BUYING OR SELLING A BUSINESS:
ASSET PURCHASE OR ENTITY PURCHASE
By Attorney Randall J. Andersen
May, 2012
ASSET PURCHASE OR ENTITY PURCHASE
By Attorney Randall J. Andersen
May, 2012
Disclaimer: The information contained on this page is not legal advice. The information provided on this website is for general informational purposes and is not necessarily updated to account for changes in the law. You should consult with an attorney for legal advice regarding your individual circumstances.
When consulting with an attorney regarding the purchase or sale of a business, one of the first questions which will be asked is: What is the form of the purchase? Is it an “entity purchase” or an “asset purchase?”
With an entity purchase, the buyer purchases the business entity itself. If the business is organized as a corporation, the buyer purchases the actual shares of stock owned by the shareholders of the corporation. If the business is structured as a limited liability company, the buyer purchases the membership units. If, on the other hand, the transaction is structured as an asset purchase, the buyer purchases the actual assets of the selling business. In other words, the buyer purchases the equipment, inventory, etc., and takes an assignment from the seller of the contracts for the projects or work in progress. The buyer does not purchase the shares of stock or membership units of the selling corporation. With an asset purchase, the buyer typically assumes only certain liabilities of the seller, and in some cases no liabilities of the seller.
The buyer will usually be quite concerned about assuming the seller’s liabilities, particularly contingent or unknown liabilities. Therefore, buyers often prefer to structure the deal as an asset purchase transaction, with the seller or the seller’s shareholders agreeing to be responsible for the seller’s debts and liabilities.
However, if the buyer has been a longtime employee of the seller, the buyer may be more comfortable with assuming responsibility for the seller’s liabilities, and more willing to structure the transaction as an entity purchase, meaning that the buyer purchases the shares of stock or membership units of the seller.
Structuring the transaction as an entity purchase often means that the seller will pay less income tax on the transaction. Therefore, the seller will often be willing to accept a lower price if the buyer is willing to structure the transaction as an entity purchase.
Structuring the transaction as an entity purchase may have the additional benefit of avoiding the need to seek consent of third parties for the assignment of contracts for work in progress and the assignment of leases to which the seller is a party and which will be assumed by the buyer.
The tax implications are often one of the most important considerations in determining whether to structure the transaction as an asset sale or an entity sale. Therefore, it is critical to consult with a CPA who deals with business sales early on in the negotiation process.
Obviously, there are many other factors to be considered from a legal perspective when purchasing or selling a business. Selecting the form of the transaction (asset purchase vs. entity purchase) is just the beginning.
With an entity purchase, the buyer purchases the business entity itself. If the business is organized as a corporation, the buyer purchases the actual shares of stock owned by the shareholders of the corporation. If the business is structured as a limited liability company, the buyer purchases the membership units. If, on the other hand, the transaction is structured as an asset purchase, the buyer purchases the actual assets of the selling business. In other words, the buyer purchases the equipment, inventory, etc., and takes an assignment from the seller of the contracts for the projects or work in progress. The buyer does not purchase the shares of stock or membership units of the selling corporation. With an asset purchase, the buyer typically assumes only certain liabilities of the seller, and in some cases no liabilities of the seller.
The buyer will usually be quite concerned about assuming the seller’s liabilities, particularly contingent or unknown liabilities. Therefore, buyers often prefer to structure the deal as an asset purchase transaction, with the seller or the seller’s shareholders agreeing to be responsible for the seller’s debts and liabilities.
However, if the buyer has been a longtime employee of the seller, the buyer may be more comfortable with assuming responsibility for the seller’s liabilities, and more willing to structure the transaction as an entity purchase, meaning that the buyer purchases the shares of stock or membership units of the seller.
Structuring the transaction as an entity purchase often means that the seller will pay less income tax on the transaction. Therefore, the seller will often be willing to accept a lower price if the buyer is willing to structure the transaction as an entity purchase.
Structuring the transaction as an entity purchase may have the additional benefit of avoiding the need to seek consent of third parties for the assignment of contracts for work in progress and the assignment of leases to which the seller is a party and which will be assumed by the buyer.
The tax implications are often one of the most important considerations in determining whether to structure the transaction as an asset sale or an entity sale. Therefore, it is critical to consult with a CPA who deals with business sales early on in the negotiation process.
Obviously, there are many other factors to be considered from a legal perspective when purchasing or selling a business. Selecting the form of the transaction (asset purchase vs. entity purchase) is just the beginning.