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If you want to sell your business in whole or part, you can structure the business sale through an asset sale. Compared to a share sale, an asset sale has certain advantages and disadvantages from your perspective as the seller. This article will explain the key points to consider in an asset sale.
What is an Asset Sale?
In the context of business disposal, an asset sale is one of two ways you can structure the transaction. As the name suggests, you sell your business’ underlying assets rather than the business entity itself through a share sale. 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 sale, the seller must transfer each of the assets to the buyer according to the legal requirements imposed by the law. For example, a piece of land must be transferred through a conveyance process. However, ordinary property like a machine can be sold according to a sale contract without requiring any other specific documentation.
Advantages of an Asset Sale
There are some advantages to an asset sale that you should consider.
Flexibility
As the above example shows, an asset sale does not obligate you to sell all of the assets that a company holds. Instead, you can sell some of your assets and retain certain rights in other assets.
That said, if you want to retain an asset, nothing is preventing you from transferring the legal title to that asset to a new company and selling your existing company, which holds the remaining assets via a share sale to the buyer, to achieve the same effect.
Taxation
Though not always the case, if you reinvest the sale proceeds from certain assets, including land, plant and equipment, your business may not have to pay any tax. That said, the law around taxation and business disposals is quite complex. Hence, you should seek clarification from a qualified tax professional.
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Disadvantages of an Asset Sale
Nevertheless, there are some disadvantages to undertaking an asset sale.
Third-Party Obligations
The law considers a contractual benefit to be an asset. Hence, in some cases, your buyer may want to acquire a valuable contract that you are party to. However, you cannot discharge your obligation to a third party just because you have sold the benefit to a willing buyer.
That said, you can draft technical agreements with the buyer as part of the transaction documentation as a workaround. Most commonly, you can require the buyer to agree to perform the contract and indemnify you if they later fail to uphold their obligation. But there are risks: for instance, the buyer’s subsequent insolvency will not release you from your obligations.
Taxation
One of the key points to consider in an asset sale is that you may find it challenging to ultimately realise the proceeds of your asset sale. This is especially true if you operate through a private limited company. The reason is that your business is often taxed twice. For example, the government taxes private limited companies for the proceeds of the sale and again if you distribute the proceeds of the sale to shareholders as a dividend.
Complexity
Determining which assets to transfer and how to transfer them can result in higher legal and administrative costs than share disposals. This is because share disposals are a single transfer, whereas asset disposal requires the seller to transfer multiple assets to the buyer.
Key Takeaways
In the context of business disposal, asset sales are one of two ways to dispose of all or part of your business. Asset disposals can provide you with some flexibility as to how you structure the disposal. However, the key downside to asset disposals is that you may still be required to observe contractual obligations with third parties, even if you sell the benefit of a contract or agreement to the buyer. As always, the optimal choice depends on the particulars of the transaction and your negotiating position. Nevertheless, a team of advisers, including a skilled commercial lawyer, can advise you on further key points to consider in an asset sale.
If you need help with business disposal, our experienced business sale 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.
Frequently Asked Questions
Asset disposals let you pick and choose which assets you will sell, which gives you a degree of flexibility. You can also reserve certain rights to sell the property, such as by selling the land title while negotiating a discount leasehold in the property.
The main disadvantage is the difficulty of transferring obligations to the buyer. For example, suppose you are trying to sell the benefit of a contract, such as a supply agreement or lease. In that case, releasing your business from its obligations is usually impossible without the third party’s consent.
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