When buying a business, what you buy can be just as important as what you pay. One of your first decisions is whether to purchase the entity that owns the business or selected assets of that business.
In an entity purchase, you buy the ownership interests—such as corporate stock or LLC membership interests. The company continues to own its assets and remains responsible for its obligations.
In an asset purchase, you buy specified assets, such as equipment, inventory, customer relationships, and goodwill, while agreeing to assume specified liabilities.
The difference can affect your cash requirements, operating continuity, taxes, and exposure to problems from the seller’s past.
Preserving what makes the business work
An established business has more than equipment and customers. It has supplier credit, purchasing arrangements, leases, licenses, and contracts that support its operations.
An entity purchase can make preserving those arrangements easier because the company itself remains in place. However, change-of-control provisions and regulatory requirements may still require approvals. An asset purchase may require assignments, new agreements, or requalification. Never assume everything carries over automatically.
For someone buying their first business, that continuity deserves considerable weight. An established company buying a competitor may already have the infrastructure and supplier relationships needed to make an asset purchase practical.
The working capital surprise
Suppose the seller’s suppliers allow 60 days to pay. After an asset purchase, those suppliers might require your new company to pay on delivery until it establishes credit.
Same business. Same inventory. A very different cash requirement.
Before choosing a structure, determine which credit terms will survive and how much additional working capital you might need. A lower purchase price can lose its appeal quickly if operating the business requires substantially more cash.
Liabilities and buyer protection
An entity purchase leaves historical liabilities inside the company you now own—including problems you may not have discovered. An asset purchase generally offers more ability to select the liabilities you assume, but it does not eliminate every potential exposure. Successor-liability rules can still apply.
Thorough due diligence and carefully negotiated protections matter in either structure. Seller indemnities, escrow holdbacks, and properly drafted rights to offset claims against a seller note can provide recourse. Their value depends on the terms and the ability to collect.
Taxes affect the economics
In an asset purchase, the price is allocated among the acquired assets, affecting the buyer’s tax basis and the seller’s tax treatment. Have your tax adviser model the proposed structure before you commit to the price.
The right question is: Which structure gives me a functioning business, manageable risk, and the strongest economics—including the cash required after closing?
That is the comparison worth making before you sign.
