Equity Sale instead of Asset Sale

8 Replies

Has anyone ever done an equity sale when selling an investment property? 

I would like to sell the entire company that owns an apartment building, to an investor that I know. the advantages to the buyer may include stepping into attractive debt (i would hold a note for the difference unless my bank would give him a second or refi the property to the new value), no reassessment of a property that has appreciated over the past 5 years, no estoppels, no need to contract new utilities, avoid using a realtor, and the company has a strong track record. I may be missing some advantages or overlooking some things that would eliminate the above advantages to him.

Thoughts?

Originally posted by @Scott French :

Has anyone ever done an equity sale when selling an investment property? 

I would like to sell the entire company that owns an apartment building, to an investor that I know. the advantages to the buyer may include stepping into attractive debt (i would hold a note for the difference unless my bank would give him a second or refi the property to the new value), no reassessment of a property that has appreciated over the past 5 years, no estoppels, no need to contract new utilities, avoid using a realtor, and the company has a strong track record. I may be missing some advantages or overlooking some things that would eliminate the above advantages to him.

Thoughts?

We have acquired properties this way, the benefits to the buyer are typically limited, if not elusive.

If I were looking at your business, based on the items listed above, only the financing arrangement would possible be of interest.   Even then, it would likely be necessary to have the lender involved/on-board.  Most lenders view a "change of control" in the same light as a sale and it would trigger the "due on sale" provision of the financing.  

While the no-reassessment may be attractive on the surface, it cannot be guaranteed as the taxing authority can alter their assessment at any time based upon the "value" of the business.   One big downside of buying the shares of the business is the buyer inherits the existing cost basis of the assets and the accumulated depreciation ... and would be on the hook for any recapture if/when the asset is sold.   Conversely, if the buyer were to acquire the asset, s/he would have a cost basis based upon the acquisition costs with no prior depreciation.

No estoppels might be attractive to the vendor, but as the buyer, I would collect estoppels as part of my diligence on the business.

Similarly, not using a realtor is attractive to the vendor (who traditional pays for the service) and of minimal concern to the buyer.  Regardless, you can sell an asset w/o a realtor.

Contracting utilities and services is not a big deal either and they will normally transition with the property if it is acquired as an asset.

1(506) 471-4126

I agree with Roy N

When I looked into buying businesses, I was advised by business brokers, attorneys, insurance agents to buy assets, not equity, which includes liabilities, and thus also trouble. As a buyer, it would be a bag of worms.

For instance, say a tenant advised the seller a while back of mold problems and infestation problems, you sold the equity, no estoppels, the buyer would have no idea of this. Say soon after the take over, the tenant sues because he was injured and got sick. It is the same exact company, so as far as they're concern, you're all responsible. And attorneys here sue the LLC, as well as the owners personally. If you're the buyer, that would be you and the seller.

There's also tax audit issues. A customer of mine sold a business along the lines of what you thinking. It's a business that operates in cash as most small businesses are, and the IRS suspected the new owners of cheating. The IRS audited the books of the new owner, and because it's the same company going back, the audit included the time he owned the business as well, and both were socked with penalties and fines. Here he thought he wash his hands of it going into retirement.

If I was the buyer, especially in the real estate business, there's a clean line drawn when the assets is sold, and when assets are purchased, I have an exact handle of the numbers on the day of purchase. What happened before, is your problem.

I bought a business that operated thru an S Corp, and I found out after the purchase the sellers had a $3 million lawsuit filed against the S Corp and the sellers personally. I bought assets. Had I bought the equity, I would have also bought the liability claims against it as well.

This investor is a good friend and this is a very solid property. Knowing my business and that there are no liens etc, I would feel comfortable selling in an equity deal. The purchase price would be adjusted to account for his "new" basis in the asset. If there are instances where I could be dragged into a lawsuit based on his negligence, that would change my opinion on doing the sale this way. 

We would probably use a closing attorney instead of a realtor anyhow, so that benefit is a wash. 

He is a strong borrower, and I use a small regional bank who I have a great relationship with. I have no doubt that they would accommodate us and probably allow the note to transfer.

Still thinking of an equity sale as on option, but leaning toward offering him the property and winding up the company after the sale.

@Scott French

If you were selling an active business with a strong local brand - say a local market with deep roots in the community or a renown B&B - there would be a strong goodwill component (an intangible asset) and acquiring the business would be beneficial to the buyer.

While this level of "brand" is theoretically possible in a local residential or commercial rental market, I've yet to encounter it in the wild.

1(506) 471-4126
Originally posted by @Frank Chin :

I agree with Roy N

When I looked into buying businesses, I was advised by business brokers, attorneys, insurance agents to buy assets, not equity, which includes liabilities, and thus also trouble. As a buyer, it would be a bag of worms.

For instance, say a tenant advised the seller a while back of mold problems and infestation problems, you sold the equity, no estoppels, the buyer would have no idea of this. Say soon after the take over, the tenant sues because he was injured and got sick. It is the same exact company, so as far as they're concern, you're all responsible. And attorneys here sue the LLC, as well as the owners personally. If you're the buyer, that would be you and the seller.

There's also tax audit issues. A customer of mine sold a business along the lines of what you thinking. It's a business that operates in cash as most small businesses are, and the IRS suspected the new owners of cheating. The IRS audited the books of the new owner, and because it's the same company going back, the audit included the time he owned the business as well, and both were socked with penalties and fines. Here he thought he wash his hands of it going into retirement.

If I was the buyer, especially in the real estate business, there's a clean line drawn when the assets is sold, and when assets are purchased, I have an exact handle of the numbers on the day of purchase. What happened before, is your problem.

I bought a business that operated thru an S Corp, and I found out after the purchase the sellers had a $3 million lawsuit filed against the S Corp and the sellers personally. I bought assets. Had I bought the equity, I would have also bought the liability claims against it as well.

 Frank, did you ever buy any businesses? I've considered doing that myself but never did. I've started businesses, but never bought one.

(Crap, sorry, just finished reading your post and saw the sentence about the business you bought.) So I guess my next question would be, did you buy the business in order to improve it and resell it later, or just to run it for the profit? What was your approach? Thanks.

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Shawn, I started businesses and I bought one.

Problem with a small consulting businesses I started is you have to scale up to make money, but you have the freedom to do what you want to do, take long lunches, etc. This gives me the freedom to run my real estate business.

The advantage of buying a larger business with employees is you start up higher in scale, you choose what you want to do. I got one in auto repair, wholesale retail tires. I hire mechanics, had a manager that runs the place, and I work finance and accounting and business development. Having your own business also allowed me to pursue real estate as well.

I had a high paying W2 job, in IT, with 401K's bonuses etc. Unfortunately the hours are long and I don't get a chance to do any of anything else, except work, go home and sleep. In the end, the whole thing boils down to time management. All three, W2 job, small business, larger business has it's own advantages and disadvantages.

Having done all three, if I had to do it all over again, I would have stayed in IT, and hire a PM firm to handle my real estate. Having businesses free up my time, but I wasted it handling minor repairs, tenant issues. I had a few small properties with repair issues, and one year I was down there every other week spending half days patching holes in the walls after plumbing repairs because it was not cost efficient to hire someone to patch small holes. 

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