Buying a Business: The Difference Between Acquiring Assets and Acquiring Equity

We just want to give a quick reminder that this podcast is not intended to be legal, tax, accounting or other professional advice. And we encourage you to seek the advice of a professional before making any decisions.

How much more successful would you be if you had lunch once a week with insanely successful entrepreneurs who share their biggest secrets on how they think and achieve success? Grab your seat at the table because this is business lunch with Roland Frazier and Ryan Deiss.

Let's talk about assets versus equity. So when you're buying companies, a lot, a lot, a lot of people get confused in how they should buy it. Like, they think that it's just like the stock market. The stock market, you're going out and you want to buy an interest in a company. Shares of ownership, you're buying equity, you're buying shares of stock in companies. That's what stock exchanges are for, right? But when we're thinking about buying companies that are private companies or if we're doing mergers and acquisitions, when we're acquiring companies, we're not just investing like as a retail investor buying shares in a company that's traded on a stock exchange. We're actually thinking we're going to acquire significant equity in a company or we're going to acquire equity in a private company. There are a couple of different options that you have. Rather than acquiring the equity, which is the stock, you could also acquire the assets. So in there's a couple of different situations where you're going to think about this one would be if you're acquiring a significant portion of the company. So let's say that you're going to acquire a controlling interest in a company that's 51% or more of the voting stock of a company. Then you may want to think about how could you avoid potential liability that's out there, right? Well, when you're buying assets, you are buying the component parts of the physical and intangible things that the company owns that allows it to be in business. So there are tangible assets, like things you can put your finger on, like this, this I, iPad, pencil or this keyboard, right? These are things that are computers, all that kind of stuff. Equipment manufacturing machines, office chairs, desks, all the stuff that you see here, these are all physical assets that if you were going to buy the company that owns this, you could buy the company that owns all these things or you could just buy these things directly. So here's the cool thing. The equity asset carries with it whatever liabilities already exist in the company. So if you acquire stock, you get all the assets that the company owns. But also if there are claims against the company that can be everything from its short term credit that it's gotten from other companies. Those are called accounts payable to long term promissory notes that it might have executed like on a piece of real estate would be a mortgage or deed of trust. And all of that debt is going to come with ownership of the equity, similarly contingent debt. So maybe there's a lawsuit that's pending against that company that hasn't yet been resolved, or maybe there's one that's been threatened either orally or in writing. Maybe there is an existing or a potential employee dispute that's out there. Maybe there's a workers comp claim or a workplace injury claim. Maybe there's some copyright infringement that's taken place, or a sexual harassment, or maybe there's a disability claim. You know, all of these things that could be out there lurking that we just don't know about, right? So one way that lawyers have come up with and business people to figure out how can I acquire that company and feel safe that I'm not also acquiring all of these liabilities. Well, the way that they do that is with a sale of assets or a purchase of assets instead of purchasing the equity. So the biggest difference is that equity represents ownership evidence in a company and therefore all of its underlying assets and assets just are the things that the company owns both tangible and intangible. Tangible I mentioned was physical stuff. Intangible would be things like URLs, website addresses, could be logos, could be digital assets, software code, copyrighted items, anything that's patented or trademarked. Those are all considered intangible assets because we know that they're worth something or even just the goodwill of the business. Hey, you know, this business has been around for a long time. Oh yeah, I trust them. Them that's called goodwill. That has value, but you can't really put your fingers on it, you can't hold it in your hand. So intangible assets refers to that. So we've got these two types of assets, tangible and intangible, that we could buy directly and effectively. If we owned all those things, we would be able to operate the company. Or we can acquire the little piece of paper that's stock or otherwise evidences ownership in the company. And, and when we own that, then we also effectively own all the assets cause that company owns those assets. So that's kind of the difference between that. Now as I mentioned, when you acquire equity, you take all of the claims that are known or unknown that exist as of the date that title transfers to you for that equity. So that's kind of a downside. Right now, the benefit is that you do also get with that any, like, credit that the company has that's not subject to changes of control and things like that. But other than that, you can still buy assets and effectively get all of the benefits that you would have got if you'd bought the equity without the liability. So a lot of businesses, when you're doing mergers and acquisitions, I would say most of the deals are not equity deals, they're asset deals. Now, there are some tax consequences to think about as buyer versus seller as well. When you are acquiring assets, you generally are allowed for tax purposes to depreciate those assets over some period of time. When you buy equity, you're generally not allowed to depreciate the equity. Okay? So that can be a big one. You get, like, you buy millions of dollars worth of assets that can be written off over time. That's a pretty big advantage that effectively reduces your cost of acquisition. When you buy equity, you don't get that. So that's kind of a big deal. Now, 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 got on the sale of your stock. So there's a lot of issues back and forth, and it's really a good idea to get somebody that's a tax professional involved. Even if you don't feel like you want to have a business attorney, which I would recommend you do. Definitely having somebody that's familiar with the taxes, looking at these kinds of deals for you can be very, very helpful. Now, some of the benefits, I think I'm pretty sure, pretty much said the benefits, you know, the ability to depreciate assets, the ability to not have the liability attached to them, Those are really the primary benefits of buying assets. What types of assets that you should buy? Well, here's the thing. When you're buying assets, just buy the ones that you need. Because one of our strategies for how we can reduce the purchase price of a company that we're acquiring is to say, are there assets that perhaps the seller has acquired that are owned by the company that we don't need to run the company or that we don't need to run the part of the company that we really want to buy? So this is called carving out or a carve out. So when you have somebody that's selling a company and you don't need or want all of the assets they've got. Maybe they've got a whole bunch of audio visual equipment and they're a publishing company, but they bought all this audio visual equipment so that they could create podcasts and videos and things like that of the talent they've got. And, and they've got a book, they've got a book of business of all of the copyrights and things that they've got licenses to from authors. And you only care about the copyrights and licenses. And you don't need the AV equipment. Maybe you've already got all the AV equipment. You're really just buying it to get a hold of the rights to a couple of authors that you think you can monetize. Well, you wouldn't want to buy all the AV equipment. So you just carve that out, say, okay, look, it's a million dollars you're asking for this company, but I don't want the AV stuff. You keep it. It's on the balance sheet right now at $300,000. Well, you've just reduced the purchase price by 30%, so that's really, really, really cool. So, so really those are the primary advantages and disadvantages between having equity and assets, the two different types primarily of assets that exist tangible and intangible. And just know that most of the time people are going to think that in, particularly in private deals, small deals and deals where you're acquiring controlling interest in the company, you're going to acquire assets, not equity, even if you're acquiring part of a company. 30, 40, 50%, 60%. Very often when you go into the deal, if you set up a new company, we'll call it a new co, you set up a new company and that company will acquire the assets of the old company and you will own part of that company. And then the seller will transfer the assets into the company and receive equity in the new company in exchange for the assets. So that effectively the seller is also benefiting from having this new company that's set up. So lots and lots of kind of details and legal stuff to think about, but high level conceptually, I think that's really a good amount of information to help you kind of figure out which of these things you want to do.

You've been listening to Business Lunch with Roland Frazier. If you're enjoying the show, let us know by subscribing and leaving a review. And for more information, go to businesslunchpodcast.com thank you for listening.

Hey, quick question. Do you know someone who's Looking to grow as a leader? Maybe their team is growing a little faster than they expected. Or maybe their new rule requires them to work a little bit more through people. If the answer is yes, I want to recommend a new podcast by the scalable media network called Ready to Lead. It's hosted by Richard Lindner, one of Roland and Ryan's business partners, and Jeff Mask, who's one of the top executive coaches in the world. They cover tactical strategies on how to improve as a leader and also their biggest failures they've had throughout their career. You can find the show@readytolead.com or search for it wherever you listen to podcasts.

Ever wondered how some people build real wealth through acquisitions while others just sit on the sidelines? Well, I'm here to tell you it's not about luck. It's about having the right system, the right deals and the right guidance. And that's exactly what we give you in the EPIC Deal Fast Track. If you've been thinking about buying a business, but you keep getting stuck, whether it's finding the right deal, structuring the financing, or negotiating with sellers, you are not alone. 2 Too many people waste months, even years just thinking about acquiring a business while the real opportunities pass them by. The EPIC Deal Fast Track is not another course. It's actually an implementation program and it's designed to get you from the idea to the acquisition in just 16 weeks or less. We work with you one on one to help you find, fund and close your first or next deal. And once you do, we're going to plug you into our elite EPIC board community so that you can keep scaling through acquisitions. We install three powerful systems in your business. The first is the Deal Flow Engine so you always have high quality off market deals coming to you. Number two, we give you our offer and funding system so that you can structure offers that get accepted and fund them creatively many times with no money out of your own pocket. And number three, our closing and integration system so that you don't just buy a business, you actually successfully run and scale it once you have acquired it. Plus you'll have direct one on one support from an EPIC Deal Advisor every step of the way. And that's people that have actually come up through the system and done these deals themselves. That's the only way to become an EPIC Deal Advisor. And if you're serious about acquiring a business this year, don't just sit on the sidelines. Just text I'm in to 334-45-89034 and we'll get you in. So text. I'm in to 334-458-9034. We'll get you in. No fluff, no wasted time. Just real deal making from people that are actually out there doing deals right now.

I'll see you there.