Equity purchase

What it is

An equity purchase transfers ownership of the legal entity. Nothing inside the company moves, because nothing needs to — the company still owns its equipment, still holds its contracts, still employs its people. Only the ownership on the register changes.

It is variously called a stock purchase (corporations) or a membership-interest purchase (LLCs). The mechanics differ; the principle does not.

When continuity is worth having

Sometimes the business is its permissions, and re-papering them is either slow, risky, or impossible:

• Non-assignable contracts. A key customer agreement that prohibits assignment, or permits it only with a consent the customer may use as an opportunity to renegotiate.
• Licences and permits tied to the entity. Where a permission attaches to the company and a transfer would mean a fresh application with its own timeline and uncertainty.
• Track record that has value. Bonding capacity, supplier terms, or a rating built up over years by that specific legal person.
• A workforce you do not want to disturb. Employment continues with the same employer, avoiding the terminate-and-rehire mechanics of an asset deal.

What you take on

Everything. The company’s past tax positions, its employment history, its contractual commitments, its litigation exposure, and whatever has not surfaced yet. That is the defining feature of the structure, and it changes what diligence has to be.

Practical consequences:

• Diligence goes deeper and costs more. You are underwriting an entity’s history, not an asset list. Expect to look at prior-year returns, payroll history, contracts, and any dispute the company has been party to.
• Confirm the entity itself. Check standing, name history and filings on the Department of State entity database, and search liens against every name the company has used.^[1]
• Representations, warranties and indemnities carry more weight, because they are much of what stands between you and undisclosed history. A holdback or escrow is doing real work in an equity deal.
• The tax basis of the assets does not generally reset, which affects your depreciation position. Model it with your CPA.

The New York wrinkle worth knowing

Buyers often assume an equity deal avoids New York transfer tax, because no deed changes hands. It does not always. If the entity owns real property, taking a controlling interest in the entity can trigger the tax by itself. If your target owns its premises, get that analysed before you settle on a structure — it is set out in the asset versus equity guide.

Do not assume either way on sales-tax successor liability. Get advice on your deal: the bulk-sale rules are built around transfers of assets, and an equity purchase is not that.^[2]

Choosing between the two

Buyers usually prefer an asset purchase and sellers usually prefer equity, so the structure is a negotiated term with real money attached. Decide it in the letter of intent, because it determines the diligence you need to run, the consents you need to collect, and the tax outcome for both sides. Deciding it late means re-running work you have already paid for.