An Asset Purchase is a less well-known form of business acquisition in which the buyer doesn’t buy the shares of the target company, but buys the assets instead. Common scenarios when asset purchase is sometimes preferred is when the buyer wants to acquire the assets of the target business instead of acquiring the complete business entity.
While asset purchase can be beneficial for businesses of all sizes, small businesses often prefer this type of transaction because they don’t have stock that they can easily sell. Entrepreneurs that are looking to sell certain assets and liabilities associated with those assets may also prefer asset purchase.
With that said, since this business acquisition method is complicated and less widely used, most entrepreneurs aren’t sure what is involved in an asset purchase translation. In general, an asset purchase is governed by an asset purchase agreement. So if you want to understand how asset purchases work, you will first need to learn more about an asset purchase agreement or APA. If you are an entrepreneur who is planning on selling your business using the assets purchase structure, then we suggest you keep reading to learn more about an asset purchase agreement.
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What is an asset purchase agreement?
In its most basic form, an asset purchase agreement is a contract between the party that is selling its assets (entrepreneur) and the party that is buying the assets (buyer). Now, this contract is different from a regular merger or acquisition contract because an APA allows entrepreneurs to specify what assets they want to sell, and not.
So when an entrepreneur is trying to sell a portion of their assets without giving up the rights to their business, they can use an asset purchase agreement. These agreements can ensure that the seller doesn’t lose ownership of their business during the asset purchase. Another reason why asset purchase agreements are beneficial for entrepreneurs is that an APA gives them an opportunity to get rid of liabilities along with the assets. Once specified in the agreement, the seller no longer remains responsible for any loans or other liabilities associated with the assets that they sold off.
These agreements can be used for the sale of physical assets such as equipment, furniture, vehicles as well as intangible assets such as patents, trademarks, goodwill, and more. So in short, you can sell any type of asset that your business owns with the help of an APA. While the buyer may want to purchase certain assets, the APA allows the seller to only hand over the assets they need to and retain the ones they don’t want to sell. By learning how asset purchase agreements work, entrepreneurs can leverage this contract to safeguard their valuable assets while getting rid of unimportant assets and liabilities.
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Key elements of an asset purchase agreement
One thing that entrepreneurs might find confusing about asset purchase agreements is that they don’t have a standardized format or set of conditions. This means no two asset purchase agreements are going to be exactly the same, and each asset purchase will require both parties to draft up a unique agreement together.
So the best way for entrepreneurs to ensure that they understand what an APA contains and how to draft the agreement properly is to know the key components of asset purchase agreements. So without further ado, here are all the components of an APA that entrepreneurs need to be aware of:
The opening paragraph is usually the very first section of the APA, and this section contains the names of the seller and the buyer.
This section will contain a list of all the assets that are being sold by the seller. In addition, this section is also used to specify the assets that the seller doesn’t want to sell. So if the seller specifies any assets that are excluded from the sale, the buyer cannot legally acquire the excluded assets.
As mentioned earlier, asset purchases mean that the seller can transfer the liability associated with an asset to the buyer. The liabilities section of an APA will list down all the liabilities that are to be transferred to the buyer as a result of the asset purchase. This section also protects the buyer’s interests, as it specifies that the buyer doesn’t assume any liabilities that are not listed in this section. So as an entrepreneur, you should make sure to include all the liabilities associated with the assets being sold in this section.
Closing date of the sale
The closing date section will define the exact day on which the asset purchase will be finalized.
This section of the APA contains agreements to keep the sellers from directly competing with the buyer after selling the assets. Other than the “non-compete agreement“, this section may also contain other agreements relevant to the asset purchase.
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This section is going to contain undertakings by the seller regarding the ownership of the assets they are selling and the financial data they have presented for the assets involved in the purchase. This section also contains an undertaking about the liabilities associated with the assets being sold, and that the seller has clearly stated the liabilities associated with each asset.
Another important section that is a part of almost all asset purchase agreements is the governance section. This section specifies what laws govern the agreement between the buyer and the seller. So in case of any disputes, both parties can take legal action as per the specified state, federal or international law.
Asset purchase agreements may not be limited to the sections mentioned above. So it is best to involve legal experts when drafting an APA to make sure your interests as a seller or buyer are protected.
Before offering your assets for sale for raising funding for your company, a critical step is knowing how to value your company. If you would like more information on how to do that, check out this video I have created.
Asset purchase and stock purchase – What is the difference?
Since most acquisitions take place using the stock purchase structure, it is natural to ask about the differences between stock purchase and asset purchase models. The most obvious difference between the two types of acquisitions is in the value that is being exchanged between the buyer and seller.
Stock purchases involve the buyer acquiring all of the stock from the seller, while asset purchase involves the buyer acquiring only selected assets. However, the actual differences between the two acquisition models go far beyond the obvious difference stated above. Here are some detailed differences between an asset purchase and a stock purchase:
Differences in the level of control
One major difference between an asset purchase and stock purchase structures is that an asset purchase offers more control to the buyer and the seller. Both parties can negotiate on what needs to be sold. Sellers can offer certain assets and liabilities that they wish to sell, and buyers can select the ones they want to acquire. On the other hand, stock purchase doesn’t offer much control to both parties and the buyer has to acquire the target company by buying all of its stock.
The involvement of shareholders varies in both types of acquisitions. Stock purchase requires the approval of all of the shareholders, and if the shareholders disagree with the sale, then the buyer can’t acquire the firm. On the other hand, asset purchase doesn’t always require the involvement or approval of the shareholders.
With that said, there are cases when a special shareholder’s agreement exists that requires their involvement in case of an asset purchase. So if a special agreement exists, the shareholders may also be able to object to an asset purchase. However, in normal conditions, the involvement of shareholders in an asset purchase is not necessary.
The level of complexity is different
While both asset and share purchase structures have a certain level of complexity associated with them, asset purchases are usually more complex. That is because a stock purchase involves the transfer of share capital while an asset purchase requires the transfer of multiple assets.
Each asset of an asset purchase will have its own set of liabilities that need to be accounted for. This can create a complexity of ownership transfer of each separate asset. So in general, a stock purchase is less complicated for both parties compared to an asset purchase.
Due diligence differences
Due diligence is an integral part of every merger or acquisition deal and is required for both stock purchase and asset purchase. However, since asset purchase only involves the transfer of specific assets, it is much easier to verify the financial, legal, and commercial status of the selected assets.
On the other hand, a stock purchase involves the transfer of all the assets and liabilities of the company. So it is easier to perform due diligence for an asset purchase as a buyer compared to a stock purchase.
Tax rates can be a major concern during the acquisition of a company. The proceeds from the sale of the company are taxed differently for both stock and asset purchase models.
A stock purchase usually gives the proceeds from the sales directly to the shareholders of the target company, which can reduce the amount of taxes that the shareholders have to pay. In contrast, if a company sells its assets, it may be subjected to capital gains tax or corporation tax, which bumps up the amount of taxes it has to pay.
The number of warranties required in both stock purchase and asset purchase differs significantly due to the different scales of both types of transactions.
Generally, an asset purchase only requires the seller to give warranties for the assets involved in the acquisition.
On the other hand, a stock purchase requires the seller to give more warranties to the buyer. That is because the buyer is acquiring all of the assets of the target company along with all of the liabilities associated with them.
Separation involves any steps that need to be taken after the purchase has taken place. Separations are generally more hands-off and clean because the seller is selling the entire company and doesn’t have to worry about any leftover assets.
However, when sellers sell selected assets, they are left with some assets and liabilities that they will either have to sell to other buyers or wind down their operations completely.
With that said, if the buyer makes a claim against the seller within a specified time frame following the sale regarding any false warranties, the seller will be liable. So as an entrepreneur trying to sell your business, your goal should be to limit the number and the extent of warranties you give to the buyer. On the other hand, buyers will want to get more detailed warranties to make sure that the seller is liable for any false claims, even after the sale has been closed.
Why should entrepreneurs use asset purchase agreements when selling their company’s assets?
By now, you have learned most of what an entrepreneur should know about an asset purchase. However, it is also important to learn why an asset purchase agreement is necessary and what are the implications of selling your assets without an APA in place. With that said, here are some key reasons why you should make sure you have an asset purchase agreement in place:
Ability to retain certain assets
If an entrepreneur thinks that they should hold on to certain assets while getting rid of other assets and liabilities, they can specify their terms using an APA. If an APA doesn’t specify what assets are included in the sale and which ones aren’t, the buyer may hold the seller responsible for any liabilities that the seller intended to transfer.
Limit the extent of warranties
Warranties are an integral part of any asset purchase, and an APA allows the seller to limit the extent of warranties that they want to give for the assets.
Asset purchase structure allows entrepreneurs to get rid of or liquidate their business assets and liabilities quickly. An asset purchase agreement is meant to facilitate an asset sale and protect the interests of both the buyer and the seller.
Now that you know what asset purchase agreements are and how they work, you are in a better position to enter an asset purchase deal for yourself.
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