Merger and Acquisition Deal Structure - Sale of Assets

Assets transactions offer limited liability and tax benefits to the buyer, but create administrative burdens.

Because acquisition transactions in Silicon Valley move very quickly, it is a good idea to understand the basics of deal structure. Every approach contains trade-offs among a number of different factors, including ease of closing, tax impact, risk preferences, third party involvement, and regulatory issues. This post examines the asset purchase structure.

Asset purchase agreements are used when the buyer does not want to assume any liabilities of the seller, except for those specifically outlined in the agreement (and those from which applicable law does not permit the buyer to escape). This structure is typically used for small owner-operator businesses, such as restaurants, retail establishments, and small service or manufacturing businesses. It can also be used where actual, or a fear of, residual liabilities exist, such as with businesses performing hazardous operations. In addition to their liability-limiting feature, asset purchase transactions can provide tax benefits to the buyer. For example, some of the assets purchased in the transaction can be depreciated over time.

The tax impact may of the transaction, however, require attention and negotiation. Assets which are not intended for resale may be subject to sales tax. Although the seller is liable for any sales tax in California, parties often negotiate and apportion this liability in sale documentation. Because different types of assets and obligations create different tax obligations, parties are required to agree to an allocation of the assets purchased to particular classes and report the allocations to the taxing authorities.

Special tasks face buyers purchasing a restaurant or a company which principally sells merchandise from stock. In these cases, a buyer, in cooperation with the seller, will make a "bulk sales" notice. If the buyer fails to do so, the buyer may be liable for claims of the purchased company, even if the buyer merely purchased the company's assets.

Assets can be purchased with cash or stock. If stock is used, securities laws must be complied with, which can increase expense and time to close a sale. If a mixture of cash and stock is used, tax impacts might arise in corporate transactions depending on the relative proportion of each component.

Asset transactions create administrative burdens. All assets must be listed and accounted for. This often requires taking a physical inventory and making adjustments if the inventory predates the closing. If the business has valuable contracts, the contracts need to be reviewed to determine if they can be assigned to the buyer. If not, the other party to the contract may need to consent to the assignment, a potentially time consuming and frustrating process.

Because only assets are being purchased, employees of the purchased business may have to be terminated. Any employees with accrued vacation will have to be paid that vacation. The buyer will then have the option to hire those employees back, or bring in its own employees. For companies with a large number of employees which expect to close facilities after the acquisition, federal and California law may require advance notification to affected employees.

Asset deals provide the best liability limitation for buyers. However, their complexity may render them unwieldy for larger transactions and their use should be explored prior to committing to any sale.