What Are the Key Points To Consider in an Asset Purchase?

If your business wants to acquire all or part of another business, you can structure the transaction through an asset purchase. Compared to a share purchase, asset purchases have certain advantages and disadvantages from a buyer’s perspective that you should be aware of. Hence, this article will summarise some key points to consider in an asset purchase. 

What is an Asset Acquisition?

Asset acquisition is one of the two main ways you can structure the purchase of another business. As the name suggests, an asset acquisition is where you purchase a business’ underlying assets rather than the business itself through a share purchase. These assets can include:

• tangible property like land, machinery, and equipment; and 
• intangible property like intellectual property, goodwill, and business contracts.

To execute an asset purchase, each asset must be sold according to the legal requirements for transferring that asset. For example, the land must be transferred through a conveyance process. In addition, ordinary property like a machine will usually be sold with a deed certifying the sale. 

Structuring an Asset Acquisition 

Unlike a share purchase, an asset acquisition is not limited to transactions between limited companies. In fact, if you wanted to acquire an unincorporated business’ entire operation, you would have to structure the transaction as an asset purchase. 

Regardless of the seller’s business structure, you can choose how you wish to incorporate the newly-purchased assets into your business. For example, you may simply wish to absorb the assets into your limited company. Alternatively, you can create a new company to own and manage the assets within your business group. Consider the following example. 

Advantages to Asset Purchases

There are many advantages to undertaking an asset purchase. 

Flexibility 

Unlike a share purchase, you are free to pick and choose what assets you purchase. This is the primary advantage. From your perspective as a buyer, this means you:

• can only acquire the assets you determine are sufficiently valuable; and
• are less likely to wind up with undisclosed or unknown liabilities related to the target’s business.  

Taxation 

The law surrounding tax and business acquisition is quite complex. However, you will benefit from several tax advantages not available under share purchases under an asset sale. These include:

• tax relief when acquiring certain assets like plant and machinery; and
• flexibility in how you account for the total cost of the acquisition.

That said, there are certain tax advantages to share purchases not available for asset purchases. 

Disadvantages

However, there are some disadvantages of an asset purchase you should consider. 

Legal Complexity 

Under an asset purchase, the seller must lawfully transfer each asset to you. If the proper steps are not taken, you will not become the effective owner of some or all assets. Therefore, depending on the assets, this might entail substantial legal paperwork. 

Employees 

In many cases, the target company will have employees. In some cases, even if you do not want to acquire the employees during the asset purchase, the law will obligate you to take on the employees. Additionally, even if you do not inherit the employees, the employees may still be able to claim against you. 

Key Takeaways 

In the context of a business acquisition, asset purchases are more favourable to the buyer because you can pick and choose which assets you will assume. The downside is that asset purchases are complex, giving rise to additional legal and administrative issues. Whether you decide to undergo an asset purchase depends on your negotiating position. Nevertheless, a team of advisers, including a skilled commercial lawyer, can advise you on the key points to consider in an asset purchase. 

If you need help with a business acquisition, our experienced business purchase lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today at 0808 196 8584 or visit our membership page.

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