Selling or Buying a Business: Asset Sale vs. Equity Sale (Buying the Company) – A Practical Guide

Transaction Structure Overview

Buying or selling a business is a major decision. One of the first—and most important—choices is transaction structure: do you buy/sell the assets the business uses (an asset sale), or do you buy/sell the company itself by purchasing its ownership interests (an equity sale, often called a “stock” or “membership interest” sale)? The wrong structure can expose Buyers or Sellers to hidden liabilities, create legal complications, or prevent the transfer of critical operating licenses. Below we explain the risks and tradeoffs in plain language and give a practical checklist for structuring transactions.

Quick definitions

Asset sale: The Buyer purchases specified things the business owns (equipment, inventory, IP, customer lists, sometimes a lease), not the company itself. The Seller keeps the legal company.

Buying the company (equity sale): The Buyer acquires ownership of the whole company — its bank accounts, contracts, known and unknown liabilities, and any licenses the company holds.

Hidden Liabilities

Hidden liabilities are problems that don’t show up on the balance sheet but can become expensive later: unpaid taxes, pending lawsuits, environmental contamination, or customer disputes. In an equity sale the Buyer steps into the company’s shoes and inherits those obligations. In an asset sale the Buyer can avoid many old liabilities, but not all—creditors may still reach some assets depending on timing and local law.

Legal Complications and Contract Issues

Many commercial contracts (premises lease, supplier, distributor, franchisor, or others) forbid assignment without the other party’s consent. If a key contract can’t be assigned, the Buyer may lose important rights after closing unless the parties negotiate consents or use an equity sale.

License Transfer and Regulatory Hurdles

Some operating licenses are effectively non-transferable or require regulatory approval for any change in ownership or control. In heavily regulated sectors—cannabis, alcohol, healthcare, certain financial services—an asset sale may not allow the buyer to lawfully operate until the regulator approves a transfer or the buyer obtains a new license. If the license sits with the legal entity, an equity sale may be the only workable path, but it carries the liability risk described above. For California cannabis deals, for example, Sellers and Buyers commonly work through the Department of Cannabis Control (DCC) notification and change-of-ownership processes in addition to the local government regulators.

Representations and Warranties

Representations and warranties are the factual assertions the parties make about the company or assets in the purchase sale agreement. These statements cover many aspects of the business or assets being sold in order to disclose information and allocate risk between the Buyer and Seller. The reps and warranties also assign responsibility if the assertions made prove untrue after closing.

Head-to-head: Buyer vs. Seller Considerations

Here’s a quick comparison of Buyer and Seller considerations for asset sales vs. equity sales:

Buyer vs Seller Considerations: Asset Sale vs Equity Sale

Transaction Type	Buyer Advantages	Buyer Disadvantages	Seller Advantages	Seller Disadvantages
Asset Sale	Pick and choose assets; avoid unknown liabilities	May lose rights to unassignable contracts or licenses	Exclude non-core assets from sale	Retains entity and some liabilities; may complicate winding down
Equity Sale	Keeps company intact; contracts and licenses stay in place	Inherits all known and unknown liabilities; higher due diligence	Complete exit; clean transfer; broader buyer pool	Potentially higher purchase price; risk of inherited liabilities

Asset Sale — Buyer Advantages

•  Can pick and choose assets; avoid unknown liabilities.
•  Easier to exclude problematic contracts or claims.

Asset sale — Seller Advantages

•  Exclusion of non-core assets (real estate, certain contracts, investments, or personal property) and keep them out of the transaction.

Asset Sale — Seller Disadvantages

•  Must retain the entity and its liabilities, which can complicate winding down.
•  Some licenses and contracts may not transfer, reducing Buyer interest.

Buying the company (Equity Sale) — Buyer Advantages

•  Keeps the company intact — contracts, permits, and licenses can stay in place.
•  Lower transactional friction when third-party consents are required.

Equity Sale — Seller Advantages

•  Complete exit from ownership: Selling all equity lets owners walk away from the business without needing to wind down the legal entity or retain ongoing administrative obligations.
•  Clean transfer of the going concern: Selling the ownership interest transfers the business as-is without the need to reassign dozens of contracts, retitle assets, or renegotiate leases.
•  Broader buyer pool and potential price premium

Equity sale — Buyer Disadvantages

•  Inherits all liabilities (known and unknown) unless well-managed through a well drafted purchase sale agreement containing representations and indemnities.
•  Greater due diligence burden and often higher purchase price.

What to Include in the Body of the Deal — Key Protections

Due Diligence From the Buyer’s Perspective

•  This consists of many items to be investigated that is custom made for each deal

Deal Documents and Buyer Protections

•  Detailed purchase agreement with tailored representations and warranties (financial, tax, IP, regulatory compliance).
•  Indemnity clauses allocating known and unknown risks; carveouts for fundamental matters (tax, environmental).
•  Escrow/holdback for a negotiated period to cover post-closing claims.
•  Purchase-price adjustments for working capital and inventory reconciliation.

How Sellers Can Protect Value

•  Clean up known liabilities before marketing the business.
•  Obtain necessary consents in advance where practical (landlord, major suppliers, regulators).
•  Use escrows or indemnities to bridge buyer concerns while preserving sale proceeds.
•  Consider tax planning to reduce adverse consequences of an asset sale vs. equity sale.

Securing Seller Financing or Promissory Notes

If the Seller carries financing (Seller note), use strong security measures:
•  Take a secured interest in assets (UCC-1 filings for personal property).
•  Obtain stock pledges or guarantees where appropriate.
•  Use deeds of trust or mortgages for real property.
•  Include events of default, remedies, and cross-default protections.

Closing and Post-Closing Checklist

•  Asset sale: deliver bills of sale, assignments of leases and IP, and assignment agreements (with required third-party consents).
•  Equity sale: deliver executed transfer documents (stock certificates or membership-interest assignments/stock powers), shareholder/member consent minutes, and updated corporate records showing the change of ownership.
•  Post-closing (both types): record security interests as needed (UCC-1 filings for personal property; mortgages or deeds of trust for real property), complete any required state or regulatory filings, and begin the agreed transition steps (working-capital reconciliation, escrow release schedule, license change-of-ownership notices).

Practical Next Steps for Buyers and Sellers in California

•  Start with a regulatory review: determine whether your industry requires change-of-ownership filings and whether licenses transfer in an asset sale (cannabis clients should consider the DCC and local government processes early).
•  Conduct detailed due diligence.
•  Negotiate protective deal terms: escrows, indemnities, security for Seller financing, and tax allocations.
•  Engage counsel and tax advisors early to identify the structure that best balances tax, liability, and operational needs.

Conclusion

Choosing between an asset sale and buying a company’s ownership interests will shape your exposure to liabilities, tax consequences, and whether the Buyer can operate immediately after closing. Every deal is different; careful due diligence and thoughtful drafting bridge the tensions between Buyer protection and Seller value.

If you’re considering buying or selling a business, don’t navigate the complexities alone. Contact Wicker Law Group to discuss how we can help protect your interests and guide you through every step of the process.

Nothing in this blog should be considered as legal advice nor as creating any type of attorney client relationship. The information provided is not a comprehensive analysis of each item that needs to be considered in a purchase or sale of business assets or equity. Each business sale is unique and will require a full analysis of the facts.