What Is an Asset Purchase of a Business?
What is an asset purchase of a business? An asset purchase of a business is one of three ways to structure a company's acquisition.3 min read
2. Purchasing Assets
3. Allocated Purchase Price
4. Contracts Must Be Renegotiated
5. What Happens With Liabilities in an Asset Purchase
6. Asset Step-Up
7. Asset Titles
What is an asset purchase of a business? An asset purchase of a business is one of three ways to structure a company's acquisition. A statutory merger, which is also called a share exchange, and buying the shares from current shareholders are the other two company acquisition methods. The one purchasing assets might buy only specific business assets or all of them, and specific business liabilities, if there are any.
Types of Purchased Assets
There are a number of purchased assets to consider when managing an asset purchase. The list includes:
- Accounting packages
- Customer lists
- Marketing materials
- Phone numbers
- Rights to software
- Trade names
- Vendor lists
- Web domains
Specific assets being purchased are listed on slips of paper. The purchase agreement then specifies that the buyer is purchasing all of the assets that make up the business. The business name is also specified. The buyer is taking ownership of the company when he or she buys up the shares, and all the company's assets and liabilities become the property of the shareholder who takes ownership. Only certain company assets can be purchased, not the liabilities as a way to reduce the potential risk.
Allocated Purchase Price
Purchasing assets of a business lets buyers allocate the company's purchase price among different assets so they reflect a fair market value. This creates a way to increase the tax basis, which lets owners claim higher depreciation amounts and bigger amortization deductions. It also provides tax savings in the future.
Defining the specific assets the buyer wants to acquire can be challenging. Businesses usually try to sell a single division or subsidiary. So, the assets used in the division or subsidiary in question are typically sold first. Shared assets, however, need to be negotiated, followed by switching licensing to the purchaser, and they need to be recorded in accounting books as part of the purchase price.
Contracts Must Be Renegotiated
When the purchaser only buys a seller's assets, the buyer doesn't get any of the original contracts with the company's business partners. Contracts with business partners of the company being acquired can cause trouble for the acquirer if he or she plans to keep doing business with existing customers and suppliers. This is because all contracts have to be renegotiated between the existing suppliers and new owner.
What Happens With Liabilities in an Asset Purchase
In an asset purchase, or acquisition, the buyer only buys the specific assets and liabilities listed in the purchase agreement. So, it's possible for there to be a liability transfer from the seller to the buyer. Undocumented and contingent liabilities, however, are not included. This is something that adds to the appeal of an asset acquisition.
With asset step-up, the buyer accounts for acquired assets at their elevated, or stepped-up, fair market value, then depreciates the values of the assets for tax reasons. If the acquired assets fair market value is lower than their actual book values, the buyer doesn't get the advantage of a tax benefit. The buyer can also use amortization to record goodwill that's associated with the asset purchase for tax reasons.
The buyer has to get a title for each individual asset purchased. This can add up to an extensive amount of legal work if the company owns a lot of fixed assets. In addition to that, it might not be an option to separate liability for environmental cleanup from purchases of fixed assets.
Environmental rules, in some cases, state that future costs for hazardous waste cleanups can be attached to a company's assets, as well as a company's legal entity. That means the buyer needs to perform extra due diligence to check for environmental issues if making a plan to purchase a company's real estate holding as part of the asset purchase.
Purchasing stock is a way to almost completely get rid of the need to purchase all of a company's assets. Purchasing is also called a title transfer. A stock purchase also means there is no reason to reapply, renegotiate, or transfer things like employment agreements, permits, facility leases, and utilities.
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