Why Smart Investors Buy Assets, Not Equity

Author

Roland Frasier
October 15, 2023

Investing, like many things, gets easier with experience. The longer you buy businesses, the more you discover the “cheat codes” to making successful purchases.

If I could wind the clock back and give myself one cheat code when I started, I’d choose to buy assets instead of equity.

Why would I do that and why should you consider doing it too?

Let’s dive in…

Brainstorming over paper

Photo by Scott Graham on Unsplash

Why Buy Assets Instead of Equity

In an equity purchase, the investor assumes the assets AND the liabilities of the company they just bought. But if the investor only buys the assets, then the liabilities stay with the owners of the purchased company.

When you opt to purchase the assets of the company instead of their equity, you avoid several common pitfalls:

  • Unsecured Payables and Undisclosed Debt: Equity purchases may lead to the discovery of undisclosed debts that you must shoulder.

  • Hidden Warrants or Options: You might suddenly find yourself facing unexpected claims from people who possess unmentioned warrants or options.

  • Phantom Equity: A departing employee’s phantom equity deal, unknown to you during due diligence can come back to haunt you.

  • Tax and Legal Issues: Unforeseen tax liabilities, pending litigation, or labor organization disputes may surface after you buy the business, putting your assets at risk.

No one likes talking about these hidden issues, but they’re the difference between a profitable acquisition and a nightmare.

Understanding The Different Types of Acquisitions

When you’re looking to buy a business’s assets, it’s important to know the different types of assets and their accompanying financial implications. Here’s a brief breakdown:

  • Tangible Assets: These are physical assets you can touch and potentially sell or carve out of a deal.

  • Intangible Assets: These include brand, goodwill, copyrights, trademarks, social media accounts, and website traffic.

  • Current Assets: These assets can be liquidated quickly and are often preferred for raising capital.

  • Fixed Assets: Less liquid, fixed assets can be harder to sell but may hold some value.

  • Operational Assets: Assets used in daily business operations, which you’ll need to assess for necessity.

  • Non-operational Assets: These can be sold off since they aren’t integral to ongoing business operations

Knowing which assets you’re buying is crucial if you aim to profit from your acquisition.

GIF by Billions

Evaluating The Assets

As you evaluate the business’s assets, consider the following factors:

Brand: Does the brand carry significant worth or do you need to rebrand?

Cash and Accounts Receivable: Do you have too much idle cash?

Real Estate: Is the property essential to operations?

Inventory: Do you have too much or too little inventory?

Equipment: Do you have too much or too little equipment?

Employees: Do you have too many or too few employees?

Every asset has a different role to play. The important lesson is understanding both the difference between acquiring assets and acquiring equity (assets and liabilities) and the different types of assets.

Smart investors meticulously perform their due diligence to ensure the business can be acquired profitably for both parties. So, if you have the opportunity to acquire assets over of equity, I strongly encourage you to consider it.

On The Business Lunch Podcast: How To Build And Expand Your Portfolio - Listen on Apple Podcasts I Spotify 

Become an AI Powerhouse: Want to learn how to leverage AI to boost your credibility, drive traffic, how we took a business to 7 figures in 7 days with AI, and more? Get Access To The 7 Figures In 7 Days Webinar For Only $7

Level Up Your Network: Are you generating $1M in annual revenue or more? You’re invited to join the #1 private network for high-performing entrepreneurs, investors, and executives: Learn More About The Rise Nation Mastermind

I recently made $40 million on a single deal - and while that is a lot of money, I was reminded once again how large sums of money don’t guarantee happiness. Unless you’re doing work you love, fulfillment will be hard to reach.

In this short video I explain my fulfillment roadmap to making money while working in areas you love and care about. There are 4 key steps to this winning formula, and when you’re done, you will have a list of activities you love, where you excel, and where your connections can support or collaborate with you.