The acquisition transaction can take the form of an asset or stock purchase. The divisional or asset sales have advantages and disadvantages depending on the facts and circumstances of each deal and the Buyer and Seller have different perspectives in determining the ultimate form of the transaction. An asset sale transaction is memorialized in a definitive agreement, the asset purchase agreement.
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An asset sale is an advantageous transaction for the Buyer because the Buyer can choose what assets of the target company to purchase; the company can purchase a all or substantially all of the assets or a division of the assets of the selling company. Furthermore, the Buyer is not liable for the target company’s liabilities and is not required to assume any liabilities of the seller. The Buyer can be liable only for the liabilities specifically assumed by agreement and is generally free of any undisclosed or contingent liabilities. In an asset sale, there is a step-up in the basis of the assets acquired equal to the purchase price, allowing for higher depreciation and amortization. Finally, asset purchases generally result in termination of labor union collective bargaining agreement and the Buyer may maintain or terminate any existing employee benefit plans and elect new accounting methods. On the downside, in a divisional or asset sale there is no carryover of the seller’s corporation’s tax attributes such as credit carryforwards or net operating loss, among others. Moreover, nontransferable rights or assets like licenses, franchises or patents cannot be transferred with ease to buyers. Instead, a divisional or asset sale transaction is more complex and costly when it comes to transferring specific assets and liabilities; new title to each asset transferred must be recorded and state sales tax may apply.
For the Seller, a divisional or asset sale is an advantageous transaction because the selling company maintains their corporate existence and can generally maintain the corporate name and the goodwill. Furthermore, the seller generally retains ownership of the nontransferable assets or rights and the corporation’s tax attributes. Generally, the seller is responsible for liquidating the corporation and distributing the proceeds to the shareholders, which can result in double taxation. On the downside, the seller can face double taxation if the corporation is also liquidated. In addition, the transaction generates various kinds of gain or loss to sellers based on the classification of each asset as capital or ordinary and the bill of sale must be comprehensive to ensure that no key assets are overlooked. Finally, third-party consents are typically required in order to transfer tangible and intangible assets to the buyer and the asset acquisition must comply with applicable state bulk sales statutes, as well as state and local sales and transfer taxes.
Overall, a buyer prefers to engage in a divisional or asset sale out of concern about the selling company’s debts, obligations and liabilities and out of the desire to enjoy the income tax benefits of purchasing assets instead of stock.
Contact us, your business attorney in Florida, to advise you advise on the optimal selection of assets and liabilities and execute the asset purchase agreement in connection with the divisional or asset sale of a company.