Buying Assets or Equity

Either way, you could be required to assume the seller’s liabilities Question: I’m considering buying a competing equipment dealership. I’m being told that I should buy the assets rather than the equity of the target business because, if I do that, my company won’t assume any of the seller’s liabilities. Is that true? Answer: For most business buyers, purchasing the assets rather than the equity of a target is a good place to start, but doing so does not necessarily protect the buyer from all liabilities of the seller in most states. The basics. When buying a business, you will generally have the option to purchase either the equity or the assets of the selling or target business. From the perspective of most buyers of privately held, non-publicly traded businesses, asset purchases tend to be more favorable than equity purchases with respect to both tax effects and liability exposure. To answer your question directly, I’m going to focus on just the liability issues for the purposes of this discussion. • Equity purchases. If you purchase equity, you’re buying the ownership interests in the legal entity that operates the business — for example, all the shares of the issued and outstanding stock of a corporation. Consequently, all the liabilities associated with the seller’s business that are not paid off as of closing will continue to exist and bind the purchased business entity after closing because that entity will continue to exist; it will just be owned by you or your company, perhaps as a subsidiary, rather than by the former owners. • Asset purchases. By contrast, if you purchase only the assets and do not expressly assume the liabilities of the target business, then in theory, only those assets would transfer to you or your company. Consequently, a buyer — typically, a corporation or limited liability company (LLC) — should be able to avoid responsibility for the selling entity’s liabilities because those liabilities remain with the seller and perhaps based on the assumption that the cash you use to pay for the assets would then be used by the selling entity to pay off its liabilities. In any event, most people would assume that, in an asset sale, the retained liabilities of the target entity would remain the seller’s responsibility and would not become liabilities of the buyer merely because the buyer bought some or even all of the selling entity’s assets. Successor liability. For asset purchasers, over the past two decades, courts have whittled away at the notion that business purchasers can avoid liability for the obligations of their target sellers merely by purchasing their assets rather than their equity. Utilizing a wide and expanding variety of facts and circumstances, courts around the country now have established successor liability as a legal theory that, in an increasing number of cases, enables the seller’s creditors to hold a purchaser of all or substantially all the seller’s assets liable for the seller’s debts. READ FULL ARTICLE>>