One of the more common approaches to a sale of a business is a asset purchase agreement, or “APA.” Under this agreement the business owner sells some or all of the assets of the business. Generally, this type or sale is less favored by business owners selling a business because (1) the tax ramifications of the sale and (2) the seller may be left with non sellable assets.
From a buyer’s prospective, however, an asset sale is generally preferred. The reason is the tax favorable depreciation for the buyer, and that the buyer only purchases the assets it wants without acquire unknown liabilities.
Despite some of the negative issues in an asset sale to sellers, an asset sale is typically used in most small to medium sized sales.
Typical Issues in an Asset Sale
Typical issues that must be dealt with in an asset sale include:
- Transfer of assets, including franchises, real estate, and other title to property
- Licenses and continued qualification to operate
- Handling any “due on sale clauses” or “right of first refusals
- Approval of the shareholders, and potential dissenter’s rights
- Any required consents must be obtained
- The purchase price, and when it will be earned
Approvals from Company Owners
If the seller is an LLC or partnership, in almost all cases the company must have consent of all of the members or partners to complete the sale. If a corporation desires to sell substantially all of its assets, the board of directors of the corporation must adopt a resolution and recommending the sale and submit it to a vote at a shareholders meeting. Unless the bylaws or articles of incorporation state differently, the corporation typically will only require majority of the shares to
Stock for Asset Acquisition< /h2>
The assets of a corporation can be acquired in a tax-free exchange. The exchange is completed under I.R.C. §368(a)(1)(C). Under a tax free exchange, the corporation nor the shareholders transferring the assets incur any tax liability. Instead, the shareholders of the seller own stock in a different corporation, which is typically the acquirer.
The consent of both the buyer’s shareholders as well as the seller’s shareholders may be needed. Finally, it should be noted that securities law is implicated in a stock for assets sale, so it is important to determine how securities law may apply.
Approving the Sale
A purchaser will generally desire 100% of the outstanding shares of your company or substantially all of the assets. If you cannot get a unanimous vote for a stock sale, it is possible to sell the assets of the company without unanimous approval of the shareholders. In a merger, less than unanimous approval is required, however, the dissenting shareholders will be entitled to certain buyout rights.
Disadvantages of Asset Purchase
An asset purchase is far more time consuming than a merger or stock acquisition. The reason is that a transfer of title for each asset must be accomplished. In addition, transfer tax may be incurred as well.
Third parties must give their consent to the sale. A third party with a right of first refusal can make the deal very difficult to accomplish, particularly if the seller does not want to sell to the third party holding the right of first refusal.
Finally, the seller may not be able to take advantage of favorable grandfather rights, or favorable ratings for unemployment tax or insurance purposes. These consideration should be determined before the form of the sale is determined.
Advantages of an Asset Purchase
From the viewpoint of the buyer, a purchase of assets, rather than one of the other reorganization transactions, may be considered to be favorable for a variety of reasons.
The buyer can accomplish the following:
- Get complete control over the assets of the seller;
- The buyer can pick and choose which assets it wants;
- Limit liabilities to liabilities it wants;
- The buyer can allocate purchase price in a variety of ways, obtaining a step up in basis in the assets it buys
The goal of an asset purchase agreement, or any agreement, is the avoidance of future litigation. Call us if you have any questions on your asset purchase agreement.