Face Challenges Confidently

Understanding How To Purchase A Company

Friday, October 6th, 2017

Whether this is your first or fifth business acquisition, this type of transaction can be an emotional and exhilarating experience. For many people, purchasing a business is the culmination of a lifelong dream. For others, it is a strategic acquisition that will make a current business more competitive for the future. Regardless of whether you’re a first-time buyer or a veteran buyer, making the big move requires understanding the process. How you purchase a company depends as much on your liquid assets and access to financing as it does on the structure of the acquisition itself.

Asset Sale vs. Equity Sale

If you are buying a corporation, limited liability company, partnership, or other business with multiple owners, you will need to determine the sale method. The two most common methods are through an asset sale or an equity sale.

An asset sale occurs when the business you are buying sells you all, most, or a substantial portion of the held assets. The company is the nominal seller, and you acquire the “stuff” from the company, not individual ownership. For instance, you could purchase all of the equipment, inventory, real estate, and intellectual property, while the original business owner retains their equity in the company.

In an equity sale, you acquire the ownership equity in the company. The “equity” is represented by stock, as in a corporation, member units like in a limited liability company, or partnership interests in a partnership. The basic result is the same in that you are acquiring ownership in the enterprise. In an equity sale, you acquire the equity directly from the owner, not the company. The company remains intact and continues to operate normally.

Risks of equity acquisitions

You may wonder why someone would choose an asset sale when the equity sale seems simpler. While acquiring individual assets is a more complicated purchase, it also involves less risk. When you buy a business through an equity sale, you are stepping into the shoes of the original owner. That means you are responsible for all debts and liabilities, both known and unknown. For instance, you would be responsible for all personal injury suits, environmental conditions, employment violations, and breaches of contract.

To mitigate the risks of buying a business through an equity sale, you should conduct an extensive due diligence analysis. Carefully examine the company’s books and financial statements, and ensure that the company is audited by a third party before you purchase. You can also ask for an indemnification clause, which requires the seller to insure you for obligations and liabilities that are unknown.

Complications involved in an asset sale

While you acquire the risk in an equity sale, in an asset sale, you need to form an entirely new business entity. This means you need to create the entity either before or soon after the deal. The primary concern in asset sales is the value and basis allocated to the acquired assets and the associated tax implications. The basis is the initial amount for which you buy the asset. If you sell the asset for more than its basis, you have gain, although you can also lose money if you sell the business assets for less.

The sum of the property you acquire is your tax basis in the new entity. This is a crucial calculation because it is the starting point from which the basis in your new company rises and falls. Determining equity basis is complicated, but the calculation is essentially the cost or transfer value of all the assets in the net liabilities of your business. Your basis then rises and falls each year based on depreciation, distributions, and other factors.

Getting help from professional business and finance attorneys

As you can see, acquiring a company is complicated. You need a purchase agreement to delineate the terms of the sale and assign liability, if necessary. A law firm can assist you in conducting a due diligence analysis, evaluating the pros and cons of any deal structure, and understanding the tax implications.

If your company is in need of a professional team of lawyers, contact Brown & Fortunato in Amarillo, Texas today. Our Corporate Finance team can help you with the purchase of your next business. Give us a call at (806) 345-6300 or Contact Us via email for more information about our Practice Areas. We welcome you to visit our office at 905 S. Fillmore St., Suite 400, in Amarillo, Texas.