Buying a Small Business
If you are considering buying a business, you must decide whether you will purchase the entity that owns the business (“entity purchase”) or purchase the assets of the business (“asset purchase”).
An entity purchase involves the buyer purchasing the interest of the individuals or entities that own the company that owns the business. In other words, if the business is owned by a corporation, Limited Liability Company or a partnership, you must buy the stock, membership interests or interests of the partnership.
If you pursue an entity purchase, you will replace the prior owner of the entity that owns and operates the business. The business assets continued to be held in the name of the entity. This can be beneficial if you prefer that the public not be aware that there is a new owner. However, the buyer in an entity purchase assumes all of the liabilities of the entity, known or unknown. This means that the buyer assumes all responsibility to perform under the entity’s existing contracts, employee agreements, lease obligations and other claims that may exist against the entity. Before you enter an entity purchase agreement, it is essential that you conduct extensive due diligence so you fully understand the commitments you are undertaking.
When a buyer purchases all or a portion of the assets of a business, the buyer does not acquire any ownership interest in the entity that owns the business. In other words, the owners of the business remain the same. This approach is beneficial if you do not want to acquire the debts and liabilities of the entity that owns the business. In an asset purchase, the buyer is typically only liable for the liabilities of the seller that are specifically outlined and agreed to in the purchase agreement.
If you are considering purchasing the assets of a business, it is essential that you thoroughly negotiate and understand all of the liabilities of the entity that you will assume after the sale closes. It is prudent to expressly state that the buyer is only assuming liability for the liabilities of the entity that are expressly disclosed in the asset purchase agreement and no liability exists for any liabilities that are not specifically listed.
Contact a knowledgeable business attorney at Nielsen Law Group for advice on buying a business or starting a new business, including business formation matters and the tax consequences for either sellers or buyers. You can schedule your initial consultation by calling (480) 888-7111 or submitting a web request here.