While it is more common to sell a business as an entity, particularly if it is a corporation, there are circumstances in which a sale of assets is preferable, or the only option available to the seller. A sale of assets may be partial or complete. In most cases, a complete asset sale occurs when the seller is in trouble–if the seller is exiting the business entirely, it would generally be preferable to transfer the business as a whole rather than to sell assets. However, asset sale transactions are often more beneficial to the buyer.
Since each form of sale has different benefits and drawbacks for each party, it is best if the seller and the buyer are each represented by an attorney with experience in asset sale transactions.
Transfer of Assets and Liabilities
An asset sale transaction may benefit the purchaser because this type of sale allows the buyer to pick and choose which assets to purchase and, more importantly, to decide which liabilities to assume. Of course, some assets will necessarily be transferred with liabilities attached, but in an asset sale negotiation, the buyer has a better opportunity to avoid encumberments.
In contrast, a buyer who takes on the company as a whole also assumes its liabilities. Though the buyer in either a wholesale purchase or an asset sale transaction can negotiate for indemnification against certain types of liability, it may be difficult to obtain sufficient assurances when the company is liquidating.
A purchase intending to buy all of a company’s assets must conduct a thorough inventory in advance of purchase. Some assets, such as equipment and accounts receivable, are obvious. However, some asset types are frequently overlooked. These may include options and licenses, customer lists and other intellectual property.
Working with an experienced asset sale attorney will help ensure that you do not overlook assets, whether you are a seller seeking to ensure that you are compensated for all viable assets or a buyer who wants full value for your investment.
Liquidating After an Asset Sale
In order to wind down the business after a complete asset sale, the seller will have to settle outstanding liabilities or file for bankruptcy protection on behalf of the company. In either case, it is likely that some or all of the proceeds of the asset sale will be required to settle debts. Thus, although an asset sale may be desirable for the purchaser, this arrangement may be costly for the seller.
If you are winding down your business, an attorney experienced in corporate sales and asset sale transactions can help to identify the best approach to divesting yourself of assets, and advise you of the ramifications of each type of sale. If you are purchasing assets from a corporation that is winding down, your attorney will negotiate for the most profitable transfer while taking measures to protect you from inherited liability.
Taxation Issues in Asset Sale Transactions
In addition to the direct issues regarding the transfer of assets and assumption of liabilities, parties to an asset sale transaction must consider the tax ramifications of each type of purchase. When the company itself is sold, the result may be capital gains to the shareholders. When only assets are sold, the income is attributed to the company. Depending on the structure of the business, such income may result in double taxation. Thus, in some cases the seller’s negative consequences will outweigh the benefits to the buyer, whereas in situations where the company is structured as a pass through entity such as an S Corp, the impact on the seller may be far less significant.
Other, more complex tax consequences may be associated with an asset sale. An experienced commercial lawyer can advise you as to the tax consequences of each type of sale before you make a decision as to how to proceed.
Negotiating for Indemnification in an Asset Sale Transaction
While some liabilities are expressly assumed in an asset sale transaction, a purchaser of assets may be at risk for unanticipated liability. It is in the buyer’s best interest to negotiate for indemnification, but attaining an effective indemnification agreement may be complicated, since the assets are being purchased from a company that will be liquidated soon after the transaction.
Talk to an Asset Sale Transaction Attorney Before You Act
Selling assets may seem as simple as selling your personal vehicle or vacation property, but the potential impact and possible complications far exceed those associated with a personal sale. When you are preparing to sell assets and wind down a company, or to sell off assets associated with a specific product line or division, your first step should be to talk to an experienced commercial lawyer. Contact KPPB LAW today.