Business Asset Sale:  Basic Considerations

Article by Joanne Cassidy

The three most common ways to transfer ownership of a business are by asset sale, stock sale and merger.  Each type of sale has certain advantages and disadvantages.  This article will discuss some basic considerations when deciding whether to purchase a business through an asset sale.

First: What are assets? What exactly am I buying?

The word “assets” can mean different things to different people.  As a business buyer, assets are all of those things that are important to owning, operating, growing and eventually selling, the business.  All asset sales must fully describe the assets being purchased and it is also a good idea to generally describe any assets that are not being purchased. Assets might include:

  • Inventory
  • Licenses
  • Real estate
  • Furniture
  • Telephone numbers
  • Company name
  • Patents
  • Cash
  • Customer lists
  • Leases
  • Chemical formulas
  • Vehicles
  • Permits
  • Equipment and supplies
  • Fixtures
  • Computer programs
  • Company web sites
  • Trademarks and logos
  • Accounts receivable
  • Contracts
  • Claims and cash equivalents
  • Operational systems

The goodwill and reputation of the company are also considered assets, as are trade secrets, business operations and management systems that are generally not known throughout the industry in which the business operates.

Second: How do I determine if the assets are worth buying? What is due diligence?

Due diligence is the procedure you go through to make sure the assets are what you think they are, that the seller has the right to sell them and that ownership of the assets is transferable. Typically, due diligence involves several different types of inquiry, depending upon what types of assets are being purchased.  For instance:

All assets:  Are there any liens against the property? Are there any claims or contingent claims against the property or the business?  Who actually owns the assets?  Can the seller deliver clear title to all assets being purchased?

Real estate:  Is the building sound and is it configured to your specifications?  Is it the right location for your business?  Are there any nearby changes or construction planned or in progress?  Are those changes likely to help or hurt the business?

Inventory, furniture, fixtures and other personal property:  Is the quality and quantity as represented?  Will it be necessary to transport the assets to a new location?  Have those costs been taken into consideration in establishing the purchase price?

Contracts:  Are there any contracts that are essential to the operation of the business and if so, can they be assumed? Are there any long term contracts that may be difficult to fulfill or that you have no interest in assuming?  Is the consent of the other party to the contract required to transfer the owner’s rights in the contracts?  Are you required to assume any liabilities in exchange for assignment of the contract?

Licenses and permits:  Can existing licenses and permits be legally transferred to a new owner? Can you fulfill the necessary requirements to obtain new licenses and permits? Have any laws or regulations changed since the original business was granted its licenses and permits so that you may not be able to acquire them?  How long will it take to acquire governmental authorization to transfer certain licenses and permits?

Liabilities:  Are you or the seller aware of any liabilities or potential liabilities that might “follow” the assets or that might arise out of the sale itself?  Is the sale a fraudulent attempt to protect assets against claims of creditors? Are there any taxes that might attach to the assets?  Are there potential environmental liabilities?

Purchase and Sale Agreement

Once you have (a) identified assets to be purchased and (b) completed the due diligence inquiry to your satisfaction, it’s time to have your business attorney begin drafting the Asset Purchase and Sale Agreement. Although that agreement is beyond the scope of this article, you are encouraged to read other articles on this web site that are related to the purchase and sale of a business.

For additional information, call Joanne Cassidy at 713-974-1766 or send an email.