BUYING SHARES IN A BUSINESS: WHAT EVERY INVESTOR AND OWNER NEEDS TO KNOW

You’re looking at an opportunity. Maybe it’s a stake in a Dallas real estate partnership or a growing oil and gas operation. The numbers look good, the timing feels right, and you’re ready to write a check. But most don’t realize that buying shares in a business isn’t the same as buying property or opening a brokerage account. You’re stepping into tax obligations, legal complications, and financial risks that can turn a smart investment into an expensive mistake if you don’t know what you’re doing.

This guide walks you through everything you need to know about buying shares in a business. We’ll cover how share purchases work, what the tax bill looks like, how to value what you’re buying, and where the risks hide. By the end, you’ll have a clear action plan for investing in private equity and investment partnerships, agriculture, or any other industry.

Understanding What You’re Actually Buying

When you’re purchasing shares in a company, you’re buying ownership in the legal entity itself. That’s different from buying the company’s assets, and the distinction matters.

Here’s the key difference:

• Share purchase: You own a percentage of the whole business, including profits, voting rights, and all liabilities. Outstanding debts, pending lawsuits, and tax obligations come with your shares.
• Asset purchase: You pick what you want (equipment, customer lists, intellectual property) and leave debts behind.

The IRS treats these transactions completely differently. With shares, your cost basis carries over from the previous owner. That affects your future tax bill when you sell.

Most private company transactions involve S-Corps or LLCs. These structures are common in oil and gas, farming, and real estate partnerships here in Texas. Public shares trade on exchanges with transparent pricing, but private shares require direct negotiations.

Who should consider owning shares in a company? If you’re a high-net-worth individual looking for passive income, growth potential, or strategic control, this works well. We see clients in agriculture buy shares to gain steady returns from land operations without managing daily farming activities. Real estate investors use share purchases to access partnerships without full property management.

The key is understanding what you’re getting into before you commit.

The Step-by-Step Process for Purchasing Shares

Buying shares in a business follows a specific sequence.

Step 1: Identify Opportunities

Start in your network. Many private share sales happen through industry connections, specialized brokers, or professional advisors. In Dallas, oil and gas deals often come through energy-focused intermediaries.

Step 2: Initial Valuation and Letter of Intent

Get a rough valuation first. You don’t need a full appraisal yet, but understand if the asking price makes sense. Many buyers use simple earnings multiples like 4-6x EBITDA.

Sign a non-binding letter of intent (LOI) that outlines:

• Proposed purchase price
• Timeline for due diligence
• Major conditions
• Confidentiality terms

Step 3: Due Diligence

This is where most of the work happens. You need to verify everything the seller told you:

• Review three to five years of financial statements
• Check tax returns match the books
• Examine customer contracts and supplier agreements
• Verify licenses and permits are current
• Look for pending legal issues
• Confirm shareholder agreement terms

We often help clients review accounting systems during this phase. If the company uses QBO or similar platforms, we can spot red flags in expense categorization or revenue recognition. I’ve seen cases where stated profits were overstated by 30% because of accounting errors.

Step 4: Final Valuation

Get a professional business valuation. This protects you in two ways. First, it confirms you’re paying a fair price. Second, it establishes your cost basis for future tax purposes.

Step 5: Negotiate and Structure the Deal

Work out the final terms:

• Purchase price
• Payment structure (lump sum or installment)
• Representations and warranties from seller
• Ongoing obligations

Step 6: Close the Transaction

Wire funds, sign documents, update corporate records, and get your stock certificates. Make sure you receive copies of the operating agreement, shareholder agreement, and governing documents.

The whole process typically takes three to six months. Budget 1-5% of the purchase price for professional fees. 

Tax Implications You Need to Know

Taxes can make or break your returns when buying and selling shares in a business.

Your Tax Position as a Buyer

When you buy shares, you establish a cost basis equal to what you paid. With private companies, this often equals the seller’s adjusted basis carried forward. That’s important because it determines your future capital gain or loss.

Unlike an asset purchase, you don’t get to step up the basis of the company’s underlying assets. You can’t claim big depreciation deductions right after buying.

One major exception: Qualified Small Business Stock under Section 1202 lets you exclude up to 100% of your capital gains if you hold shares for at least five years. This only applies to C-Corp stock in companies with under $50 million in assets. The exclusion can save hundreds of thousands in taxes.

Tax Implications for Sellers

Sellers prefer share sales because they pay long-term capital gains rates on profit. For 2026, those rates range from 0% to 20% depending on income, plus a potential 3.8% net investment income tax. That beats ordinary income rates that hit 37%.

Installment sales spread the seller’s tax bill over multiple years. You might pay 30% upfront and the rest over three years. The seller only pays tax as they receive payments.

Ongoing Tax Considerations

Once you’re owning shares in a company, your tax situation changes:

• Pass-through entities issue K-1 forms each year showing your share of income, deductions, and credits
• You pay tax on allocated income even if the company doesn’t distribute cash
• S-Corp shareholders face basis limitations on losses
• You can only deduct losses up to your stock basis plus any loans to the company

Industry-Specific Tax Angles

Different industries carry different considerations:

• Oil and gas: Depletion allowances and intangible drilling cost deductions flow through to shareholders
• Real estate: Depreciation deductions from rental properties reduce taxable income
• Farming: Special depreciation rules for equipment and livestock
• Private equity and Investment Partnerships: Qualified business income deductions and carried interest treatment

How to Value Shares Before You Buy

You can’t make a smart decision without knowing what shares are worth. Overpay by 20%, and you start in a hole.

Valuation Methods

Professional valuators use several approaches:

• Discounted Cash Flow (DCF): Projects future cash flows and discounts to present value. Works well for predictable revenue businesses.
• Market Comparables: Look at what similar businesses sold for recently. If real estate partnerships in Dallas traded at 5x EBITDA, that’s your benchmark.
• Asset-Based: Add up what the company owns, subtract what it owes. Better for asset-heavy businesses like farming operations.

Most professional valuations combine all three methods.

Adjustments You Should Know About

These factors change the final number:

• Minority discounts: 20-40% reduction if you’re buying less than a controlling stake
• Lack of marketability: Another 20-30% discount because private shares are hard to sell quickly
• Control premiums: 20-30% increase if you’re buying enough to control company decisions

Red Flags in Valuations

Watch for these warning signs:

• Revenue growth that doesn’t match industry trends
• Major customers representing more than 25% of sales
• Deferred maintenance on equipment or facilities
• Key employees without contracts
• Inconsistent accounting between tax returns and financial statements

Get your own independent valuation even if the seller provides one. The few thousand you spend upfront prevents six-figure mistakes.

Risks and Protection Strategies

Every investment carries risk, but purchasing shares in a company exposes you to specific dangers.

Hidden Liabilities

You inherit all company obligations:

• Outstanding loans and credit lines
• Pending or potential lawsuits
• Unpaid taxes or payroll obligations
• Environmental cleanup requirements
• Product warranty claims

Strong due diligence helps, but you can’t catch everything. Purchase agreements include representations and warranties where the seller promises certain facts are true. Holdback provisions or escrow accounts protect you by keeping 10-20% of the purchase price in reserve for 12-18 months.

Key Person Dependence

If the business relies on one person’s relationships or expertise, what happens when they leave? Ask for employment agreements or consulting contracts with key people. Non-compete clauses prevent them from starting a competing business.

Illiquidity

Private company shares are hard to sell quickly. Look for buy-sell agreements that give you options. Put rights let you force the company to buy your shares under certain conditions. Drag-along rights let majority owners force a sale of the whole company.

Shareholder Disputes

Disagreements with co-owners can paralyze a business. A detailed shareholder agreement should cover:

• Voting rights and major decision thresholds
• Distribution policies
• Transfer restrictions on shares
• Dispute resolution procedures
• Buy-out provisions if relationships break down

Limit any single share investment to 10-20% of your total portfolio. Get appropriate insurance like directors and officers liability coverage.

How Due Diligence Protects Your Investment

Imagine a real estate investor considering a 30% stake in a Dallas oil and gas company for $1.2 million. The seller presents annual net income of $800,000, which appears to justify a valuation around 5x earnings for a minority position.

When a CPA reviews the accounting records, they might uncover issues like:

• Depletion allowances calculated incorrectly, potentially overstating income by $90,000 annually
• Deferred equipment maintenance requiring $150,000 in work within 18 months
• Production rates below industry averages, suggesting faster-than-expected decline

A petroleum engineer brought in to assess reserves might determine the corrected valuation should be closer to $950,000 for the 30% stake, not $1.2 million.

With this information, the buyer could renegotiate to $980,000 with a holdback provision keeping $100,000 in escrow for 12 months to cover any undisclosed liabilities.

Smart structuring matters too. Purchasing through an LLC rather than personally provides liability protection and creates estate planning flexibility down the road.

If the company happens to be a C-Corp with under $50 million in assets, the shares might qualify as Qualified Small Business Stock under Section 1202. Hold for five years, and you could potentially exclude all gains from federal tax when you sell.

In this scenario, professional fees might run around $18,000. But the combination of a corrected purchase price and tax optimization could create savings exceeding $200,000. That’s why buying shares in a business requires experienced advisors who know what to look for.

Your Next Steps

Buying shares in a business can build wealth and create passive income. But only if you do it right.

Start by clarifying your goals:

• Are you looking for cash flow, appreciation, or tax benefits?
• Do you want active control or passive ownership?
• What’s your exit timeline?

Get your financing lined up before making offers. Assemble your team early with an attorney specializing in business transactions and a CPA who understands tax implications.

When you find an opportunity, move through due diligence methodically. Check financials, legal compliance, contracts, and competitive positioning.

Model returns under realistic scenarios, not best-case projections. What happens if revenue drops 20%? If your key customer leaves? Make sure you can handle the downside.

At Patten & Company, we guide clients through this process regularly. We’re not just about closing deals. We care about making sure each transaction fits your long-term financial strategy.

If you’re seriously considering buying shares in a business, it’s worth having a professional review the structure before you move forward. Contact us for a free consultation. We’ll review your opportunity, identify key issues, and outline how we can help.

Download our free resource with 10 high-income tax planning tips. It includes strategies we use every day with investors like you.

Buying shares in a business is a big decision. Make sure you have the right information and the right team before you commit your capital.

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