Asset Purchase vs. Entity Purchase When Buying a Liquor Store
When you buy a liquor store, you can buy the things the business uses, or you can buy the company that owns them. In a liquor store asset purchase, the buyer acquires specific assets such as inventory, fixtures, goodwill and the right to the location. In an entity purchase, the buyer acquires the seller’s shares or membership interests, and the existing company, with its history, continues under new ownership. The choice affects liabilities, taxes, financing and, in many places, how licensing is handled.
This article outlines the general considerations. It is not legal, tax, regulatory or licensing advice. The right structure depends on the specific store, the parties and the rules where the store is located, so buyers should make this decision with an attorney, a tax advisor and, where appropriate, a licensing professional.
The Asset Purchase
In an asset purchase, the buyer typically forms a new company that acquires the assets listed in the purchase agreement.
Potential advantages
- The buyer generally selects which assets to acquire and which liabilities, if any, to assume
- Unknown liabilities of the seller’s company generally remain with the seller, subject to applicable law and the agreement
- Possible tax advantages for the buyer, depending on how the price is allocated
- Clear separation from the seller’s past operations
Potential challenges
- Licenses, contracts, permits and accounts may need to be transferred, reissued or newly obtained
- The landlord’s consent may be required to assign the lease
- Supplier accounts and vendor agreements may need to be re-established
- The seller may face different tax consequences than in an entity sale
The Entity Purchase
In an entity purchase, the buyer acquires ownership of the company that operates the store.
Potential advantages
- Contracts, accounts and permits may remain with the company, depending on their terms
- Fewer assignments may be required in some cases
- Some sellers prefer this structure for tax reasons
Potential challenges
- The buyer generally inherits the company’s history and liabilities, known and unknown
- More extensive due diligence and stronger contractual protections are usually needed
- Leases and contracts may still require consent for a change of ownership
- Tax treatment may be less favorable for the buyer
How Licensing Fits In
Licensing implications are jurisdiction- and transaction-specific. In some places, an asset purchase may require a license transfer or a new license for the buyer’s company. In others, a change in the ownership of a licensed company may itself require notice to or approval from the licensing authority. Neither structure should be assumed to avoid licensing review. Buyers should confirm the requirements with the applicable licensing authority and qualified professionals before choosing a structure. Our guide to liquor license transfer explains the broader considerations.
Liabilities to Consider
Whichever structure is used, buyers should review potential exposures such as unpaid taxes, licensing violations, employment claims, supplier balances and pending disputes. Purchase agreements commonly include representations, warranties, indemnities and holdbacks to address these risks. Our liquor store due diligence checklist covers what to review.
Inventory and Price Allocation
In either structure, the treatment of inventory and the allocation of the purchase price among assets have tax and financing implications. Our articles on liquor store inventory and liquor store valuation discuss how these components are evaluated.
How Lenders View the Structure
Lenders will review the structure as part of underwriting. They may have preferences or requirements regarding the borrowing entity, guarantees, collateral, how liabilities are addressed and how licensing is handled. Some programs have specific rules for different deal structures. Discuss the structure with your lender early; our guide to liquor store loan requirements explains what lenders review.
Choosing the Right Structure
There is no universally right choice. Asset purchases are common in small business acquisitions because they can limit exposure to the seller’s past, while entity purchases may make sense in particular situations. The decision should reflect the store’s history, licensing rules, tax consequences for both parties and lender requirements.
US Professional Funding helps buyers finance the acquisition of existing liquor stores under the structure their advisors recommend, subject to lender review. Learn more about our liquor store acquisition financing.
