Rather than acquiring all of the shares in a company and, therefore, both its assets and liabilities, a buyer will often prefer to only take over certain assets of a business. Typically in an asset purchase, the company itself will be selling the assets, whereas, in a share sale, the individual shareholders will be the sellers.
A buyer will normally prefer to buy the assets of a business, while the seller will prefer to sell the shares. This is because an asset purchase enables a buyer to pick exactly which assets they are buying and identify precisely those liabilities they wish to take over.
It is important to identify what exactly is being purchased. Assets transferred as part of an Asset purchase agreement may include:
- plant and machinery
A typical asset purchase agreement will deal with the following matters:
Goodwill is the brand reputation that is built up in relation to specific goods or services and which attracts customers. Where a business has established goodwill it is expected that customers will return to purchase something from the business. The buyer will therefore seek reassurance that he is protected from the seller adversely affecting its goodwill. The buyer will usually require the inclusion of restrictive covenants into the agreement, such as a non-competition clause.
Employees and TUPE
The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) protects employees' rights on the transfer of assets of a business. The fundamental principle of TUPE is that if a seller is buying the assets of the business as a ‘going concern’ (ie the company is running and making a profit), the employees engaged in that business will be deemed to transfer to the buyer automatically. On that basis, the buyer and the seller will have to liaise early in order to inform and consult affected employees.
For advice on transferring employees and TUPE as part of an asset purchase, you can always Ask a lawyer.
Stock must be identified and a mechanism put in place for valuation at completion. Such value is usually estimated. Upon completion, a stock check is usually taken, which will change the estimated value to an actual value and thereby varying the purchase price.
Value Added Tax (VAT)
If the business is purchased ‘as a going concern’, VAT can be ignored as long as both parties are VAT registered. There will be a clause dealing with VAT in the agreement.
In an asset purchase transaction, if a contract is considered to be fundamentally important to the business, the buyer may insist on making the completion of the business transfer conditional on the contract's novation (ie the original contract being replaced by a new contract). In this case, you can use a Novation agreement to make sure all three parties agree to this change. For more information, read Novating a contract.
Alternatively, a party to the contract may wish to transfer their role in the contract to a new party. This is known as ‘assigning a contract’. Note that this can only be done if the contract allows for an assignment. Where this is the case, a Letter assigning a contract can be used. For more information, read Assigning a contract.