Buying Assets of a Business: Everything You Need to Know
Buying assets of a business entails purchasing items such as property, fixtures and equipment which results in the previous owner's business ceasing to exist.3 min read
2. About Asset Purchases
Updated November 6, 2020:
Buying assets of a business entails purchasing items such as property, fixtures, equipment, and customer and client goodwill. This results in the previous owner's business ceasing to exist. Your business takes over with all the old business' assets.
Information for Buying Company Assets
When purchasing a company's assets, you do not want to include the liabilities. To exclude the liabilities, you would buy only the assets and not the company's stock.
Buying the company's assets and avoiding buying the liabilities is just one of many ways a company can purchase another. An asset purchase is not limited to buying all the assets; the acquiring company can be selective in the assets it wants to purchase. In general, the company buying the assets is in a more favorable position than the company selling its assets.
While the primary value of buying company assets is avoiding taking on the responsibility of the liabilities, certain rules must be followed to avoid the company being classified as a de facto merger.
In a de facto merger, the court of law views and treats the transaction as the companies having merged instead of one company buying the assets of the other company. In this case, the purchasing company is held responsible for the other company's liabilities.
De facto mergers also apply to the acquisition of companies that continue to use the same personnel and those that commit any form of fraud to avoid liabilities.
Regardless of the amount paid for the assets or the conditions of the agreement, the company being purchased is still responsible for certain payments. Ignoring these responsibilities is a violation of state statutes. The company being acquired is responsible for the following three liabilities:
- Workers' compensation premiums
- Unpaid excise taxes
- Unemployment taxes
The purpose of these liabilities is to prevent taxpayers from going out of business to avoid taxes. These statutes apply whenever a seller is selling, exchanging, or disposing of their business and a buyer becomes the successor.
The process of liabilities being transferred from the seller to the buyer is called successor liability. This is a risk associated with the sale of assets when fraud on creditors is involved or when the seller and the buyer are common owners.
Even if assets are purchased at a fair price and there is no fraudulent activity on the part of the seller, the statutes can be triggered.
A "successor" is someone who buys or has conveyed to them, either directly or indirectly, a major part of a business's merchandise, inventory, materials, supplies, and equipment by a seller.
Using Georgia as an example, the Department of Revenue has regulations in place covering the role of a successor. The definition of "major part" in the regulations states that a successor must purchase assets at more than 50 percent of their market value at the time they are sold. If it is found there is more than a 50 percent interest in the fair value of assets, this can result in successor liability. The regulations do have some limitations regarding who is considered a successor.
It is also possible that debts will be incurred by the successor that exceeds the value of the company assets purchased. Buyers need to be aware of the statutes and how to avoid them as well as other potential issues.
About Asset Purchases
The difference between an asset purchase from a stock acquisition and a purchase from a merger is the person or company making the purchase does not include ownership or stock in the target company. The buyer may pay cash or use company stock as payment.
In turn, the buyer may be purchasing some or all of the following:
- Lease rights
- Business permits
- Lease rights
- Franchise rights
Two categories are generally involved in the purchase of a company's assets: operational assets and intangible assets.
Operational assets are used to provide services for customers or to make products. An example would be an espresso machine used in a coffee shop. Intangible assets are usually ownership rights that have no physical substance. Examples of intangible assets include copyrights, licenses, and permits.
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