What is an Equity Purchase?
In an equity purchase of an existing business, the purchaser buys the equity away from the existing owner. This type of purchase results in your Corp becoming the owner of the existing legal entity. All liabilities transfer to the buyer by operation of law, wanted or not. However, the buyer can contractually allocate liabilities to the seller by selling them back. For this post we will focus on a few key differences for a ROBS corporation. To keep it simple, the existing legal entity is “Neighborhood Market”, a small, local store with good revenue and customer loyalty, a handful of long term employees and a retiring owner.
ROBS Corp as an Operating Company
What does your ROBS Corp own? The equity of the existing legal entity. The existing legal entity still owns the assets and is the employer. The Plan is purchasing stock in the plan sponsor, the C Corp. The plan’s equity in the sponsor does not change to equity in “Neighborhood Market”.
If “Neighborhood Market” is an LLC, we simply need to ensure that from the date of purchase the LLC is treated, for federal income tax purposes, as a single member pass-through entity with the corporation as the responsible taxpayer. Your CPA / accountant should know what paperwork to file with the IRS to let them know of this change.
A ROBS purchaser runs into issues if “Neighborhood Market” is a corporation. One of the hard requirements for ROBS qualification is the the Corporation that is the plan sponsor meets the definition of an operating company: is in business providing a product or service for profit. Owning the equity of “Neighborhood Market”, by itself, is not enough. By regulation, a corporation cannot be a pass-through entity for tax purposes if the owner is another corporation. The ROBS corporation would simply own stock and that doth not an operating company make (throwing in a little fake Shakespearean lingo). How to solve this depends on several factors, the sum of which is too detailed for a blog post. A corporation purchasing a corporation as an equity purchase is rare, but I have told a few clients over the years that their deals were not feasible as designed because of this requirement.
ROBS Corp as the Employer
Some of my equity purchase clients initially believe that they don’t need to offer them the 401K Plan to the employees of the target entity because their ROBS corp is not the direct employer. No, the plan is for the benefit of all of the employees directly of the sponsoring corporation and any subsidiaries or control group entities.
Which entity should employ you, the client? From a ROBS perspective it does not matter. That is a good question for your CPA. If you intend to be employed by the ROBS corporation while everyone else is employed by “Neighborhood Market”, you need to know how your ROBS corporation is going to get the money to pay you.
Not all of our clients know whether their purchase is an equity or asset sale. That’s ok, we can help you figure it out. Some people ask which one is better. From a ROBS point of view, if you have an option (and most of the time you won’t, that will be set by the seller), following the proper steps for the transaction type is far more important which type of purchase you structure. Either way, we can help. Just want to brainstorm the differences as it relates to your ROBS business purchase? Set up a no cost or obligation initial consult. Let’s chat.