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Need help with an Asset Sale?
Asset sales are helpful when one company wants to acquire another company’s entire or partial asset portfolio. However, there are several legal considerations to make since asset sales carry tax implications and other options are available. Preparing yourself with knowledge before approaching the process is essential to the best possible outcome.
This article describes asset sales, how they work, and other relevant details that buyers and sellers would want to know.
What is an Asset Sale?
Asset sales are types of business transaction where buyers purchase assets from a business, and the sellers retain legal ownership of the company. They carry less risk for buyers while allowing sellers to perform fair market value due to diligence measures thoroughly. Sales are only complete upon final asset acquisition, meaning sellers are liable for the assets until then.
How Does an Asset Sale Work?
Asset sales work by allowing a company to obtain valuable assets by purchasing another. At transaction close, the buyer must ensure that the acquiring company can continue doing business with the acquired assets.
You structure these transactions using an asset purchase agreement . Other names for this type of contract include:
The negotiation of an asset sale agreement typically starts when a prospective buyer submits a letter of intent to buy. If the seller agrees to the terms, both parties must sign the asset purchase agreement, including a non-competition agreement for specialized situations. Buyers and sellers should also include provisions that detail the Bill of Sale documents and transfer dates.
This web page describes asset purchase agreements.
Why Do Buyers Prefer Asset Sales?
Buyers prefer asset sales since they allow them to write off assets for tax purposes and also allow them to leave behind any liabilities or other potential risks that the selling company may have. All these assets are included in the price of asset sales which turns out to be a great deal for them over the long run, and sellers get to avoid capital gains taxes on the date of the transaction.
Asset Sale vs. Stock Sale
The main difference between asset sales vs. stock sales is that the buyer acquires some or all business assets under an asset sale, whereas stock sales only involve equity acquisitions. Buyers can select the assets they wish to purchase during an asset sale, but if they utilize a stock sale, they have to purchase the company in its entirety.
Apart from tax advantages, buyers and sellers may choose an asset or stock sale for various reasons. Asset sales are generally more advantageous to buyers, while stock sales are more advantageous to sellers. Generally speaking, asset sales take longer to complete than stock transactions, and the business may receive a higher fair market valuation.
What Are Stock Sales?
Stock sales are when a buyer purchases the existing legal entity’s shares directly and do not require in-depth analysis of each asset. Typically, businesses distribute or pay off unwanted assets and liabilities before closing. You utilize a stock purchase agreement when engaging in stock sales.
Check out this web page for more information about mergers & acquisitions.
Examples of Asset Sales
Here’s an example of how an asset sale works:
- Jem and Rio are the spouse co-owners of Hologram Gym
- They want to retire and liquidate their business
- They’re sole owners of the business and are requesting $500,000 for it
- The sale will include the entire property, building, parking lot, gym equipment, mats, towels, and furniture
- The couple can sell their assets, but they’ll have nothing left in the business
- This situation would require a real estate purchase agreement , and they would have to pay gains taxes at the time of the transaction
- Maria and Tony are another entrepreneurial power couple, and they’re considering purchasing Hologram Gym
- Hologram’s asset sale structure is perfect for Maria and Tony since they can essentially purchase a “turn-key” operation for a fair price
- Maria and Tony purchased Hologram Gym from Gem and Rio and formed a new LLC under the name West Side Gym
- They record the purchase of the gym’s assets in their newly formed LLC and begin operations
- Before finalizing the asset purchase , West Side Gym performed its due diligence by auditing the current customer agreements between Hologram and their members
- Hologram’s contracts allow for the transfer of customer contracts to asset sale buyers
- West Side Gym completes the transaction and is happy to walk away with an ideal outcome
The example above demonstrates how powerful asset sales can be for buyers and sellers. Gem and Rio avoided significant tax implications by using an asset transfer versus selling assets separately. Tony and Maria were able to get a great deal on a gym of their dreams with an existing customer base.
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Tax Treatment for Asset Sales
Whether buying or selling a business, tax considerations can complicate any transaction. Finding a transaction structure that meets the buyer’s and seller’s needs are complex issues to address as soon as possible. One of the most critical tax considerations to make when structuring a buy-sell agreement is whether to treat it as an asset sale or stock sale.
Below, we’ve outlined five tax treatments for asset sales to consider when deciding on your company’s strategy:
Treatment 1. Depreciation and Re-Depreciation
The buyer may increase asset values to their fair market value for asset sales and re-depreciate them, including bonus depreciation. This option allows for massive tax savings on capital gains.
Treatment 2. Amortization
Buyers may also choose to allocate a more significant portion of the purchase price to rapidly depreciating assets and a lesser amount to amortizing goodwill slowly. Current tax laws allow for amortization over fifteen (15) years while remaining tax-deductible but not for accounting purposes.
Treatment 3. Tax Gains Rates
Certain asset sales gains are taxed at a higher rate than ordinary income. It would be best to discuss the acquisition of the assets with a legal professional since the assets you’re acquiring will affect your taxes.
Treatment 4. C-Corporations
If the seller is a C Corp , the gain may be subject to double taxation, and this outcome is not unusual since double taxation is standard for operating a c-corp. The acquiring business pays corporate taxes on capital gains while shareholders face the second taxation from sale proceeed dividend distributions.
Treatment 5. Section 338 (H)(10)
Parties of pass-through entities may elect Internal Revenue Service (IRS) Section 338 (H)(10) to treat stock sales as asset sales for tax purposes. This option helps the buyer benefit from the depreciation deduction without incurring the cost or inconvenience of transferring asset ownership.
Regardless of your strategy, be aware that buying and selling a business is a complicated process that requires prior consultation with asset purchase agreement lawyers for the best possible result. This strategy will help you avoid expensive legal mistakes that could cost you a significant amount in the future.
Get Legal Help with Asset Sales
An acquisitions lawyer has experience and knowledge of the relevant laws applicable to asset sales. They can also help you draft and finalize the written legal documents for your situation. Connect with an award-winning legal professional in your state today.
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