What Does Equity Sale Mean?
An equity sale refers to the sale of the common shares of a company, instead of only the assets. When an equity sale occurs, the company remains exactly the same with only the ownership structure changing hands between the seller and the buyer. It is different from an asset sale in that the buyer acquires all the assets, but also all the liabilities (disclosed and undisclosed) of the company as a whole. An equity sale typically results in less disruption to the customers, employees and other stakeholders of the company because it continues to operate in the same way as it did prior to the closing of the transaction.
Divestopedia Explains Equity Sale
Buyers like equity sales because they are simpler to transition after the transaction is completed. The company remains the same without significant closing date setup requirements. However, because the buyer is acquiring all the liabilities of the company including any that may be undisclosed or contingent, the buyer must conduct additional due diligence to uncover any of these potential liabilities (e.g. pending litigation, warranty obligations or tax reassessments).
In addition, in an equity sale, a buyer does not get the benefit of writing up the assets acquired to fair market value for tax purposes, potentially losing some of the available tax write'offs to shield future income. Given this, buyers are sometimes drawn towards an asset sale rather than an equity sale since there is less concern for undisclosed liabilities and a better tax treatment. On the other hand, a seller may be better off from an after-tax standpoint conducting an equity sale. A smart seller should always request a potential buyer to issue an offer for both an asset sale and equity sale and select the one that delivers the higher after-tax cash proceeds.