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Asset purchases are one option when an individual or entity wants to acquire another company’s tangible or intangible assets. When purchasing or selling a business’s assets, it’s critical to execute the transaction without legal mistakes. The purchase’s structure may ultimately mean the difference between long-term success and an unprofitable transaction.
This article helps buyers and sellers understand what asset purchases are and how they work from legal and tax standpoints.
Asset purchases, also known as asset sales, occur between a seller and buyer of a company’s assets, including facilities, vehicles, equipment, stock, and inventory. Buyers and sellers use an asset purchase agreement to govern the terms of the transfer or sale.
Asset purchases include acquiring seller assets under the terms and conditions outlined in the asset purchase agreement (APA). There is a negotiation period, followed by terms drafting, and then the final signing like many contracts. Approaching the negotiation table with fundamental knowledge can produce a better result.
Here are ten terms to know about asset purchases before negotiating or signing one:
A letters of Intent (LOI) is a proposal outlining and justifying a buyer’s objectives in cover letter format. It is a critical step in the project’s development, as it must typically be approved before any transfers can begin. An LOI is also an excellent negotiation tool so that both parties have a starting point.
Experienced buyers conduct extensive due diligence measures on the seller. Timelines should be included in your asset purchase agreements, as should corresponding representations and warranties from both parties.
Parties should determine whether the buyer will hire any of the seller’s employees during negotiations. Otherwise, the seller is liable for paying salaries, benefits, and severance. Additionally, businesses with at least 100 employees must comply with the Worker Adjustment and Retraining Notification (WARN) Act , requiring you to give staff members at least 60 days’ notice of an impending mass layoff.
Indemnification protects parties against misrepresentations and other types of breaches. Consider resources imposed on these indemnification provisions to deter issues from arising in the first.
Buyers may want to consider non-competition agreements and have the seller and key employees sign one. This strategy protects the value of the assets purchased. However, non-competition agreements are not legal in every jurisdiction, so you will want to determine which local rules apply to your situation before drafting an agreement.
At closing, the purchase price may need to be adjusted based on the business’s performance as indicated by financial information and due diligence reporting results. Purchase prices face adjustments for capital, valuation, revenues, and more.
The purchase price allocation determines how much the seller can treat as capital gains and thus benefit from a lower tax rate. Consider the tax treatment and implications carefully when drafting your agreements.
Selling companies typically have contracts , leases, and other agreements requiring transfer approval. These approvals typically take a long time to obtain and should be addressed early in the transaction’s development.
It is also worth remembering that some states may require specific terminology when engaging in asset purchases and business transfer agreements . An acquisitions lawyer in your state can go over the legal options available for your situation.
Each asset must have a bill of sale to prove that ownership belongs to you or your company. The seller should provide this document to the buyer, and your APA should address stipulations surrounding its delivery.
Meet some lawyers on our platformThe difference between an asset purchase and a share purchase lies within their functionality. Asset purchases involve a specific asset purchase from another company. In contrast, share purchases involve the purchase of an entire company’s equity portfolio and, thereby, effectively purchasing the company itself.
Let’s take a closer look at share purchases below for greater insight into the differences of both structures:
Share purchases, also known as stock purchases, are when one business buys a company’s shares, in their entirety, from its shareholders. When a buyer purchases a company’s shares, they effectively acquire its entire asset base. However, shares are the only assets that change hands.
The primary legal document for selling the shares is a stock purchase agreement , which details the buyer’s acquisition terms. Stock purchase agreements are lengthy, depending on the complexity of the legal situation. The added complexity is due to buyers becoming the acquired company’s new owner and taking responsibility for all past, current, and future liabilities.
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When someone purchases acquirable assets, they typically assume most liabilities, even ones from the past. Therefore, you should carefully consider the tax implications associated with asset purchases. However, buyers will be relieved to find that several advantages apply to them.
Below, we’ve outlined four tax implications of an asset purchase to consider before offering or signing one:
Capital assets are prone to depreciation over time. The Internal Revenue Service (IRS) recognizes this situation and allows buyers to deduct a portion of equipment over the expected useful life each year. The higher the asset’s cost basis, the larger the allowable depreciation deductions, generating more after-tax cash flow for the acquirer than a stock sale.
Section 338 of the IRS Code permits businesses to tax a stock purchase as an asset purchase. However, both parties must agree upon this election. The purchaser is responsible for any taxes incurred due to the step-up in tax basis, which results in an immediate tax liability.
Buyers get a step-up basis when acquiring assets through an asset purchase transaction. The asset’s purchase price becomes the new tax basis, which is advantageous to the seller as it reduces the ultimate tax liability on sales.
It’s necessary to understand the tax basis to understand the associated implications fully. The tax basis of an asset is the amount of money invested by a business in that asset. When a business sells an asset for a profit, the IRS assesses capital gains taxes on the difference between the asset’s sale price and tax basis.
Asset purchase agreements, also known as asset transfer agreements , are legally binding documents governing business asset sales. With the asset purchase agreement, you will need to include exhibits to provide additional details about the transaction. The purpose of this tactic is to ensure that you account for all assets when there are many of them.
Parties can also require the seller to disclose existing contracts, employee names, licenses, permits, and debts. In summary, your APA and exhibits should describe what the asset purchase includes explicitly. You should not leave issues unresolved, as it can result in uncertainty, potential conflict, and unwanted liability.
This web page also discusses asset purchase agreements.
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Diana is a registered patent attorney and licensed to practice law in Florida and in federal courts in Florida and in Texas. For nearly a decade, Diana has been known as the go-to brand builder, business protector, and rights negotiator. Diana works with individual inventors, startups, and small to medium-sized closely held business entities to build, protect, and leverage a robust intellectual property portfolio comprising patents, trademarks, copyrights, trade dress, and trade secrets.
Forest is a general practice lawyer. He provides legal advice regarding small business law, contracts, estates and trusts, administrative law, corporate governance and compliance. Forest practiced complex commercial litigation in Florida for eight years, representing clients such as Host Marriott, Kellogg School of Business, and Toyota. Since moving to Nashville in 2005, he has provided legal advice to clients forming new businesses, planning for the future, and seeking funding through the use of equity and/or debt in their businesses. This advice has included the selection of business type, assistance in drafting and editing their business plans and offering material, reviewing proposed term sheets, and conducting due diligence. Forest is a member of the Florida, Tennessee, and Texas Bars; in addition. Forest has held a Series 7, General Securities Representative Exam, Series 24, General Securities Principal, and Series 63, Uniform Securities Agent State Law.
I am a licensed and active NY and CT Contracts Attorney, with over 20 years of diverse legal and business experience. I specialize in reviewing, drafting and negotiating commercial agreements. My practice focuses on working with small business clients as well as clients from international brokerage firms on acquisitions, especially in the Ecommerce space; drafting, negotiating, reviewing and advising on business agreements; ; breach of contract issues, contract disputes and arbitration. I am licensed to practice in New York and Connecticut, and am a FINRA and NCDS Arbitrator. My experience includes serving as General Counsel to small businesses. This entails reviewing, updating and drafting contracts such as employments agreements, asset purchase agreements, master services agreements, operating agreements and a variety of business and commercial contracts. Additionally, I assist clients with business strategies, contract disputes and arbitration. My diverse experience allows me to give my clients a well-rounded approach to the issues they face. I have been at top AML law firms; a Vice President at an Investment Bank, a Civil Court Arbitrator presiding over cases in contract law, commercial law, a Hearing Officer, presiding over cases and rendering written decisions, and a Judicial Clerk to a Civil Court Judge. It would be a privilege to assist you and your business with my services.
Charlton Messer helps businesses and their owners with general counsel and contract drafting services. He has helped over 500 businesses with their legal needs across a variety of industries in nearly a decade of practice.
I received a bachelor’s degree in philosophy from Northwestern University in 1996 and then got my JD at University of Illinois College of Law in 1999. I have been a lawyer helping people with legal issues in the United States and Internationally since then. That includes litigation as well as contracts/transactions. I am also passionate about helping small and medium businesses with trademark registration and trademark-related legal projects. The law can be confusing and complicated for people, and I am passionate about providing professional legal services to my clients while simultaneously making the legal process less confusing and stressful for them. My goal is to help clients navigate through both good and difficult times by tailoring my skills, experience, and services to their specific needs. I am currently licensed and authorized to practice before the Illinois courts and the United States District Court for the Northern District of Illinois. Internationally I am one of a select few American attorneys licensed and authorized to practice before the United Nations ICTY/IRMCT, the International Criminal Court, and the State Court of Bosnia-Herzegovina. Clients have retained me internationally alongside local counsel in several European countries, Australia, and Africa in private legal matters. I have also been appointed by the United Nations to represent persons at the ICTY/IRMCT and chosen by indigent accused to represent them. Since 2009 my law firm has handled domestic and international cases, including Trial litigation (including Commercial, Premises Liability, Personal Injury, Criminal Defense, and General Litigation) and Transactional work (Contracts, Corporate formation, and Real Estate Transactions). I enjoy helping less experienced practitioners and students evolve and improve. I served as an instructor/lecturer on Oral Advocacy and Trial Practice for the participants of the ADC-ICT & ICLB Mock Trial since 2014, and have presented Advocacy Training lectures for the ADC-ICT on several topics as well as regularly lecturing to visiting University and Bar groups from around the world. If you or a loved one have a legal matter of importance, let's see if I can help you with it!
