How to Buy at a Business Asset Sale or Entity Sale

Deciding between an asset sale or an entity sale is an important decision when selling or buying a business.

When businesses are purchased or sold, there are two main types of transactions that take place: asset sales and entity sales. Asset sales are agreements for a party to buy the assets of the company, not the legal entity controlling the assets. Entity sales, often called stock sales or equity sales, are agreements for one party to buy the ownership rights of the legal entity that controls the business. Along with the legal entity comes everything the entity owns--the business's assets. While the result is the same--a business changes ownership--the tax and legal implications of the two approaches are quite different.

Instructions

Main Points

1. Decide if you are willing to take on the seller's liabilities. In a asset sale, the buyer only acquires the company's assets and none of the company's liabilities. When the entire company is purchased via an entity sale, the liabilities of the company transfer to the new owner along with the assets. If you do plan to agree to an entity sale, be sure to do extensive due diligence on the companies liabilities to creditors, government agencies, employees, and suppliers.

2. Ask the seller what type of transaction he seeks. Most sellers will look for entity sales it provides the seller with better tax benefits. Occasionally though, sellers may request an asset sale if one of the minority shareholders of the entity won't consent to the sale. The majority shareholders can authorize an asset sale without the minority shareholder's permission. Some governments also impose transfer taxes on assets sales; entity sales avoid these taxes.

3. Talk with your attorney and accountant. Before making a final negotiation with the sellers, be sure to get counsel from your attorney and accountant. The tax and legal implications of both types of transactions are vast. Dollars spent on professional advice when buying a business are almost always well-spent as proper planning will help ensure the success and financial health of the business.

Tips & Warnings

• Ultimately, the decision to structure a business transaction as an entity or asset sale is a negotiable point between the two parties. Sellers always want entity sales; buyers always want asset sales. Asset sales are more common in "main street" transactions where the purchase price is under $1 million. Whereas, entity sales become commonplace in "middle market" where the purchase price is above $5 million in sales. Often the type of sale--entity versus asset--can affect other terms of the sale, such as purchase price and financing.

References

• Dun and Bradstreet: "Selling Your Business: Entity Sale vs. Asset Sale"
• Find Law: "Asset Purchase vs. Stock Purchase: Advantages and Disadvantages"