In the final Part Three of a three-part series on corporate transactions, we describe important considerations around structuring the sale of a business as an "asset" sale.

This article is the third part of a three-part series on structuring corporate transactions involving the purchase or sale of a business. In Part One of our series, we introduced high-level distinctions between stock and asset sales, HERE. In Part Two, we analyzed stock sales, HERE. In today's article, we analyze asset sales.

asset sales

Asset Sale Advantages

An asset deal is a transaction where the buyer buys the business’s assets and it’s contractual liabilities directly from the company, not from the company’s shareholders. These assets usually include things like inventory, furniture, real estate, intellectual property, accounts receivable and contracts.

This requires that the deal documents clearly specify which assets and liabilities are being purchased and which assets are not being purchased. This does not mean that each asset needs to be specifically identified. Typically, transaction documents describe the type of assets that are being purchased.

In an asset deal, the tax advantages to the buyer can be substantial. For example, the buyer can receive a stepped-up cost basis for the assets it is purchasing if the purchase price exceeds the seller’s cost basis. And the buyer can depreciate the amount of goodwill that the buyer is paying in the transaction. Goodwill is the amount of the purchase price that exceeds the net fair market value of the assets being purchased. However, asset deals cannot qualify for tax treatment as a tax-free reorganization. Also, with an asset sale, sales or transfer taxes may be incurred.

Furthermore, in an asset deal, the buyer can avoid purchasing certain unwanted liabilities. For example, if the buyer purchased the entire company, there is the potential that a lawsuit could arise relating to something that occurred before the buyer purchased the company. Also, in an asset deal, the buyer and the seller can agree to exclude certain assets and/or liabilities from the transaction. And the buyer can start anew with the corporate formalities of the business, such as the organizational documents, bylaws, meeting minutes, taxes, etc.

Asset Sale Disadvantages

However, there is one issue that can sometimes make an asset deal unworkable. Many contracts, permits and licenses are not easily assignable. Therefore, many of the contracts that the business has with its suppliers, customers, employees, landlords, etc. will need to be renegotiated, sometimes before the transaction can take place. While sometimes these consents and transfers can be obtained, these can delay the sale of business substantially, which is sometimes unacceptable to one or both of the parties.

Furthermore, in an asset deal, all of the company’s assets will need to be retitled. These assets can include real estate, vehicles, bank accounts, insurance policies, other investments, etc. Even when retitling these assets can be accomplished as a matter of right, the time, effort and cost of retitling the company’s assets should be considered when deciding which type of transaction is the most favorable.

Conclusion

The advantages and disadvantages above need to be carefully considered by the parties involved. It is often also a good idea to seek the advice of competent legal counsel early in the negotiation process to determine which type of deal structure would benefit you the most. Please do not hesitate to contact us with any questions.

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