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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.
What is an Asset Purchase?
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.
What’s Included in an Asset Purchase?
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:
Term 1. Letter of Intent
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.
Term 2. Due Diligence
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.
Term 3. Employees
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.
Term 4. Indemnification
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.
Term 5. Non-Competition Agreement
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.
Term 6. Price At Closing
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.
Term 7. Taxation
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.
Term 8. Third-Party Permissions
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.
Term 9. State-Specific Provisions
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.
Term 10. Bill of Sale
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.
Differences Between an Asset Purchase and Share Purchase
The 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:
What Is a Share Purchase?
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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Tax Implications of an Asset Purchase
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:
Implication 1. Depreciation
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.
Implication 2. Section 338
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.
Implication 3. Step-Up Basis
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.
Implication 4. Tax-Basis
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.
What is an Asset Purchase Agreement?
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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Mark P.
www.parachinilaw.com I represent a diverse mix in a vast array of specialties, including litigation, contracts, compliance, business and financial strategies, and emerging industries. Credit for this foundation of strength goes to those who taught me. Skilled professors and professionals fostered my powerful educational and professional background. Prior to law school, I earned dual Bachelor’s degrees in Business Administration & Accounting from Peru State College. I received a Master of Business Administration degree from Chadron State College. My ambitions did not stop there. While working full time as a Senior Accountant for the University of Missouri, Columbia, I achieved the lifelong goal of becoming a licensed Certified Public Accountant (CPA). Mizzo provided excellent opportunities and amazing experiences. Managing over $50M in government and private research funding was a gift. As a high ranking professional in the Department of Research, I was given priceless insight into the greatest scientific, journalistic, medical, and legal minds in the world. My passion for successful growth did not, and has not stopped. I graduated summa cum laude (top 3%) with a Doctorate in Law, emphasizing in urban, land use and environmental/toxic tort law from the University of Missouri, Kansas City. This success lead to invaluable experiences of serving as Hon. Brian C. Wimes' judicial clerk for the U.S. District Court for the W. D. of Missouri, as a staff editor/writer for UMKC Law Review, and as a litigation and transactional attorney with Lathrop GPM (fka Lathrop & Gage). My professional and personal network is expansive, with established relationships throughout the U.S. and overseas. Although I engage in legal practice all over the country, I maintain law licenses in Missouri, Kansas, and Nebraska. Federally, I hold licenses in the W.D. and E.D. of Missouri and the District of Nebraska. To offer extra value, efficiency, and options, I maintain a CPA license and am obtaining a real-estate brokerage license.
Jeremiah C.
Creative, results driven business & technology executive with 24 years of experience (15+ as a business/corporate lawyer). A problem solver with a passion for business, technology, and law. I bring a thorough understanding of the intersection of the law and business needs to any endeavor, having founded multiple startups myself with successful exits. I provide professional business and legal consulting. Throughout my career I've represented a number large corporations (including some of the top Fortune 500 companies) but the vast majority of my clients these days are startups and small businesses. Having represented hundreds of successful crowdfunded startups, I'm one of the most well known attorneys for startups seeking CF funds. I hold a Juris Doctor degree with a focus on Business/Corporate Law, a Master of Business Administration degree in Entrepreneurship, A Master of Education degree and dual Bachelor of Science degrees. I look forward to working with any parties that have a need for my skill sets.
Kenneth G.
I build legal solutions which create extraordinary value for my clients. I am a partner in Alliance Law Firm International PLLC in Washington. My specialties include tax, wealth management, estates, corporations/business, venture capital, private equity, and natural resources. Prior to practicing law, I had a decade-long career in international private equity and investment banking. I have worked on building and managing companies in technology, energy, materials, retail, and natural resources. I am licensed to practice in the District of Columbia and Pennsylvania. I have degrees from the Georgetown University Law Center (JD) and the Yale School of Management (MBA).
Garrett M.
I am a solo-practitioner with a practice mostly consisting of serving as a fractional general counsel to start ups and growth stage companies. With a practical business background, I aim to bring real-world, economically driven solutions to my client's legal problems and pride myself on efficient yet effective work.
Billy Joe M.
I graduated from the University of Illinois at Urbana-Champaign in 2006 with a degree in Political Science, Finance, and Economics. I stayed around Champaign for law school and graduated in 2009. I then worked at a big law firm in downtown Chicago. It was boring, so I quit in early 2011. I thought that I could not be happy practicing law - I was wrong. After I quit the traditional law firm life, I began representing my own clients. I realize now that I love helping normal people, small business owners, and non-profits address a variety of legal issues. I hope to hear from you.
August 28, 2021
Gerald W.
My clients know me as more than just an attorney. First and foremost, my background is much broader than that. Prior to attending the Valparaiso University School of Law, I earned a Master of Business Administration and ran a small business as a certified public accountant. Thanks to this experience, I possess unique insight which in turn allows me to better assist my clients with a wide range of business and tax matters today. In total, I have over 20 years of experience in financial management, tax law, and business consulting, and I’m proud to say that I’m utilizing the knowledge I’ve gained to assist the community of Round Rock in a variety of ways. In my current practice, I provide counsel to small to medium-sized businesses, nonprofit organizations, and everyday individuals. Though my primary areas of practice are estate planning, elder law, business consulting, and tax planning, I pride myself on assisting my clients in a comprehensive manner. Whenever I take on a new client, I make an effort to get to know them on a personal level. This, of course, begins with listening. It is important that I fully understand their vision so I can help them successfully translate it into a concrete plan of action that meets their goals and expectations. I appreciate the individual attributes of each client and know firsthand that thoughtful, creative, and customized planning can maximize both financial security and personal happiness. During my time as a certified public accountant, I cultivated an invaluable skill set. After all, while my legal education has given me a deep understanding of tax law, I would not be the tax attorney I am today without my background in accounting. Due to my far-reaching experience, I am competent in unraveling even the most complex tax mysteries and disputes. My CPA training benefits my estate planning practice, too. In the process of drafting comprehensive wills and trusts, I carefully account for every asset and plan for any tax burdens that may arise, often facilitating a much smoother inheritance for the heirs of my clients. Prior to becoming certified as a CPA, I made sure to establish a solid foundation in business both in and out of the classroom, and the acumen I’ve attained has served me well. Not only am I better able to run my own practice than I otherwise would be; I am able to help other small business owners fulfill their dreams, as well.
September 3, 2021
James David W.
I graduated from Harvard Law School and worked first for a federal judge and then a leading DC firm before starting a firm with a law school classmate. My practice focuses on company formations, early-stage investments, and mergers & acquisitions.
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Asset Purchase
Florida
Buying an online business
I am in the process of buying an online business. The seller send me a purchase agreement from his lawyer that needs review - how do I get a one time review of the contest to ensure my interest are maintained ?
Donya G.
Hello, This is Donya. I would love to assist you with reviewing the APA from the sellers attorney for the purchase of your online business As a contracts attorney, with over 20 years of legal and business experience, my business focuses on the purchase and sale of ecommerce and other businesses. I work with clients from international brokerage firms like Website Closers, Fortia and Flippa in the purchase and sale of assets, ecommerce stores, trademarks, patents and/or complete businesses. I have been involved with purchase and sale of a host of ecommerce companies. Within the past year, I have completed at least two dozen deals. If you would like me to assist you, you can reach out to me on the Contracts Counsel website or on my personal page on the site and send me a message or schedule a call with me. I look forward to hearing from you. Donya Gordon
Dispute
Asset Purchase
California
I am a seller .Buyer broke the contract, How do I get the earnest money in case the buyer did not agree to sign ? .
I am a seller . made a contract to sell the commercial building. But Buyer did not make to fulfill their jobs, my broker asked to sign for the deposit. They did not answer for long time. Escrow company said without both sign, can not release the deposit to the seller.
Donya G.
That is correct. The escrow agreements I have drafted or reviewed would only release the money if both parties agreed. However, the document should outline what happens when there is a dispute. You will need the document reviewed and then advised on the next steps. As a contracts attorney who has experience with contract disputes, I can assist you. If you would like to engage my services, you may contact me on the Contracts Counsel website. Donya Gordon
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