If you’re considering purchasing an existing business, make sure you understand the difference between a business purchase and an asset purchase.
Let’s start with the easier of the two, the Asset Purchase. Here, you’re purchasing the assets of the business only – its inventory, customer lists, vendor lists, software, hardware, vehicles, intellectual property and trade secrets, and other valuable assets that keep the company running. Alternative, in additional to all of the above, a Business Purchase generally requires purchasing the business entity itself. This may sound like a minor distinction, but it’s actually very important to understand the difference.
Assume a Bucks County Business Owner A owns Pizza Shop, LLC. Pizza Shop, LLC has assets including ovens, pizza boxes, recipes, customer lists and vendors. If you enter into an Asset Purchase agreement with Business Owner A, you would only purchase the assets of Pizza Shop, LLC – ovens, pizza boxes, recipes, customer lists and vendors. This would not include the purchase of the entity Pizza Shop, LLC. However, if you enter into a Business Purchase agreement, you would purchase the assets of Pizza Shop, LLC plus the entity itself.
Why the distinction? By purchasing the entity Pizza Shop, LLC, you are also purchasing its history. On the one hand, you could be on the hook for any outstanding liabilities including contracts, lawsuits, debts owed, and tax concerns, just to name a few. On the other hand, the business entity could have long-term contracts with customers and purchasing the business entity allows those contracts to continue. So you have to weigh one versus the other.
Whether you should purchase the business or just its assets require a review of your specific circumstances. Contact us today for a free consultation.