What is an Asset Purchase?
When a business undertakes an asset purchase, in reality, it just taking this approach to structure the acquisition of a company. Other ways to do this is through a share exchange or statutory merger and purchasing the shares of current shareholders of another company.
The one buying assets might purchase only specific company assets, if not the entire assets, and specific liabilities of the company, if any. Moreover, there are many purchased assets you can consider when handling an asset purchase, such as:
- Rights to software,
- Customer and vendor lists,
- Accounting packages,
- Chattel assets,
- Plant and machinery,
- Tools and equipment,
- Furniture and fixtures,
- Marketing materials,
- Office supplies,
- Phone numbers
- Trade names,
- Web domains,
- Expertise and processes, and
Specific assets subject to purchase are generally listed on paper. The APA or Asset Purchase Agreement is then prepared, usually by the lawyers, which specifies the intention of the buyer to purchase the listed assets of a company. The document also specifies the business name. This undertaking means that the buyer exists taking over company ownership when he buys the shares.
When this happens, all the assets and liabilities of the company belongs to the shareholder who is now the new owner. Generally, only certain assets of the company can be bought, excluding the liabilities, to lessen any potential risk.
An asset purchase occurs when an acquirer only buys the assets of an acquiree. Doing so has a number of ramifications, which are noted below.
If the acquirer only buys the assets of the seller, it is not acquiring any contracts with the business partners of the seller. This can cause havoc if the acquirer intends to continue doing business with the customers and suppliers of the seller, since all contracts will have to be renegotiated.
Liabilities Not Transferred
An asset acquisition actually means that the acquirer buys only those assets and liabilities specifically stated in the purchase agreement. Thus, there may be a transfer of liabilities. However, it will not include undocumented or contingent liabilities; this is the main reason for an asset acquisition.
The acquirer records any assets acquired at their fair market values, and depreciates these (presumably) stepped-up values for tax purposes. If the fair market value of the assets acquired is less than their net book values, then there is no tax benefit. In addition, the acquirer can amortize any goodwill associated with the acquisition for tax purposes.
Net Operating Loss Carryforwards
Since the acquirer is not purchasing the seller’s business entity, it does not obtain the NOLs associated with that entity.
Title to Assets
The acquirer must obtain the title to each individual asset that it purchases – which can involve a substantial amount of legal work if there are many fixed assets.
It may not be possible to disassociate the liability for environmental cleanup from an asset purchase. In some situations, environmental regulations state that the cost of future hazardous waste remediation can attach to assets, as well as legal entities. Consequently, if the acquirer is planning to buy real estate as part of an asset purchase, it should engage in considerable due diligence for environmental problems.
In summary, an acquirer may insist on an asset acquisition if it believes that the risk of acquiring additional liabilities is too great. It may also be a useful method if the acquirer only wants to pluck a specific “crown jewel” asset out of the seller, such as a key patent.
Allocated Purchase Cost or Price
Purchasing business assets lets buyers earmark the purchase price of the company among different resources for them to reflect an FMV or fair market value. In the process, this constructs a way towards increasing the tax base, which lets company owners claim more depreciation amounts, besides more significant deductions on amortization.
Also, it provides future tax savings. On the other hand, defining the particular assets the company buyer wishes to acquire is challenging. Usually, businesses try to market just a single subsidiary or division. So, the resources used in the said subsidiary or division are typically put up for sale first.
Shared resources, however, require negotiation, followed by swapping licensing towards the purchaser, as well as the need for recording in accounting records as a portion of the acquisition price. Then, contracts have to be renegotiated. Once the purchaser just buys the assets of a seller, the buyer does not get any original deal the selling company holds with its business partners.
Agreements with partners in the business of the selling company can cause problems for the buyer if he plans to maintain business dealings with existing suppliers and customers. Therefore, all contracts need to be negotiated anew between the present suppliers and the new owner.
At this point, you are probably curious about how an asset purchase affects the liabilities of the selling company. Well, in an asset purchase, the buyer buys specific assets, besides liabilities, if any, as stated in the APA.
So, there may also be a transfer of liability from the selling company to the buying company. Please take note that contingent and undocumented liabilities are never included, which enhances the charm of resource acquisition.
With this process, the buyer answers for the acquired resources at their raised or stepped-up FMV, then decrease the asset values by depreciation for tax purposes. If the FMV of the acquired assets is below their real book values, the asset buyer does not get a tax advantage. Also, the asset buyer can use amortization in recording goodwill that is related to the asset bought for tax purposes.
Without a doubt, the buyer needs to obtain a title representing each asset acquired. And this can increase the extensiveness of legalities if the business already owns many fixed assets. Additionally, it may not be a choice to separate legal responsibility for environmental cleaning from fixed asset purchases.
In some instances, environmental rules state that forthcoming costs for dangerous waste cleanups may be enclosed to an asset of a company and its legal entity. Thus, this means that the buyer has to perform additional due diligence towards checking for environmental concerns when making plans of purchasing a realty holding of the company as a portion of the purchase.
Asset Purchase versus Stock Purchase
If you are purchasing stocks, you are almost wholly ridding yourself of the necessity to buy the entire assets of a company. After all, purchasing is likewise a transfer of title. So, opting for a stock acquisition also means freeing yourself of reapplying, renegotiating, or transferring things, such as permits, employment agreements, utilities, and facility leases.
In considering purchasing an existing company, buyers must determine whether he opts to seek asset purchase or a stock purchase of a business entity. Keep in mind that when you are thinking of purchasing a single proprietorship, partnership, or an LLC or Limited Liability Company, you would not be able to make a sale of stocks.
And this is due to the simple and obvious reasons that not one of these business entity structures hold stocks by nature. The only alternative is for owners to sell their interest in the business against the entity marketing its assets.
On the other hand, if the company is incorporated by way of a C-corporation, both parties, meaning the seller and buyer, must agree whether to make the deal using an asset or stock sale. If the decision is an asset purchase governed by an APA, then both parties will have to adhere to its guidelines.
In most cases, the asset purchase safeguards the buyer because he will only assume legal responsibility for the resources itemized in the acquisition agreement. In contrast, a stock purchase is governed by the stock purchase agreement or SPA, which indicates the sold company shares.
On the other hand, by purchasing resources, in place of stock, buyers get to avoid the problems linked to minority shareholders who refuse to market their shares. Rather than buy all the shares of a company, and of course, both its liabilities and assets, buyers very often prefer to take over specific resources of a company.
As typical in asset purchases, the business itself is selling the resources, whereas, in the sale of share, the individual stockholders are the sellers. Thus, buyers typically prefer buying the resources of a company, while sellers prefer selling shares.
And this is for the reason that an asset acquisition enables buyers to precisely pick which resources they are purchasing and identify exactly those legal responsibilities they are confident of taking over. To facilitate you in making your own choice, coming up next are the lists of advantages and disadvantages of undertaking an asset purchase in contrast to making a stock purchase.
Asset Purchase Strengths
In a resource acquisition, the buyers can lay down the legal responsibilities they are willing to take up and leaving unwanted liabilities behind. On the other hand, the buyers purchase stocks in a business that may hold unknown or unclear liabilities in a stock purchase.
If the acquisition price goes beyond the total tax base of the resources being purchased, the buyers receive a stepped-up base in the resources that is the same as the purchase cost. By purchasing resources instead of stock, the buyers avoid the problems brought about by minority stockholders who refuse to let go of their shares. Buying a business via asset acquisition exists less complicated when viewed from the securities law standpoint because the involved people are not usually required to meet the terms of the state and national securities regulations and laws. Also, goodwill may be amortized for tax reasons in favor of the buyer over 15 years.
Asset Purchase Weaknesses
The assets of the selling company must be titled again in favor of the buyer. This requirement does not exist in stock transactions. In a transaction involving the sale of stocks, the buyer normally obtains the non-assignable permits, contracts, and licenses of the selling company without the approval of the selling company to the permit, contract of lease, or license.
Purchases of assets do not meet the requirements for tax action as a tax-exempt reorganization. If the trading company has a small number of stockholders, a stock deal will generally be less problematic. In several states that levy transfer or sales taxes on asset sales, a stock deal can avoid a part or all fees that may apply in asset transactions.
Asset purchases could be a two-edged sword for selling companies. On one side, buyers may bid a higher amount on the asset purchase. Also, asset purchases provide sellers the opportunity to restrict the exposure of the buyer to various legal responsibilities. Then again, these deals could be disadvantageous for sellers.
And this is the other side of the sword, wherein the seller needs to prepare for the manner of liquidating any resource that is not purchased. On top of that, preparation is also required to unwind the leftover company after the transaction is completed. Also, sellers may face higher taxes when having an asset purchase deal.
For instance, if the company being sold is a C-corporation, a tax is levied when it markets the assets. Then, the business owners will be individually taxed when they transfer the sale proceeds to them from the company.
Finally, stock sales can help avoid double taxation, as well as the proceeds being subjected to tax at a lesser capital gains percentage. What is more, the seller gets rid of future legal responsibilities for himself and many more concerns just because he is selling all to the other party.
Frequently Asked Questions
What is an asset purchase?
An asset purchase is the purchase of specific assets of a company, as opposed to purchasing the company’s stock.
Is an asset purchase an acquisition?
Yes, an asset purchase is an acquisition. An asset acquisition strategy is the purchase of specific assets of a target company.
What is the difference between an asset purchase and a share purchase?
The key difference between an asset purchase and a share purchase is that in an asset purchase, the buyer acquires specific assets of the target company, while in a share purchase, the buyer acquires ownership of the target company.
Let’s say that you want to purchase a company that makes widgets. In an asset purchase, you would acquire the company’s factory, the machines used to make widgets, and the inventory of widgets that the company has on hand.
In a share purchase, you would acquire ownership of the company, including the factory, the machines used to make widgets, and the inventory of widgets that the company has on hand.
What are the advantages of purchasing an asset?
There are several advantages to purchasing an asset:
- The buyer does not have to meet the terms of state or national securities regulations and laws.
- Goodwill may be amortized for tax reasons in favor of the buyer over 15 years.
- The buyer may be able to step into the shoes of the seller with respect to certain contracts, permits, and licenses.
Why would a seller prefer an asset sale?
There are several reasons why a seller might prefer an asset sale:
- The seller can avoid certain taxes that would apply in a share purchase.
- The seller can avoid legal liabilities that would attach to the buyer in a share purchase.
- The seller can more easily liquidate assets that
Why shareholders are opposed to asset purchases?
The shareholders of the seller are usually opposed to asset acquisitions, because they end up owning any residual parts of the seller (usually its liabilities). In addition, the seller must pay income taxes on any gains realized from the sale of its assets. Then, if the entity chooses to pass through these gains to its shareholders, it does so with a dividend, which is taxed again. To make matters worse, if the seller had previously claimed an investment tax credit on the assets it is now selling, it may have to give back some of the credit, which increases its tax liability. Double taxation does not occur if the selling entity is organized as a subchapter “S” or similar organization.
The asset acquisition can be useful when the acquirer only wants to buy a small piece of the selling entity, such as a specific product line. If so, the only way to complete the transaction will probably be an asset sale, because there is no entity that owns just the desired assets and no others.