Asset and equity purchase agreements involve the culmination of a buyer and seller coming together and agreeing upon a transaction in which all or parts of a business are sold.
Comprehensive, well-written asset and equity purchase agreements benefit both parties and provide much-needed peace of mind. When you buy or sell assets, which can include land, vehicles, office equipment, and goodwill, you want to ensure that you receive the highest value possible.
The main differences between and asset and equity purchase are that with an asset sale, you’re only selling assets. From the buyer’s side you get to include or exclude specific assets as part of the sale. It also limits the liabilities you may inherit from the previous company. In a stock or equity sale, you’re inheriting all liabilities because they’re part of the same corporate entity.
It’s not only important to know the differences, but also the terms of the agreement. A crucial first step is deciding whether the transaction will be an asset purchase or an equity purchase. From there, organizations can delineate what assets and liabilities are included.
In an asset purchase transaction:
- There is no transfer of business ownership to the buyer. The seller remains in full ownership. In contrast, the company’s ownership is transferred to the buyer in a stock purchase method.
- The transaction tends to be easier to consummate compared to an equity purchase transaction.
- The buyer can choose the liabilities he is willing to bear on his balance sheet.
- Goodwill acquired by the business can be amortized over five years, which can result in significant tax benefits.
In an equity purchase transaction:
- The buyer needs to observe every business liability in its balance sheet.
- The buyer may avoid paying transfer tax, but is obligated to pay taxes in an asset purchase transaction.
- Renegotiation of employee agreements is not required.
- The ownership of the business changes hands.
Parts of Asset and Equity Purchase Agreements
Once asset vs. equity has been decided, establishing the terms of the agreement is the next critical step. The parts and details of the agreement will be the defining piece to the speed, type, timing, and numerous other factors to the agreement, some of which include:
- A Detailed Description – For starters, you must have a detailed description of what is being sold and the price of the acquisition. A strong purchase agreement clearly identifies the buyers and the sellers and defines the terms under which the assets or equity are transferred, and establishes the rights and responsibilities of both parties.
- Financing Conditions – Will terms of the agreement be financed through a personal note so the buyer can purchase it over time? Or will the buyer seek outside financing and consider how interest rates can factor into that decision? Or will it be a lump-sum purchase?
- Purchase Agreement and Tax Allocation Agreement – The purchase agreement memorializes what assets are being sold, who the new owner will be, and how the purchase price will be allocated among the assets for tax purposes. From a tax perspective, sellers normally prefer equity sales because they get a better tax rate for the sale of a capital asset. Assets such as inventory are taxed at ordinary income rates. Buyers typically like asset sales because the liabilities of the seller’s company don’t transfer over, and they can get a more tax advantageous position with depreciating assets.
- Representations and Warranties – These refer to the assertations or assurances the two parties give—what they’re claiming to be true and accurate. There must be an agreement for the contractual obligations of a purchase and the transfer of either assets or equity to be valid and enforceable. Warranties often consider such factors as operational risk, financial risk, and regulatory risk.
The Value Specialized Counsel Provides
Every asset or equity purchase agreement requires an effective contract to dictate the business relationship. The buyer needs to be fully aware of what they’re getting themselves into and having full knowledge of where their liability is. Thus, every contract must have a clear plan to protect both the buyer and seller.
As an example, when transitioning out of your business and selling your book to a new advisor, the buyer must be guaranteed they’re getting the full value of the book. An industry standard is for the purchase agreement to include a lookback provision that allows for an adjustment of the purchase price after the first year if certain revenue metrics are not met.
Having experienced legal counsel in such situations is paramount, as experienced counsel may be able to forecast issues or implications within the agreement. A sales agreement should include covenants, closing conditions, and termination rights and serve as a reliable blueprint of how every part of a specific transaction will be handled.
The team at Jacko Law Group offers businesses the peace of mind of knowing they have a trusted legal partner that is invested in their success. We help firms maintain their operations, ranging from corporate governance, contract review, intellectual property, and more. For more information, contact us at 619.298.2880 or visit us online to schedule a consultation.