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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:
- Asset sale agreement
- Asset transfer agreement
- Purchase agreement
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 proceed 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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Meet some of our Asset Sale Lawyers
Ryenne S.
My name is Ryenne Shaw and I help business owners build businesses that operate as assets instead of liabilities, increase in value over time and build wealth. My areas of expertise include corporate formation and business structure, contract law, employment/labor law, business risk and compliance and intellectual property. I also serve as outside general counsel to several businesses across various industries nationally. I spent most of my early legal career assisting C.E.O.s, General Counsel, and in-house legal counsel of both large and smaller corporations in minimizing liability, protecting business assets and maximizing profits. While working with many of these entities, I realized that smaller entities are often underserved. I saw that smaller business owners weren’t receiving the same level of legal support larger corporations relied upon to grow and sustain. I knew this was a major contributor to the ceiling that most small businesses hit before they’ve even scratched the surface of their potential. And I knew at that moment that all of this lack of knowledge and support was creating a huge wealth gap. After over ten years of legal experience, I started my law firm to provide the legal support small to mid-sized business owners and entrepreneurs need to grow and protect their brands, businesses, and assets. I have a passion for helping small to mid-sized businesses and startups grow into wealth-building assets by leveraging the same legal strategies large corporations have used for years to create real wealth. I enjoy connecting with my clients, learning about their visions and identifying ways to protect and maximize the reach, value and impact of their businesses. I am a strong legal writer with extensive litigation experience, including both federal and state (and administratively), which brings another element to every contract I prepare and the overall counsel and value I provide. Some of my recent projects include: - Negotiating & Drafting Commercial Lease Agreements - Drafting Trademark Licensing Agreements - Drafting Ambassador and Influencer Agreements - Drafting Collaboration Agreements - Drafting Service Agreements for service-providers, coaches and consultants - Drafting Master Service Agreements and SOWs - Drafting Terms of Service and Privacy Policies - Preparing policies and procedures for businesses in highly regulated industries - Drafting Employee Handbooks, Standard Operations and Procedures (SOPs) manuals, employment agreements - Creating Employer-employee infrastructure to ensure business compliance with employment and labor laws - Drafting Independent Contractor Agreements and Non-Disclosure/Non-Competition/Non-Solicitation Agreements - Conducting Federal Trademark Searches and filing trademark applications - Preparing Trademark Opinion Letters after conducting appropriate legal research - Drafting Letters of Opinion for Small Business Loans - Drafting and Responding to Cease and Desist Letters I service clients throughout the United States across a broad range of industries.
Jane C.
Skilled in the details of complex corporate transactions, I have 15 years experience working with entrepreneurs and businesses to plan and grow for the future. Clients trust me because of the practical guided advice I provide. No deal is too small or complex for me to handle.
Donya G.
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.
Pia M.
Pia is returning to private practice after spending the majority of the last five years in public service as a prosecutor, handling major and violent crimes for the Office of the Commonwealth’s Attorney for Arlington County and the City of Falls Church. She is committed to serving the community through effective legal advocacy, having spent her early career doing indigent defense work and family law. Pia attended Northwestern University where she obtained a Bachelor of Arts in Psychology. After finishing college, Pia returned home to Virginia and obtained her Juris Doctorate from the Marshall-Wythe School of Law at the College of William and Mary in 2007.
August 2, 2023
Dennis W.
2008 - Present: Sole Practitioner – Dennis W. Winkler, P.C. Practice primarily in finance and business transactions, as well as commercial real estate transactions. Represent developers, investors, lenders, and businesses, in such matters as: corporate entity selection, drafting and negotiating complex asset purchase agreements, corporate mergers and sales, stock purchase agreements, and various other business contracts for closely related businesses. Involved in a variety of real estate developments, multi-family apartment buildings, construction and acquisition financing, commercial leasing, sophisticated workout transactions, joint ventures, and tax-deferred exchanges. Advise on tax and other savings incentives available to business owners and real estate owners in Illinois. Advise companies involved in related real estate activities such as sales, leasing, property management, brokerage, and construction. Tax experience that includes the representation of taxpayers in State and Federal controversies including: sales/excess tax disputes and responsible parties’ tax assessment protest. Additionally, Dennis has experience in the protest of real estate taxes of commercial and multi-family real estate. As a legal and business advisor, Dennis is committed to helping clients find, develop, and close deals that further their business objectives. Dennis regularly advises entrepreneurs and closely held businesses on matters incidental to their day-to-day business operations as well as their capital raising and start-up needs, corporate structure, private equity raises, and operating agreements. Much like general counsel, Dennis’s breadth of experience allows him to not only provide strategic planning and routine business transactional support to companies, but he also regularly advises on a number of unique issues facing companies by spotting issues and engaging specialists when needed, such as intellectual property, environmental, and bankruptcy counsel. As such, Dennis has been actively involved in sales and acquisitions of manufacturing companies, trucking companies, and logistics companies.
August 3, 2023
Noelle S.
I have been practicing law in Minnesota for the past 17 years, in general civil practice. My primary focus is employment law and contracts.
August 3, 2023
Shane S.
I have 13+ years of experience as a real estate, construction, and general transactional lawyer focused on drafting and negotiating commercial leases, purchase and sale agreements, contractor and design professional agreements, etc.
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Location: Colorado
Turnaround: Less than a week
Service: Contract Review
Doc Type: Asset Sale (all docs)
Page Count: 15
Number of Bids: 7
Bid Range: $475 - $2,450
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Selling business-asset only
Location: Illinois
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Doc Type: Asset Sale (all docs)
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