By Clearvue Business Brokers
March 10, 2021
What is an asset sale and why is a business sale structured as an asset sale rather than a stock purchase? How does an asset sale work?
When a buyer purchases a business in an asset sale, they will not be buying the actual corporation or legal business entity. What they will do is form their own new corporation or use their existing corporation to acquire the assets of the seller. They will be buying the right to do business as the name of the selling business. Part of what they are buying is the brand name and goodwill established by the seller.
In an asset sale, the buyer will get a clean slate of assets and a fresh start even if they are buying and using the seller’s business name. The buyer will generally have no responsibility for any liabilities or debts incurred by the seller. The seller will resolve those prior to or at closing. In an asset sale, it does not matter that the buyer is not buying the seller’s corporation, because the buyer is acquiring everything that made the owner’s shares of value.
Because the buyer is not buying the corporation, they will need to have new employment agreements drawn up with current employees of the buyer’s new corporation. They will also need to have any existing contracts and leases assigned, transferred, or renewed to the new business.
So, one might ask, why not just buy the stock or the corporation to avoid having to make these transfers. With an asset sale, the buyer, in most cases, will not be responsible for actions or events incurred by the seller, and will have limited successor liability. Liabilities related to the seller’s company will stay with the seller. Otherwise, the buyer could be assuming all of the history of the business up to the date of acquisition. The asset sale structure can benefit both parties in the transaction by having a definitive end and beginning date.
Investopedia explains that, in an asset sale, “a business can choose what it’s selling. While the buyer purchases any or all of these individual assets, the seller retains possession of the legal business entity. The buyer may create a new company or use an existing subsidiary to acquire the selected assets, along with management and contracts. An asset sale carries much less risk for a buyer since any liabilities (litigation, debts, etc.) and contingent expenses remain the seller’s responsibility.”
According to the Corporate Finance Institute, following are a few details of an asset purchase:
- A major tax advantage is that the buyer can “step up” the basis of many assets over their current tax values and obtain tax deductions for depreciation and/or amortization.
- Goodwill, which is the amount paid for a company over and above the value of its tangible assets, can be amortized on a straight-line basis over 15 years for tax purposes.
- The buyer can dictate what, if any, liabilities it is going to assume in the transaction. This limits the buyer’s exposure to liabilities that are large, unknown, or not stated by the seller.
- The buyer can select which employees they want to retain (and which they do not) without impacting their unemployment rates.
- The seller still needs to liquidate any assets not purchased, pay any liabilities that have not been assumed, and take care of any leases that need to be terminated.
Once a buyer has been found, an attorney will draft the terms of the asset sale into a binding contract explaining the details. Items will be defined and explained in the contract including such things as the payment terms, the timeline for the sale, and the future restrictions of the seller. It will define the physical and intangible assets to be included in the sale, and detail the terms of any contracts or leases involved.
Licenses needed to operate the business will be defined in the agreement, as well as any warranties and indemnifications. Specifics of the allocation of the sale assets, such as: how much will be assigned to Goodwill, non-compete agreements, inventory, and assets will be detailed.
Most importantly, it is important for both buyer and seller to have both their attorneys and their accountants explain and guide them through the complexities of the asset sale. These professionals will help negotiate contract terms, and assist with the purchase and sale contract and its implementation in the sale process. Tax consequences and legal considerations are involved in asset sales. Therefore, the buyer and the seller should always involve the help of legal and accounting professionals.