.)
R
Reps and Warranties
Statements and disclosures one party makes to another in a purchase agreement. They give the other party a basis to cancel the deal or bring an indemnification claim if the statements turn out to be false. Representations address the past and present; warranties cover past, present, and future; covenants are mainly forward-looking promises.
Why it matters: In a business sale, this mostly concerns what the seller asserts about the current and expected state of the business. Some purchase agreements have the buyer explicitly accept that no reps or warranties are being made at all — worth noticing if you see that language. Representation and Warranty Insurance, usually bought by the buyer, can cover losses if the seller's reps and warranties turn out to be wrong, and can reduce or eliminate the need for a seller escrow.
S
Section 1202
See Qualified Small Business Stock (QSBS) — the underlying tax code section.
Settlement Statement
See Closing Statement — the two terms are used interchangeably.
Successor Liability
Even when a buyer structures a deal as an asset purchase (rather than a stock purchase) to try to avoid inheriting the seller's liabilities, they can still be held responsible for certain seller obligations under successor liability rules, which vary by state.
Why it matters: Buyers concerned about this exposure may want to look into successor liability insurance, and should have their attorney assess state-specific risk before closing.