Asset purchase agreements

Rather than acquire all of the shares in a company and therefore, both its assets and liabilities, very often a buyer will 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;
• Stock;
• Contracts;
• Premises;
• Know-how; and
• Goodwill.

A typical asset purchase agreement will deal with the following matters:

Goodwill

Goodwill equates to the expectation that having purchased something from a business, the customer will return. 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 & TUPE

The Transfer of Undertakings (Protection of Employment) Regulations ("TUPE") protect 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", then 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

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.

VAT

If the business is purchased "as a going concern", then VAT can be ignored as long as both parties are VAT registered. There will be a clause dealing with VAT in the agreement.

Contracts 

In an asset purchase transaction, if a contract is considered to be fundamentally important to the business, the buyer may insist on making completion of the business transfer conditional on the contract's novation. 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.

Cherry picking

The main advantage of an asset purchase is that a buyer may cherry pick the assets and liabilities it wants to acquire. There is usually less risk of hidden liabilities than is the case with a share purchase.

Fair market value

An asset purchase allows buyers to allocate the purchase price among the assets to reflect their market value. This allows for higher depreciation and amortisation deductions, resulting in future tax savings.

Rules of transfer

The major disadvantage of an asset, as opposed to a share purchase agreement is that each item must be transferred in accordance with its proper rules and made enforceable against third parties (eg through consents and approvals). This is particularly the case for customer contracts, in that a third party may view the transaction as an opportunity to renegotiate their contract. This could delay the deal and add to transaction costs.

Moreover, there may well be important contracts that are non-transferrable, or certain licences and consents might be unique to the seller. Sometimes a buyer will want to preserve as many customer relations as possible, thus may choose to buy shares as opposed to assets.

The problem with liabilities

In the event that there are liabilities the buyer is not including in the purchase, parties have to make sure that the purchase is not being made for less than the fair value of the assets and that following the sale, the company will stay sufficiently capitalised to pay its debts and liabilities. Otherwise, the transaction may be considered fraudulent.

Following completion (singing of the agreement), there are a few steps the buyer will need to take:

1. payment of stamp duty and stamp duty land tax (SDLT), if applicable. SDLT is a tax on transactions involving interests in land in the UK. 

2. payment of VAT, is applicable. VAT is chargeable on the transfer of most assets used in a business, assuming that the seller is a taxable person

3. assignments and novations of contracts with customers and suppliers

4. administrative matters such as insurance, payroll, PAYE, VAT and pensions.