Someone who purchases a business must choose whether to buy it outright or just purchase its assets. There are pros and cons to each approach, and this article will discuss asset purchase agreements. Below, we explain what an asset purchase agreement is, what its advantages and disadvantages are, and how to prepare one.
What Is an Asset Purchase Agreement?
Unlike an entity purchase, in which the buyer purchases the entire company as an entity (including all of its assets and liabilities), an asset purchase involves just some or all of the target company’s assets, such as inventory or equipment. As a result, an asset purchase does not result in a change of ownership.
What Are the Advantages of an Asset Purchase Agreement?
The primary advantage of an asset purchase for the buyer is that they do not assume any of the company’s liabilities. These can include, for example, contracts, negligence claims and other tort liabilities, tax liabilities, or lease obligations. With an entity purchase, the buyer assumes all of these liabilities and any others that the company many have, known or unknown.
With an asset purchase, generally, the only liabilities that the buyer assumes are those stated in the agreement; the selling company remains responsible for the rest of its liabilities. For this reason, many buyers choose to purchase a company’s assets rather than the entire business.
An asset purchase confers another benefit on the buyer as well: They receive a stepped-up tax basis in the assets purchased. Depending on the situation, this can entitle the buyer to greater tax deductions. By contrast, there may not be a stepped-up tax basis in assets that come with an entity purchase.
On a related note, buyers often prefer asset purchase agreements because they permit the allocation of the purchase price among the assets in accordance with their market value. This allows buyers to claim higher depreciation amounts and thus take higher amortization deductions.
What Are the Disadvantages of an Asset Purchase Agreement?
For their part, sellers usually prefer to sell their entire ownership interest in an entity purchase. Not only does this relieve them of responsibility for the company’s liabilities, but they also can report their entire gain from the sale as capital gains rather than regular income. This can result in tax savings for the seller.
One disadvantage of an asset purchase agreement is that there are rules that must be followed for the transfer of each asset, some of which may involve third parties. For example, a customer may wish to renegotiate a contract that is being transferred before the deal goes through. In addition, some contracts may not be transferrable, and certain others may require third-party consent before the transfer.
Tips for Making an Asset Purchase Agreement
When making an asset purchase agreement, there are several considerations for parties to keep in mind.
Accurately Identify the Parties, the Assets to Be Purchased, and the Price
It is important to correctly identify the parties, especially if the company whose assets are being purchased has multiple subdivisions. Likewise, describe as specifically and accurately as possible exactly which assets are being purchased so that there is no misunderstanding.
Equipment should be listed comprehensively, land should be described in accordance with the relevant real estate records, and the nature of any services should be stated specifically.
Negotiate Which Liabilities the Buyer Will Assume
When drafting an asset purchase agreement, be sure it lists exactly which liabilities the buyer will assume, if any, when the deal is complete. In addition, the agreement should provide that the buyer is not responsible for any obligations that are not expressly stated.
Perform Adequate Due Diligence Before Closing
The exact steps to take when performing due diligence depend heavily on the facts surrounding the purchase. As a result, it is important to talk to an experienced attorney like Timothy Coons to find out exactly what should be done.
Generally speaking, however, due diligence in the context of an asset purchase requires learning all the important details about the business being purchased, including its assets, liabilities, operation, etc.
Use Legal Documents That Are Drafted Correctly
The most important document is, of course, the purchase agreement (aka the purchase contract, purchase and sale agreement, or asset purchase agreement). Other documents involved in an asset sale can include, but are not limited to, the bill of sale, escrow agreement, non-compete agreement, articles of organization amendments, consulting agreement, employment agreement, deed of trust, and security agreement.
Include All Representations and Warranties
This encompasses anything that either party is depending on for the sale to go through. Representations and warranties need to be laid out specifically in the agreement so there are no unstated assumptions or other misunderstandings.
Make Sure the Company Selling Its Assets Will Still Be Adequately Capitalized
If the buyer is not purchasing all of the company’s liabilities, the parties need to ensure that the company will retain enough assets to pay for its remaining liabilities after the sale.
Contact Counxel Legal Firm
If you would like to talk to an attorney about making an asset purchase agreement, contact us at (480) 744-6621 or at request@counxel.com. Don’t forget to check out the good things that others are saying about the services they received from Timothy Coons on Google.
This article is intended for informational purposes only and does not constitute legal advice for your specific situation. Use of and access to this article does not create an attorney-client relationship between you and Counxel Legal Firm. Please contact request@counxel.com or (480) 744-6621 to request specific information for your situation.
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