Buying a Business: Entity Purchase vs Asset Purchase
Buying a business is an awesome opportunity to become your own boss. However, getting there can be challenging. One of the most important decisions you make when purchasing a business is deciding how you want to structure the purchase. A business can be set up in a variety of ways. As such, you can buy a business that is either a corporation, LLC, partnership, or sole proprietorship. For this article, we will focus on purchasing a corporation or LLC. There are two main ways to structure a business purchase. The first way is to buy the corporation or LLC as an entity. The second way is to buy the entity’s assets while the seller holds onto the entity. It is very important to understand the difference between an entity purchase and an asset purchase. It will significantly affect you as a business buyer.
Peak Business Valuation, business appraiser, values all types of businesses. Valuations are especially important for a business buyer. It can help them understand the state of the business. A business valuation also provides a fair market value. This value is a great starting point for negotiating a purchase price. For more information on a business valuation for a business you are buying or selling, schedule a free consultation below.
Entity Purchase
First, we will explain how an entity purchase works. An entity purchase is also known as a stock purchase. If a buyer purchases a corporation as an entity purchase, the shareholders sell all their stock. The buyer then becomes the sole owner and assumes control over all assets and liabilities. The corporation will still have responsibility for the debts and liabilities of the business. If you buy an LLC, members of the company will sell their interests. This makes you the owner of the LLC itself which includes all assets. The LLC will also still have responsibility for the debts and liabilities. For more in-depth information, see Structuring a Stock Purchase. In essence, the business and all its assets and liabilities transfer to the new owner.
Asset Purchase
Next, we will explain how an asset purchase works. If a buyer chooses to purchase the assets of an LLC, shareholders will sell the buyer the assets but not the corporation itself. To explain this simply; the shareholders will continue to own the corporation itself. The corporation will no longer have any assets in its name. When buying the assets of an LLC, you do not necessarily take on the debts/liabilities of the LLC. However, you could agree to assume some of the liabilities. This is the same whether it is an LLC or a corporation.
The last thing to know is a buyer could also purchase the intangible assets of a company. Some examples include a trademark or the company’s goodwill. In an asset purchase, the buyer will set up a new entity and transfer the assets to the new entity. For more detailed information, see Structuring an Asset Purchase.
What is Best for You?
Most buyers prefer to buy a company as an asset purchase. This is because the buyer can pick and choose what if any liabilities they will assume. Unfortunately, sellers usually prefer an entity sale. There are several reasons for this. Sellers prefer an entity sale is because of the way they write off the purchase price in their tax returns. In short, the seller gets taxed more in an asset sale. Oftentimes, the seller and buyer will come to an agreement on the purchase price or terms of the sale.
One reason a buyer prefers an asset sale is because it allows them to choose which assets and liabilities they will acquire. Buyers and sellers often disagree on the debt and liabilities. As previously mentioned, in an entity sale, the seller is released from all debts and liabilities. This is very attractive to sellers. However, asset sales allow the buyer more control over the terms of the sale.
Determining a solution that benefits the buyer and seller can be very difficult. Most often, the sale price is reevaluated to reflect compromises in the sale. For more information, see Structuring a Business Transaction. We are also happy to answer any questions you have. Schedule a consultation with Peak Business Valuation, business appraiser today.
Summary
Determining what suits you as a buyer is most important. The best thing to do is start at the basics. Increase your understanding of the differences between an asset purchase and an entity purchase. Lastly, be willing to negotiate to help the seller feel comfortable in the transaction.
Peak Business Valuation, business appraiser, provides valuations for all variations of companies. Whether you are looking to buy a corporation, LLC, partnership, or sole proprietorship, we are happy to help. Schedule a free consultation below to get started. We look forward to working with you!
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