Asset Purchase Agreements in Tennessee: A Guide for Small-Business Buyers and Sellers

When a small business changes hands, the deal is usually structured either as a sale of the company's assets or as a sale of the owners' shares or membership interests. In an asset sale, the asset purchase agreement is the document that decides what the buyer gets, what the seller keeps, and who pays if a problem surfaces after closing. Tennessee law adds a few rules that both sides need to know before they sign.

Asset sale or equity sale

In an equity sale, the buyer purchases the owners' shares or membership interests, and the company itself stays in place with its contracts, employees, and its history, including liabilities nobody has discovered yet. Even then, some contracts and permits treat a change in ownership or control as a transfer, so they still need review. In an asset sale, the company sells selected assets, such as equipment, inventory, customer lists, and goodwill, and the seller's entity keeps everything that is not transferred. That is a common reason buyers prefer an asset sale: the agreement can list what is purchased and which liabilities, if any, the buyer assumes. The tradeoff is that each asset, contract, lease, and permit has to be transferred on its own terms.

Which seller liabilities can follow the assets

The Tennessee Court of Appeals applies the traditional rule that when one company transfers some or all of its assets to another, the buyer is not liable for the seller's debts, with four exceptions:

• the buyer expressly or impliedly agrees to assume the debts;
• the transaction amounts to a consolidation or merger of the seller and buyer;
• the buyer is merely a continuation of the seller; or
• the transaction is entered into fraudulently to escape liability for the debts.

As Hopewell quoted the rule, some courts also recognize a fifth exception when the sale or transfer lacked adequate consideration.

The Court of Appeals applied this rule in Hopewell Baptist Church v. Southeast Window Mfg. Co. (Tenn. Ct. App. 2001), following an earlier unreported decision, and again in Johnson v. Tanner-Peck, L.L.C. (Tenn. Ct. App. 2011). In Hopewell, the buyer had purchased some of a failing company's assets and assumed only the debts secured by existing liens on them. The court held that the gratuitous efforts of an independent sales contractor to help one of the old company's customers did not amount to an express or implied assumption of the old company's warranty. In First Community Bank, N.A. v. First Tennessee Bank, N.A. (Tenn. Ct. App. 2014), the court allowed a successor liability claim alleging a de facto merger to proceed past a motion to dismiss.

Hopewell and the 1994 decision it followed are unreported Court of Appeals opinions, and I have found few Tennessee appellate decisions explaining how the merger and continuation exceptions apply to particular facts. Because those exceptions turn on the facts, the agreement should state plainly which liabilities the buyer assumes and which stay with the seller, and the parties' conduct after closing should be consistent with it.

Taxes that can follow the business

Tennessee tax statutes create their own successor liability, separate from the case law. The Tennessee Supreme Court has described the purpose of the sales tax successor statute as making the tax debt follow the business and its assets (A. Copeland Enterprises, Inc. v. Commissioner of Revenue, Tenn. 1986).

• Sales tax: a seller who sells out its business or stock of goods must file a final return and pay within 15 days. The buyer must withhold enough of the purchase money to cover the seller's unpaid tax, interest, and penalties until the seller produces a receipt from the Department of Revenue showing they have been paid, or a certificate stating that none are due. A buyer that fails to withhold is personally liable for those amounts (Tenn. Code Ann. § 67-6-513).
• Business tax: the same final-return, withholding, and buyer-liability rules apply (Tenn. Code Ann. § 67-4-721). Liquor-by-the-drink tax has a similar final-return, withholding, and buyer-liability rule (Tenn. Code Ann. § 57-4-303). That section does not itself contain the purchase-money cap or the affidavit procedure described below, although the Department of Revenue says the same steps apply to all three taxes.
• Local personal property tax: a seller of a business with assessable personal property must notify the assessor and trustee and, within 15 days, pay the taxes, interest, and penalties owed and the current year's taxes based on the last assessment. The buyer must withhold until the seller produces a certificate from the assessor and a receipt from the trustee and municipal collector, or the buyer becomes personally liable, together with the seller, for the unpaid personalty taxes (Tenn. Code Ann. § 67-5-513). This statute does not limit the buyer's liability to the purchase money paid.

Under the sales and business tax statutes, the buyer's liability cannot exceed the purchase money paid to the seller in good faith. Purchase money includes cash, purchase money notes, cancellation of the seller's debts to the buyer, and the value of other property given, but not seller debts the buyer takes on when no tax lien has been filed (§§ 67-6-513(b)(2), 67-4-721(c)(2)).

There is also an affidavit procedure. A buyer that, in good faith and without knowledge of any false statement in it, receives from the seller at the time of the purchase a sworn affidavit stating the taxes due, or that none are due, withholds that amount in good faith, and sends a copy of the affidavit by registered or certified mail or by personal service to the Department, is entitled to a release from any liability beyond the amount shown, unless the Department notifies the buyer of the correct amount within 15 days of receiving it (§§ 67-6-513(c), 67-4-721(d)). The Department's own guidance says successor liability is joint and several and can follow a business through more than one sale, and that the buyer should be prepared to show the funds were actually withheld.

Tennessee no longer has a bulk sales law

Tennessee's bulk transfers chapter of the Uniform Commercial Code (former Tenn. Code Ann. §§ 47-6-101 to -111) has been repealed, so the Tennessee Code no longer has a separate bulk transfer procedure for an asset sale. The tax withholding statutes above are what remain, along with the successor liability doctrine, and they are the main reason a buyer holds back part of the price until the seller's tax position is confirmed.

Liens on the assets

A security interest generally continues in collateral after it is sold unless the secured party authorized the sale free of the security interest (Tenn. Code Ann. § 47-9-315(a)(1)). A buyer who pays the seller for equipment or inventory that a lender has a lien on can end up owning collateral the lender can still pursue.

When Tennessee law governs, financing statements for most business assets are filed with the Tennessee Secretary of State; fixture filings and filings for timber to be cut and as-extracted collateral go in the office where a mortgage on the related real estate would be recorded (Tenn. Code Ann. § 47-9-501(a)). The search has to be made in the right state. Perfection of most security interests is governed by the law of the state where the debtor is located (§ 47-9-301(1)). A registered organization, such as a corporation or LLC, is located in the state where it was organized (§ 47-9-307(e)), and an individual, such as a sole proprietor, is located at his or her principal residence (§ 47-9-307(b)(1)). For a seller organized in another state, the search should include that state's filing office. The Secretary of State's online search shows summary information about filings, and the full filing images can be obtained through a UCC-11 information request. The agreement should require the seller to deliver lien releases or lender payoff letters at closing, and the buyer should confirm that every lien on a purchased asset is accounted for.

Contracts, leases, and permits

An asset sale does not move the seller's contracts automatically. Each one has to be assigned, and many contracts and commercial leases say they cannot be assigned without the other party's consent. Before signing, the buyer should identify every contract it needs, such as the premises lease, supplier and customer agreements, and equipment leases, and the agreement should make any required consents a condition of closing. If the lease requires the landlord's consent and the buyer closes without it, the buyer risks a dispute with the landlord over its right to occupy the premises.

Licenses and permits often do not transfer either. A Tennessee beer permit, for example, is valid only for the owner to whom it was issued and cannot be transferred to another owner; for a corporation, a transfer of control of at least 50 percent of the stock is a change in ownership, and a permit expires on a change in ownership and must be returned to the issuing county or city within 15 days (Tenn. Code Ann. § 57-5-103(a)(3), (a)(6)). The buyer should identify every license the business needs and confirm with the issuing agency whether a new one is required.

Employees

In an equity sale, the company remains the employer. In an asset sale, the seller's employees work for the seller, and the agreement should say which employees, if any, the buyer will offer jobs to and who is responsible for wages and benefits earned before closing.

• Final pay: Tennessee's wage payment statute generally requires that an employee who leaves or is discharged be paid in full no later than the next regular payday or 21 days after leaving, whichever is later. For compensation earned on or after July 1, 2026, an employee paid on a piece-work or commission basis must be paid that compensation by the last day of the month after the month the employee leaves (Tenn. Code Ann. § 50-2-103(g), as amended by 2026 Tenn. Pub. Acts ch. 617). For employers with five or more employees, final wages include any vacation pay or other compensatory time owed under company policy or a labor agreement (§ 50-2-103(a)(4), (b)).
• Unemployment insurance: a buyer that acquires all or a distinct part of a business and continues it is eligible to succeed to the seller's unemployment insurance experience, but only if the seller's outstanding liabilities under the unemployment law are paid, the parties file a notarized written agreement during the quarter of the acquisition or the following quarter, and the transfer was not made substantially to obtain a lower premium rate. When there is common ownership, management, or control between the two businesses, the transfer of experience is required (Tenn. Code Ann. § 50-7-403(b)(2)).
• WARN Act: the federal plant-closing law generally applies only to employers with 100 or more employees, not counting part-time employees (or 100 or more employees who together work at least 4,000 hours a week), so it does not reach most small businesses. When it does apply, the seller is responsible for any required notice up to and including the effective date of the sale, and the buyer after it (29 U.S.C. § 2101(b)(1)).

Allocating the purchase price

Federal tax law requires the price in an asset sale of a business to be allocated among the assets under the method the Internal Revenue Code prescribes, and if the buyer and seller agree in writing on the allocation or the value of any asset, that agreement binds both unless the IRS determines it is not appropriate (26 U.S.C. § 1060). The IRS instructions for Form 8594 say both the buyer and the seller generally must file the form with their income tax returns for the year of the sale, and that if the amount allocated to any asset is increased or decreased after the year of the sale, whichever party is affected must complete Parts I and III of a new Form 8594 and attach it to its return for the year the change is taken into account. The allocation affects each side's taxes differently, so it should be negotiated with each side's CPA involved and written into the agreement.

Representations, indemnification, and holdbacks

The representations and warranties are the seller's statements of fact about the business: that it owns the assets free of liens except as disclosed, that its financial statements are accurate, that its taxes are paid, and that there are no undisclosed claims. Indemnification decides who pays if a representation turns out to be wrong, often with a deductible or basket, a cap, and a survival period after which claims can no longer be made. Because a judgment against a seller who has already spent the proceeds may be hard to collect, a buyer may negotiate an escrow or holdback of part of the price for the survival period. Sellers, in turn, negotiate for clear limits so the sale is final within a defined time. How a contractual survival period interacts with the statute of limitations for a particular claim is a drafting question to address directly in the agreement.

The seller's non-compete

A buyer paying for goodwill usually wants the seller to agree not to compete. For proceedings occurring, and agreements entered into, renewed, or amended, on or after July 1, 2026, Tennessee courts presume that a restraint against the owner or seller of all or a material part of a business's assets or equity is reasonable in time if it lasts no longer than the longer of five years or the period during which payments are made to the seller, and presume a longer restraint unreasonable (Tenn. Code Ann. § 50-1-210). A court may modify a covenant to make it reasonable and enforceable. The presumption addresses time only; scope, geography, and the business interest the covenant protects are still judged under the case law.

The two-year presumption for former employees and independent contractors applies only to restraints not associated with the sale or ownership of all or a material part of a business or an equity interest in one, and the $70,000 pay floor in Tenn. Code Ann. § 50-1-211 applies to employees. When a seller also takes a job with the buyer, how those rules interact with a sale-of-business covenant has not yet been addressed by a Tennessee appellate court, so the covenant should be tied clearly to the sale. For more on the 2026 statute, see my article on Tennessee non-compete law.

Every asset sale depends on the assets, the contracts, the seller's tax and lien history, and how the deal is documented. If you are buying or selling a business in Middle Tennessee, my office can review the agreement with you before closing. Tax questions about the allocation and the sale itself should be coordinated with a CPA.

Educational disclaimer: This article provides general Tennessee educational information only and is not legal advice for any specific transaction.