Equity Sale vs Asset Sale: What's the Difference?

Equity Sale vs Asset Sale: What's the Difference?

When acquiring a startup, buyers and sellers must decide between an equity sale (where ownership of the company’s shares transfers) and an asset sale (where specific assets are purchased while leaving behind liabilities). Equity sales are typically simpler for sellers, preserving contracts and offering tax advantages, but they expose buyers to inherited risks. Asset sales allow buyers to selectively acquire assets and avoid liabilities but can be more complex due to contract transfers and tax implications for the seller.

1. Equity Sale

In an equity sale, the buyer purchases the shares (equity) of the company from its owners. The legal entity remains intact, meaning all assets, liabilities, and contracts stay with the company, but ownership changes.

Pros of an Equity Sale

✅ Simpler for the seller – The startup’s legal entity, contracts, and obligations remain unchanged, making the transition smoother.
✅ Favorable tax treatment for sellers – The sale is typically taxed at the lower long-term capital gains rate if held for more than a year.
✅ Preserves existing contracts & relationships – Since the legal entity doesn’t change, contracts with employees, customers, vendors, and leases generally remain valid.
✅ Less disruption to operations – Business continuity is easier since all assets and liabilities stay in place.

Cons of an Equity Sale

❌ More risk for the buyer – The buyer assumes all liabilities, including unknown or contingent ones (lawsuits, debts, tax obligations, etc.).
❌ Diligence is more intensive – Buyers must conduct deep due diligence to identify potential risks associated with the company’s history.
❌ May require third-party approvals – Some contracts may have change of control clauses requiring approval from partners, landlords, or customers.

2. Asset Sale

In an asset sale, the buyer selects and purchases specific assets (e.g., IP, customer lists, equipment, contracts) while avoiding unwanted liabilities. The seller retains ownership of the legal entity.

Pros of an Asset Sale

✅ Buyer can avoid liabilities – The buyer can cherry-pick assets while leaving behind debts, lawsuits, or contingent liabilities.
✅ Tax benefits for buyers – Purchased assets can often be depreciated or amortized, reducing taxable income.
✅ More flexibility – The buyer can structure the deal to exclude unwanted obligations or costs.

Cons of an Asset Sale

❌ Tax impact for the seller – The seller may face double taxation: first at the corporate level when assets are sold, and again when proceeds are distributed to shareholders.
❌ Complexity in transferring contracts – Customer agreements, leases, and vendor contracts may require renegotiation or explicit consent to transfer.
❌ Employee & cultural disruptions – The seller’s legal entity remains, but employees may need to be rehired under new employment terms, potentially disrupting the company culture.

Which is Better?

• Sellers generally prefer an equity sale for tax advantages, simplicity, and avoiding lingering liabilities.
• Buyers often prefer an asset sale to limit risk and optimize tax benefits.

The choice often depends on the startup’s industry, liabilities, tax structure, and contractual obligations. Buyers and sellers typically negotiate the structure based on these factors, sometimes using a hybrid approach.

Which Type of Sale is More Common for PropTech startups?

For PropTech startups, the type of sale depends on factors like revenue model, liabilities, and intellectual property (IP). However, in most cases:

1. Equity Sales are more common for mature PropTech startups with established revenue streams, long-term customer contracts, and significant intellectual property (e.g., proprietary algorithms, data platforms, or marketplace networks). Buyers prefer acquiring the full business—including branding, teams, and customer relationships—without the hassle of contract renegotiation.
2. Asset Sales are more frequent in early-stage or distressed PropTech startups, especially when buyers want to acquire specific technology, customer lists, or data assets without taking on liabilities like debt, legal risks, or unfavorable contracts. If a startup’s value is primarily in its technology or data, rather than recurring revenue or brand, an asset sale may be more attractive.

Trends in the PropTech Space

• SaaS-based PropTech platforms often sell via equity sales to preserve enterprise contracts and ensure a seamless customer transition.
• Data and analytics PropTech companies sometimes sell via asset sales, especially if a buyer only wants their proprietary datasets or models.
• PropTech marketplaces often favor equity sales, since their value depends on both network effects and ongoing platform engagement.