An asset acquisition can be an excellent way to buy a business. Unlike a share sale where a purchaser assumes all of the company’s responsibilities and takes over all property and employees, in an asset sale, you can cherry-pick the assets you want, leaving behind the rest. For this reason, an asset sale can avoid some of the nasty surprises that lay buried in a company’s books or as part of its trading history. So, what exactly is an asset acquisition and how might you go about one?
- What is asset acquisition?
- What is the asset acquisition process?
- Asset acquisition: retaining employees
- Conducting due diligence
- Acquisition of fixed assets
- Valuing intangible assets in an acquisition
- Asset acquisition accounting support
- What about the acquisition of distressed assets?
- Buying assets from an insolvent company
- Asset acquisition vs share acquisition
- Asset acquisition vs business combination
- Asset acquisition due diligence checklist
- Are asset acquisition costs tax deductible?
What is asset acquisition?
An asset acquisition is the purchase of a business by buying its assets instead of its shares. This can include land, buildings, vehicles and machinery as well as intangible assets such as intellectual property and goodwill.
When you buy the assets of a company, as opposed to its shares, you don’t have to assume all the company’s liabilities, but can cherry-pick which liabilities you assume as part of your negotiation with the seller. This makes an asset acquisition a very flexible way to acquire a business.
What is the asset acquisition process?
When you acquire the assets of a company, the parties will usually start by agreeing a heads of terms in which they agree in principle what assets the buyer is prepared to purchase, and on what terms. As tax considerations play a role in asset acquisitions, with implications for both parties, these factors will affect the acquisition process.
What’s the difference between asset acquisitions and share purchases?
A major difference between asset acquisitions and share purchases is the role of third parties in the acquisition process.
With a share transfer, the company carries on in existence much as before but under new ownership, whereas in an asset acquisition the property acquired by the buyer is removed from the selling company. The purchased assets need to be formally transferred to the buyer, and third parties like customers, suppliers and landlords may need to give their consent. This process can be time consuming and can sometimes negatively affect the business’s trading relationships.
Asset acquisition: retaining employees
Another significant factor in an asset acquisition is the role of employees. In a share purchase, employees of the company transfer with the company, whereas under an asset purchase, this is not automatic.
Whether employees transfer to the buyer of assets will depend on the individual circumstances of the transaction and whether the assets constitute a going concern. There may be an obligation during the acquisition process to inform and consult with employees under the Transfer of Undertakings (Protection of Employment) Regulations (TUPE).
Conducting due diligence
Another critical part of the asset acquisition process is due diligence. A buyer of assets will need to discover through searches and enquiries precisely what assets are being acquired, and what, if any, risks are involved. The buyer will also need to conduct valuations of the property being acquired.
The due diligence process also helps the buyer to negotiate price, understand the fundamentals of the business of which the assets form part, and also identify any third-party consents or notices that are required.
When you buy a company’s assets, your acquisition solicitors will send a detailed request to the seller asking them to disclose all relevant information about the business and the assets being acquired. This information will be stored in a real or virtual data room and is used to prepare a buyers report. You may need to carry out other specialist searches and enquiries such as property searches, environmental searches, patent and trademark searches and IT related enquiries.
Following due diligence, and assuming that a price and outline terms have been agreed, a sale and purchase agreement of the assets will be negotiated. It will contain warranties from the seller about the assets being transferred, disclosures of any matters that might affect those warranties, and may contain indemnities in the seller’s favour should any matter come to light after the sale that negatively affects the property being transferred.
The assets are then conveyed to the buyer.
Acquisition of fixed assets
What are fixed assets?
Fixed assets are business property with significant value. Fixed assets can comprise vehicles, land, equipment, machinery, IT equipment, buildings, furniture and fittings. Fixed assets can also be intangible such as patents, copyright, trademarks and customer lists. Tangible fixed assets are fairly straightforward to value and the buyer will obtain a series of reports on value that will enable them to negotiate with the seller.
Where fixed assets are sold for less than the value attributed to them in the seller’s accounts the seller may be able to claim allowable losses and balancing allowances in relation to their sale.
Valuing intangible assets in an acquisition
Intangible assets are non-physical property. It includes things like your business reputation, brand, trade secrets and processes, intellectual property, goodwill, customer relationships and contracts, domain names and software.
Intangible assets often constitute a significant part of a company’s value. They are not usually listed on the balance sheet unless you have bought them, they have a clear value and have an identifiable lifespan.
How to value intangible assets
Given that intangible assets are, by their nature, fluid, they can be difficult to value in an acquisition, but the following methods are most commonly used:
- Income method. This method involves calculating the likely future income to be gained through ownership of the asset.
- The royalty method. Similar to the income method, and used for assets like brand names and software, this technique focusses on likely royalties earned throughout the ownership of the asset.
- The cost-based method. This values an asset based on the likely cost to recreate it.
Asset acquisition accounting support
When buying a business’s assets, both buyer and seller should undertake financial due diligence, principally because the value of the assets transferred affects not only the purchase price but affects the tax payable by both buyer and seller in the future. Accounting support will be required throughout the sale process.
What about the acquisition of distressed assets?
In a distressed sale where a seller has financial difficulties, buyers are more keen to purchase assets, and sellers would prefer a sale share. Because assets and liabilities are bundled together in a sale of shares, the transaction tends to be quicker because third party consents are not required. However, the risk to the buyer is higher because of hidden or undisclosed liabilities.
In an asset sale, the buyer can pick and choose which assets to buy, so there’s less risk of taking on unknown liabilities that are buried in the seller’s company.
The assets of distressed companies can appear cheap at face value. However, there are substantial risks in buying assets from distressed companies and acquisition legal advice is essential before proceeding to purchase.
Buying assets from an insolvent company
Once a company has become insolvent, the sale process and all decisions relating to it will be in the hands of an insolvency practitioner (IP). During the period immediately preceding the IP’s appointment, while the company is experiencing financial problems and decision making is still in the hands of the directors, it can be risky to acquire assets as these transactions can later be set aside by the IP if they deem the price paid was too low.
In certain situations, however, buyers can take advantage of a distressed sale before the IP’s appointment if they have funds to move quickly, pay in full and conduct a quick due diligence exercise with the help of lawyers, accountants and HR specialists. Buyers can also take advantage of a ‘pre-pack’ sale in which buyers purchase a bundle of assets with agreement from the proposed IP before other parties get the chance to bid and prior to the IP’s formal appointment. Once the IP is appointed, the sale progresses as normal. There are certain formalities to be completed when the IP conducts a ‘pre-pack’ so that creditors can hold them to account should a pre-pack not prove to have been in the best interests of the distressed company.
When buying assets after an IP has been appointed, buyers should proceed with caution. IPs may not have the ability to dispose of all the company’s assets, for example if some property is held in the name of subsidiaries. It’s also possible that third party consents to a sale of certain property are required, or that contracts and leases are terminable in the case of insolvency and thus won’t pass automatically on purchase. Also, if your seller is a manufacturer, ownership of the goods in its possession may still be owned by their supplier pending payment.
It’s therefore essential to do proper diligence both as to the scope of the IP’s appointment and the ownership of property, and also to ensure that the contract contains terms that allow for a refund of the purchase price if ownership of certain assets are disputed and have to be returned.
When buying assets from an IP, the buyer will not get the same range of warranties and indemnities as they would in purchase from a solvent company, particularly in respect of the rights of third parties. Buyers should also be cautious in respect of employees, as contracts of employment can continue notwithstanding the sale, giving the potential for claims of unfair dismissal and the obligation to consult with affected staff.
Finally, for more valuable property, certain sales may be set aside if fair value has not been obtained, or the consent of shareholders approved before the sale.
Asset acquisition vs share acquisition
As we’ve seen, buying business assets can be a complex, risky and time-consuming process as the buyer needs to investigate title and identify exactly what liabilities it’s assuming as part of the sale. In contrast, the purchase of the shares of a target company is relatively straightforward although the buyer automatically takes on whatever liabilities rest with the target company.
Here are the advantages and disadvantages of each approach to a business sale. Ultimately, whether an asset or share sale is more appropriate depends on a cost/benefit analysis.
Sale of assets: Advantages and disadvantages
|Asset Sale Advantages||Asset Sale Disadvantages|
|In some cases, buyers and seller may be able to claim tax deductions or allowances in the future in respect to the acquired assets||Contracts and other valuable business assets may not be capable of transferring, and either terminate or have to be renegotiated|
|Buyers can pick and choose which assets and liabilities they assume as part of the transaction||Employees may also transfer with the assets if the business is deemed to have been transferred as a going concern|
|Due diligence can be quicker than in a share sale because there is less anger of assuming hidden liabilities||Each asset will have to be valued, transferred individually and rights to title investigated|
|Employees may not automatically transfer to the buyer|
|Buyers don’t need to worry about the rights of the seller’s shareholders who can be forced to accept a sale|
Sale of shares: Advantages and disadvantages
|Share Sale advantages||Share sale disadvantages|
|Share sales are simpler to execute than asset sales, so can be quicker and cheaper||The buyer may assume unwanted liabilities|
|Normally assets and liabilities will pass to the new owner automatically so the business is unaffected||Shareholders’ rights may complicate the sale|
|Assets don’t need to be investigated and valued|
Asset acquisition vs business combination
In contrast to an asset acquisition where a buyer purchases a business by acquiring assets, these are the most common types of ‘business combinations’ in which a buyer assumes the business of a selling company without purchasing individual assets:
- A merger, in which a selling company ceases to exist and becomes part of the buying company with all assets, employees and liabilities being absorbed into the acquiring business
- An acquisition, in which a buying company acquires a controlling interest in the seller
- A consolidation, in which a new company is created, and shares issued to the original shareholders of each company
- A management buy-out, where a board of directors purchases the majority stake in a business with the help of bank finance
Asset acquisition due diligence checklist
Make sure you navigate the asset acquisition process carefully with the right legal advice from M&A solicitors and our due diligence checklist to hand.
- Identify who will carry out due diligence, project-manage the exercise, and allocate duties within the team.
- Who will prepare the buyer’s report and what form will it take?
- Who will prepare the financial report and what form will it take?
- If the seller is a company, conduct company searches and search for charges over assets. Find out the identity of directors. If the seller is a company, conduct bankruptcy searches.
- Look at the company’s constitutional documents and any shareholder’s agreement to check the seller’s power to dispose of assets. Check the partnership deed if the seller is a partnership.
- Examine banking records to see whether the buyer has charged any assets, and what consents may be required.
- Will any consents be required of third parties such as guarantors?
- Will TUPE apply?
- What do you intend to do about staff, and are they on board with the sale? Will you keep any of them on after the acquisition.
- Look at contracts of employment for staff and service agreements for management, find out details of remuneration and notice periods, incentive schemes, benefits, consultation arrangements and pensions.
- Identify any potential for employment claims.
- What intellectual property rights (IPR) does the seller own? Are they registered or unregistered (for example patents, trademark, copyright, domain names, brand names and logos)?
- What domain names is the seller using? Have these been registered as trademarks?
- Has the seller licensed any of its IPR, or is it operating IPR under license?
- Have there been any disputes relating to the use of IPR, or are any threatened?
- Have any third parties been accused of infringing the seller’s IPR?
- Have any consultants created IPR that you are intending to buy and if so, can this be transferred to you?
- Are there shared IPRs being used in the business?
IT and equipment
- What hardware and software would you wish to acquire, and is there any shared access to the seller’s system? Might data need to be transferred?
- Does the seller have the necessary rights and licenses to use the software needed to run the business?
- Will any consents be needed under contracts required to operate computer systems, provide IT services or host data?
- Does the company website operate under an appropriate copyright?
- Are there disaster recovery arrangements in place?
- Are IT systems operating normally and is data secure?
- Has the seller breached any software licence terms?
- Get descriptions of all commercial properties to be bought and copies of all leases or licenses.
- Investigate title to the properties.
- Obtain valuations of the properties and conduct surveys.
- Investigate any mortgages or charges of the property and agree how these will be discharged.
Environmental/Health and Safety
- Will you need to conduct environmental searches or commission an environmental report?
- Are there any environmental permits and have these been complied with?
- Is there any contamination of property involved in the sale? Is the seller in compliance with environmental laws?
- Ask to see recent health and safety reports and records.
- Is the seller in compliance with health and safety laws and has it carried out the required risk assessments?
- Are there any complaints, enforcement actions, investigations or proceedings current or threatened?
- Will the health and safety officer transfer with the business?
- Might VAT be payable on or connection with the sale?
- Will stamp duty, stamp duty reserve tax or stamp duty land tax be payable on the transfer of property?
- Are there any corporation tax reliefs available to the buyer in connection with intangible assets?
- If fixtures are being transferred, can the buyer claim capital allowances?
Machinery and Equipment, Inventory, Vehicles
- What assets would the buyer wish to acquire, and are there any problems with them?
- Is this machinery and equipment owned or leased? If they are leased or otherwise under contract will consent be required to transfer? Will the contracts be assigned or novated to the buyer?
- Is the seller confident that the assets are owned by them without any third-party rights?
- Does the seller have any valuations?
- Is the plant, machinery inventory and/or equipment subject to any security, retention of title or other restrictions?
- Obtain details of any recent valuations.
- Does the seller have a list of stock and is stock ready for sale?
- Are there any third-party rights that might apply to the stock?
- Are any stock valuations available?
- Are logbooks available for vehicles and are there any valuations available?
- Obtain copies of all contracts including standard terms.
- Verify whether consent will be needed to assign or novate the contract to the buyer.
- Ask to see data on sales volumes per customer.
- Verify whether any third-party consents will be needed to transfer contracts to the buyer or would automatically terminate because of the acquisition.
Disputes and insurance
- Ask whether there is any litigation actual or threatened, including any disputes?
- Have there been any judgments affecting the business or the assets?
- Ask to see details of insurance policies and check whether you can continue the insurance in force.
Are asset acquisition costs tax deductible?
Some acquisition costs may be tax deductible (this is a very general guide and you should seek expert tax advice):
- Land and shares. The cost relating to these assets is deductible when working out the capital gain or loss on a subsequent sale by the buyer.
- Plant and machinery. The buyer can claim capital allowances for qualifying expenditure on plant and machinery.
- Stock. The buyer may be able to make a tax deduction for purchased stock.
- Goodwill and intangible assets. The buyer should be entitled to corporation tax relief for accounting amortisation of the sum paid for some IPR and similar assets but not goodwill.
- Costs and advisors’ fees (legal, finance, valuation etc). These aren’t normally tax deductible as they constitute capital expenditure and will form the base cost of the asset.