When it comes time to sell your business, what form should the sale transaction take – asset purchase, stock purchase or merger? Each form has its positives and negatives for the buyer and seller. In this three part series, we look at each form of transaction and walk through the advantages and disadvantages of each.
In an Asset Purchase deal, a Buyer purchases specific assets from a Seller under the terms of an Asset Purchase Agreement. This type of transaction is typically used where a division of the Company is being sold off – a divestiture – and the Seller intends to maintain the core business. Asset deals are also used if there are specific assets that the Buyer wants to leave behind with the Seller; the Buyer can pick only those assets it wants to buy and avoid general liabilities of the Company. Additionally, asset deals are used when the Seller intends to maintain the corporate shell, along with its past history, for another venture.
Asset purchase agreements can be very tricky in their drafting and it is critically important for both parties to get the description of the assets just right – the Buyer wants all the assets of the Company it needs to operate the “business” it is buying and the Seller wants to make sure nothing it wants to keep is sold. Frequently, all of the assets of the Seller are broken into two groups – Purchased Assets that are sold/purchased in the transaction and Excluded Assets that remain with the Seller following closing. These groups of assets are often described in detail on a schedule attached to the Agreement.
In the Asset Purchase Agreement, both the Seller and the Buyer will be asked to give certain representations and warranties as of the closing date and certain covenants that will bind them before and after closing. The “reps and warranties” sections tend to be the most negotiated parts of the agreement – particularly the reps regarding the business and the assets. The Buyer wants the Seller to make representations that the Seller has all the necessary corporate power and authority to enter into the transaction, that the “Purchased Assets” are all the assets needed to operate the business (or division thereof) following the closing, and that the assets are in good condition and repair. The Buyer may also ask for representations about the Seller’s financial statements, any possible litigation, any consents from third parties that are necessary to sell the assets, and the lack of a “material adverse effect” on the Seller’s business. Depending on the nature of the assets, the Buyer may request many more representations to ensure the assets are in proper form and substance.
The Seller usually wants to limit the scope of the representations and warranties to the power and authority to enter into the transaction and those that cover just the assets themselves. Alternatively, the Seller can limit the reps by using knowledge qualifiers (“to the Seller’s Knowledge, there is no …”) and materiality qualifiers (“the Seller has good and valid title to all the Purchased Assets, in all material respects …”). The Buyer typically provides limited representations and warranties as to its corporate power and authority to enter into the transaction and the sufficiency of its funds to complete the purchase.
The Seller also agrees to pre-closing covenants to continue to operate the business in the ordinary course and to pay debts and liabilities as they become due. Seller and Buyer agree to work together toward closing and to share certain information. The Buyer may ask that the Seller agree to a non-compete provision, prohibiting the Seller from competing with the Buyer, or a non-solicitation provision, prohibiting the Seller from soliciting employees or customers, each following the closing.
An asset purchase has certain advantages:
• Liabilities of the Seller will not automatically carry over to the Buyer;
• Buyer has the ability to pick and choose what assets it wants to acquire; and
• Buyer gets a “step-up” in tax basis on the purchased assets.
• Buyer does not get the “goodwill” and past performance record of the Seller (however, Buyer could purchase rights to use Seller’s name and/or intellectual property);
• Certain contracts (leases, employment agreements, purchase agreements) may require notice or consent in order for the contract to transfer to Buyer along with the business;
• Not all licenses and permits of the Seller to operate the business may transfer; and
• Bulk sales laws may apply.