What Does Sale of Assets Mean: Everything You Need to Know
What does sale of assets mean? When companies let go of some assets in exchange for needed cash or other forms of compensation, that is the sale of assets.3 min read
What does sale of assets mean? When companies let go of some assets in exchange for needed cash or other forms of compensation, that is the sale of assets. It's important to note that this term only applies when a company is selling part of their assets and not when all of them are for sale.
Shift of Ownership
These assets can be things the company doesn't need anymore, or they can be some of the company's main asset that they rely on to keep operating. The goal of this type of transaction is to shift ownership of these assets away from the business to the entity buying them. The assets can be purchased by either an individual person or a legal entity, like another business or corporation.
Accounting for a Sale of Assets
For accounting purposes, asset sales are a complicated form of transaction. The buyer of the asset can start a new business, or they can use a company that's already in business to acquire the desired assets. They can also use this process to acquire the existing management and the contracts held by another business. Unlike the sale of common shares, the sale of assets can only be considered completed after the purchased assets of a company have been acquired by the new buyer.
Maintaining Control of a Company
A sale of assets lets the seller hold onto control of the company, but it's important to note that all debt and liabilities have to be paid in full before any net cash proceeds can be claimed. Individual loans and whole loan pools are often used for this type of sale. A banks receivables accounts can be used to secure asset sales. An asset sale can be used to ease the risks associated with holding assets, it can help free up cash flow issues, and it can be used for liquidation purposes.
Types of Salable Assets
It's fairly common for retail companies to sell inventory in order to generate some revenue. There are, however, several other types of assets that companies can sell to generate revenue, such as:
- Receivable accounts
- Physical property
Companies often arrange the sale of fixed assets when those assets don't have any more value for the company. When you're selling fixed assets, your company can end up with a very big gain or very big loss that has to be reported in your financial statements. This may go under the heading of net income increase in income or decreasing income.
Liabilities Remain With Selling Company
It helps to add a note that these sales are not ordinary parts of the business and that they won't recur frequently in the company's books. Asset sales have a lot less risk for buyers. This is because of liabilities, which may be disclosed or they might not be disclosed, and contingent expenses, like pending court cases and tax assessments, remain with the selling company. For the buyer of these assets, due diligence means properly assessing fair market value, evaluating the quality of employees being transferred over, and the valuation of contracts being purchased.
Managing Change for the Buyer
There are a number of changes that need to be managed before, during, and after the close of an asset sale. When the sale closes, it has to be confirmed that the company buying the asset can keep doing business, which can mean things like getting the proper permits and licenses. If any of the employees are laid off at the time of the sale, the company acquiring them has to go through the process of rehiring them. Contracts with suppliers and customers, which the new company has purchased, have to be transferred over legally to the new company.
Buyers can't just assume that customers will stay with them after the acquisition. The buyers need to contact major customers and confirm if they're willing to stay on. If the buyer doesn't do that, they're at risk of the customer asking to renegotiate or even cancel the contract after the sale. After the close of the sale of assets, the buyer also has to make sure the revenue is properly invoiced, so the payments aren't accidentally sent to the company that sold the asset.
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