What is an Equity Sale?
Equity Sale means selling the common shares of that company instead of the assets. In a typical equity sale, the company retains the same value but the ownership structure shifts between the buyer and the seller.
It’s slightly different from an asset sale, wherein the buyer obtains the assets including the liabilities (both undisclosed and disclosed) in a single unit. Therefore, equity sales will result in less commotion among the employees, consumers, and stakeholders of that company as the operation continues to be the same prior to the transaction was conceived.
Equity Sale: An Overview
Because of the simplicity after the successful transition from equity sale, buyers are more interested in this type of sale. The company too retains the same position without any hurdles from the setup requirements of a closing date.
However, before the deal is closed the buyer should perform an additional assessment to foresee if there is anything that needs to be disclosed by the company, such as warranty obligations, pending litigation, and tax reassessment. This assessment is quite important because it will save the buyer from any contingencies in the future.
Whenever there is equity sale, the buyer will not get the benefits of writing the assets as per the market values of taxations. That means, the buyer will be losing future income from essential tax write-offs. Given the scenario, sometimes the buyers are attracted to an asset sale instead of the company’s equity sale.
The buyers will be less concerned about the undisclosed liabilities and achieve tax treatment in a better way. Similarly, the seller will be better off after conducting the sale from the taxation point of view. However, an intelligent seller must insist on a buyer for issuing an offer that would serve both for an asset or equity sale, and choose from the one that will deliver more after-tax benefits.
Understanding The Differences Between Equity And Asset Sale When A Business Is Being Sold:
When it comes to selling a business, the owner will find it very difficult to determine which type of sale might prove healthy. There will be documents for drafting, signing, filing, and more people will be involved in communicating or contacting for different reasons.
Therefore, the owner should choose depending on the availability, market liquidity, and current prices for these two types of sales. The seller will get an insight into whether there are equities to be sold or assets. Assets will include the land, property, contracts, and so on. Whereas, equity will include stocks, shares, or interests.
If the buyer is interested more in purchasing the equity rather than the assets, the dealing can be accomplished entirely by paperwork. On the other hand, if the buyer finds the building, or land commercially important in the sense that it will be utilized in the new business, the buyer will go for the assets.
The assets will include only the furniture and products if the owner’s property was taken on a lease. It is pretty common that some companies have the tendency to buy out the other only for the sake of the name, or intellectual rights, and the assets don’t count much.
Making The Decision:
Most of the privately held acquisitions of companies take place through an asset sale. The buyer opting for an asset sale usually selects the good property that will add value to the other businesses.
The buyer also gets the benefit from liabilities or debts when the owner sells the asset. That’s a crucial factor behind an asset sale. Moreover, they will be benefited from tax deductions as well. The other choice will be equity, where the sale involves stocks, shares, and interests.
Such type of deal is accomplished whenever the buyer is interested in the name of the company. The buyer will have full ownership including liabilities and assets. The previous owner will be debt-free and have no ties with the company.
Legal Things To Consider:
Before closing the sale, it’s recommended to have professional tax advisors that will represent both the seller and the buyer. Tax experts should be appointed for validating matters relating to taxes, and lawyer for signing documents to ensure that everything is legal without violating any laws.
Both asset and equity sale have different challenges and raises legal tax consequences. A buyer or a seller needs a competent professional for developing a sale structure that will be mutually beneficial for both.