When you’re doing a merger or acquisition, should you acquire equity or assets? And what’s the difference exactly?
In today’s snackable episode, host Roland Frasier breaks down the key differences between acquiring assets and acquiring equity, as well as the advantages and disadvantages to both. If you’ve ever been confused about how you should buy a company, you’re not alone.
Listen in as Roland quickly and succinctly shares everything you need to know about equity vs. assets.
You Have Options
Many people don’t realize they have options when they’re looking to acquire a business. They think it’s like the stock market, where you buy shares of ownership—equity—in companies. But when you’re talking about buying private companies—or doing mergers and acquisitions—you can acquire assets instead.
When you’re buying assets, you’re buying the physical components (equipment, computers, office chairs) and intangible components (URLs, logos, digital assets, software code, copyrights/patents) that allow the company to be in business. You could buy the whole company that owns all these things or just buy these things directly.
With Equity Comes Liability
Let’s say you’re going to acquire a controlling interest in a company (51% or more of the voting stock). You may want to think about avoiding potential liability. The equity carries with it whatever liabilities already exist in the company. You get all the assets the company owns, but if there are claims against the company, or debt, that will come with ownership of the equity. Even if the claim/debt is contingent.
Maybe there’s a lawsuit against the company that hasn’t been resolved. Maybe there’s a worker’s comp claim. Or a copyright infringement. Or a sexual harassment case. Or a disability claim. All of these things could be out there lurking. And we just don’t know about them.
How can you acquire a company and feel safe that you’re not also acquiring all these liabilities? Lawyers and business people have come up with a way: purchasing the assets instead of the equity. Equity represents ownership evidence in a company and all of its underlying assets. Assets are just the physical/intangible things the company owns. When you acquire equity, all the claims come with it. That’s kind of a downside.
Other Things to Consider
There are also some tax consequences to think about. When you’re acquiring assets, you’re generally allowed to depreciate those assets, for tax purposes, over time. With equity, you’re not allowed to do that.
If you’re a seller, selling the assets might create two tax events for you, or it might prevent you from receiving certain beneficial tax treatment that you would have gotten from the sale of stock. Roland recommends hiring a business attorney to handle all of this. At the very least, someone who is a tax professional. Have them look over the deal for you.
What types of assets should you buy? Just buy the ones you need. A good strategy for reducing the purchase price of the company you’re acquiring is to ask: are there assets owned by the company that we don’t need? This is called a carve-out. When you want to acquire a company, but you don’t need/want all their assets, carve out what you don’t want. It will save you money.
Those are the primary advantages/disadvantages of assets vs. equity. Most of the merger/acquisition deals you’ll do will be asset deals, not equity deals.