Structuring an Asset Purchase
Whether you are plan on buying or selling a business, it is important to consider how you want to structure the business transaction. The two most common types of ways to structure the business transaction are either a stock purchase or an asset purchase. This article will go in-depth on structuring an asset purchase. For more information on stock purchases, see Structuring a Stock Purchase.
What is an Asset Purchase?
Most individuals structure a business transaction as asset purchases. In an asset purchase, the seller transfers the ownership of all or some of the assets of the business. The liabilities of the business may or may not be included. The buyer and seller of the business negotiate which liabilities the buyer will assume. This differs from a stock purchase where the buyer assumes all the assets and liabilities of the business.
Both an asset purchase and a stock purchase have their advantages and disadvantages. It is best to speak with an attorney and your CPA first to decide which type of structure is best. You can also schedule a free consultation with Peak Business Valuation, business appraiser. For more information see Structuring a Business Transaction.
Important Information to know about an Asset Purchases
In an asset purchase, the buyer will need to create a new entity. They then put the assets and liabilities if included in the new entity. The seller of the business remains the legal owner of the selling entity. As such, the seller continues to remain responsible for any legal action or liabilities owed post-transaction.
Advantages of an Asset Purchase
An asset purchase is most advantageous to the buyer of a business. Through adequate due diligence, the buyer will have in-depth knowledge about the liabilities of the business. They can then choose what assets and liabilities they do or do not want. This enables the buyer to know exactly what they purchase in the business transaction. It also limits the risk of the buyer assuming liabilities that are large, unknown, or uncollectible such as outdated accounts receivable.
Next, the buyer will choose which employees they want to keep on and which they do not. Because the business is a new entity, the buyer is not held to unemployment for employees they do not keep.
Last, any goodwill more than the value of the business’s tangible assets can be amortized for tax purposes. It can be amortized on a straight-line basis over a 15 year period.
Disadvantages of an Asset Purchase
Despite the many advantages, there are also disadvantages to an asset purchase. First, the buyer may need to renegotiate/renew contracts with suppliers and customers. With the need to create a new entity, the assets of the business may also need to be retitled. The buyer may also need to renegotiate employment contracts.
In an asset purchase, the seller typically has an increased tax cost. This may result in them insisting on a higher purchase price. This may also be warranted as the buyer typically assumes less risk due to not assuming certain liabilities. In an asset purchase, the seller is still responsible to pay any and all liabilities the buyer does not assume.
Common Assets included in an Asset Purchase
The following are common assets included in an asset purchase or asset structured transaction.
- FF&E – Furniture, fixtures, and equipment
- Licenses necessary to the operation of the business
- Customer lists
- Any other fixed and intangible assets
Inventory may or may not be included in the business transaction. In some cases, the buyer purchases the inventory separate from the business transaction. Or sometimes the value of the inventory is added to the total sale’s price of the business. Price for inventory is generally at “sellers’ cost” or the price the seller purchases the inventory for.
Understanding both an asset purchase and a stock purchase is key to buying or selling a business. Peak Business Valuation, business appraiser, provides business appraisals for business transactions. Most business transactions fall in either a stock or asset purchase. However, some do not, as everything can be negotiated.
Be sure to speak with professionals regarding your business transaction. Peak Business Valuation, business appraiser, is here to answer any questions you have about structuring a business transaction. A business appraisal is an important part of both buying a business and selling a business. Get started today by scheduling your free consultation!
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