What’s the difference between an asset purchase and an entity purchase?
Typically, when buying a business you are either buying the business entity or buying the business’ assets. If purchasing a business entity, you are purchasing all the corporation’s shares or if a limited liability company, its membership interest. In contrast, if purchasing the business’ assets, you are buying all the assets, contracts, debts, and anything else registered under the business’ name. Basically, the seller will remain the legal owner of the entity, while the buyer purchases individual assets of the company. When you purchase the assets, you are buying things like equipment, property, and goodwill; but you will need to form your own entity and enter into your own contracts, leases, and loans. With an asset purchase, it is extremely important to renegotiate all contracts. This includes contracts with vendors, supplies, employees, leases, etc. Also, assets may need to be retitled.
What are the advantages of an asset purchase?
The vast majority of individuals who are buying their first small business purchase the business’ assets. An asset purchase is attractive because it limits the buyer’s liability. When you purchase assets, you don’t need to worry about inheriting debts, liens and lawsuits against the business entity because the business isn’t what you’re buying. The buyer can also dictate which assets it is not going to purchase.
What are the advantages associated with buying a business entity?
Although many buyers worry about the possible liabilities associated with buying a business entity, in some situations, it might be beneficial to do so. For example, a company’s value may be tied to its copyrights or patents, or if it has work contracts with third-party businesses, it may be easier to purchase the entity than to try to renegotiate the contracts or assign the patents and copyrights.
Also, if the business you are buying is owed money, it may be more difficult to collect on those outstanding invoices if you start a new business entity. Collecting those debts may be more hassle than they’re worth, but if not, this money could help sweeten the idea of purchasing the entity.
Another advantage is that you may be able to get a better purchase price. Sellers usually prefer entity sales. Along with the possible shift of liability to the buyer, the proceeds of the entity sale will be taxed at a lower capital gains rate. This will likely have more leverage when it comes to the selling price. If you can negotiate a price that makes any added liability worth it, buying the entity may be the right thing.
It is important to work with an attorney from the beginning of the purchasing process so that liability is limited and the best possible terms are negotiated. To read more about Why You Should Hire an Attorney for a Business Sale, please check out our blog post: https://www.wheeler-legal.com/single-post/why-you-should-hire-an-attorney-when-selling-your-business
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Disclaimer: The information contained above is provided for general informational purposes only, and does not constitute legal advice, nor is it intended to create an attorney-client relationship. This firm aims to provide quality information, but we make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained in or linked to this post. Nothing provided herein should be used as a substitute for the advice of competent counsel.