When considering buying a business, no matter whether it is large or small it is important to plan and structure the purchase correctly, otherwise there may be financial consequences. Using a business broker will help you find the business you want to purchase. However, many times the business broker does not understand how to structure the business. Worse case scenario, you may end up buying a business that may have a lot of liabilities. Another common method to acquire a business is called “asset purchase”, which is typically used for small businesses that do not have many assets or liabilities.
1. Benefits of an Asset Purchase
In an asset purchase, the buyer and the seller agree on a list of specified assets and liabilities to be acquired by the buyer. Assets and liabilities not transferred to the buyer are retained by the seller. This structure provides the buyer with the flexibility to purchase on
ly desired assets and assume only specified liabilities. This structure is particularly desirable from the buyer’s perspective if the seller owns assets that the buyer does not want, or if the buyer believes the seller has significant unknown or contingent liabilities that the buyer does not wish to assume. In sum, it allows the buyer to pick and choose what he/she wants instead of buying everything related to the business.
2. Disadvantages of an Asset Purchase
Asset purchases pose certain disadvantages, including the following:
Structuring asset acquisitions can be complex and cumbersome. Each asset and each liability to be transferred must be identified and specified. Separate assignment agreements and other transfer agreements may be required in order to effect all of the transfers and certain types of assets may be subject to formal transfer procedures.
The seller may be a party to contracts that require third-party consent to transfer items, and that third-party consent may not be easy to obtain. Consent requirements may not be necessary if the transaction is structured as a stock purchase or a merger, in which the seller is the surviving company. For example, commercial lease agreements typically require the landlord to consent to an assignment.
The transfer may trigger reassessments of real property values, which could lead to a higher property tax burden for the buyer than would exist after a stock purchase. If the purchase of a business includes the purchase of real estate, this would trigger a “change in ownership” allowing a reassessment of property taxes.
The seller must determine how to handle the assets and liabilities that it retains after the transaction is closed. Remember, the buyer is only purchasing certain assets and liabilities. This means the remaining assets and liabilities still remain with the seller and it is up to the seller to determine how to dispose of the assets or payoff the liabilities.
Just because you are only buying the assets of a company does not means the new owner is not liable for actions of the seller prior to purchase. If the seller of a restaurant caused food poisoning to a customer, then sold assets to a buyer, the customer could potentially sue the new owner for acts that the seller did. This is known as “successor liability.” The seller’s existing insurance policies generally may not cover successors without some alteration. Also, the buyer’s policies may not cover actions of the seller.
Asset purchase is a common way for small businesses to structure a business purchase. However, asset purchase is also the most burdensome because it requires a lot of paperwork to complete. All contracts that the buyer is assuming will need to be assigned. If not done correctly, the buyer may end up not buying what he/she was hoping to buy. It is important to have an attorney review over every contract and to make sure all the assets or liabilities are properly transferred.
Eric W. Ching is a real estate & business attorney with Ching & Seto, APC.