The closing of a business sale is often a time for celebration and recognition of achievements. Whether you are the seller enjoying the lucrative acquisition of your company, or the buyer getting a great deal, corporate mergers and acquisitions are often the prize for hard work and years of commitment.
In the midst of excitement about a pending sale, it can be easy to lose sight of a very important question: whether the sale is for equity or assets. Indeed, many small business owners and purchasers frequently confuse the two. When this detail is overlooked, it can create serious liability issues down the road.
Helping Rancho Cucamonga Business Owners Understand Equity and Assets
Business sales fall into two different categories:
The vast majority of business acquisitions in the United States arise from the purchase of assets, rather than equity. In an asset sale, the purchaser is obtaining the goods of the company, such as the products or equipment but doesn’t purchase the actual corporate structure.
Assets sales are favorable for buyers because they allow the buyer to obtain the best parts of the company while minimizing liability for the company’s past actions or defects. Instead, the liabilities remain with the original corporate structure. For obvious reasons, this is a downside for sellers to agree to an asset purchase.
Equity or stock sales, by contrast, involve the purchase of the entire company, including name, corporate structure and potential liabilities. Equity sales generally only arise when the company being purchased is a C or S corporation, although LLPs and LLCs may sometimes be sold in equity sales.
Because the purchaser in an equity sale takes over the ownership and interest in the corporation, he or she immediately assumes an interest in both the assets and liabilities of the company.
Many purchasers will attempt to minimize the risks of an asset sale through comprehensive background checks into any exposure the business might have. They may also require the seller to provide representations and warranties about their product – sometimes even guaranteeing to defend lawsuits against the buyer if they arise after the sale is completed.
Watch Out For the Tax Man
One very important consideration when evaluating asset and equity purchases is the tax implications of either route. In an asset sale, the profits that the seller receives from the purchase of assets are typically taxed as capital gains or personal income, depending on the specific asset sold. This can significantly increase the seller’s tax bill depending on the size of the company.
In an equity sale, the seller will be expected to pay taxes on the capital gains of the increase in equity in the company when the company is sold. The capital gains tax rate for this kind of a sale is much lower than the rate applied to piecemeal asset sales, which means that this is generally a better deal for sellers.
Overall, these considerations must be balanced against the purchaser’s interest in the business and the seller’s motivation to sell. While buyers generally prefer asset sales to limit liability, sellers may be able to push an equity sale where the company seems likely to grow in value, or the liabilities are minimal.
California Transactional Attorneys Guiding You Through A Business Purchase
There are many factors to consider when deciding whether to purchase a business, or making the move toward selling your own. The care that you take in structuring a business acquisition can have consequences that impact you for many years down the road.
At CKB Vienna LLP, our corporate and transactional attorneys can walk you through the pros and cons of equity and asset sales, and help you evaluate which approach best meets your needs. . For more information, contact us online or at 909-980-1040.