Why The Asset Purchase Agreement?
The asset purchase agreement is another way to buy or sell a business. It’s most often favored by lawyers and accountants for smaller businesses, or businesses that may face past tax or civil liabilities that the new owners don’t want to have to deal with.
The asset purchase agreement is technically not buying a “business” but rather buying only the assets that the seller and buyer agree to exchange. It may be all of a business, or parts of it. A typical purchase could include inventory, equipment, patents, trademarks, customer lists, other intellectual property like web sites and logos. There may also be an assignment of existing contracts (to ensure continued cash flow) and leases (to ensure continuity of location).
This way the new owners start with as clean a slate as they want with the new business. They’re free to change the name, advertising, but keep the product the same and keep customer lists so that there is a ready cash stream available. And they won’t have to worry about any messes left behind by the sellers.
What’s in the Asset Purchase Agreement?
The agreement will likely exclude known or inchoate liabilities. For example, there was a deli in the Chicago area a few years back that had an issue with customers getting sick. No doubt lawsuits ensued. A purchaser of the deli does not want the liability of lawsuits fostered by the old owners – not the new owner’s fault – so the known, filed claims, and potential claims, would specifically remain “owned” by the old owners. They should even have been listed in the purchase documents. But the new purchaser certainly wanted the deli and kitchen equipment, lunch tables, location, etc. Inchoate claims might also include unknown tax liability (federal, state, local, unemployment) and code violation fines.
Another use for the asset purchase agreement as a vehicle for buying an existing business is if a seller wants to spin off parts of the existing business. Suppose a seller owned a holding company that encompassed a transportation / busing service, and a landscaping business. If the owner no longer wished to run the landscaping business, the holding company might sell just those assets needed for the landscaping company, keeping the transportation business intact. The sale would include the lawn mowers, pickup and dump trucks, customer lists and company name for the landscaping business; but exclude (or just not list) the limousine and buses for the transportation business.
Another example could be where a retail business with multiple locations wanted to divest of one or more of the locations. A purchaser would be buying the goodwill as well as the assets of the purchased location, and also get a licensing or similar agreement to keep using the seller’s successful name. Sort of like a franchise, but not as regulated.
Finally, there may be good tax reasons to choose the asset purchase agreement over a share purchase of a business. Everyone’s tax situation is different, so I always work with a qualified CPA when doing these transactions. Call me if you’re buying or selling a business to help with the transaction.
See also Part 1 of this series:
http://www.palermolaw.com/selling-your-business/
For this and all your businesses legal needs, call me in Asheville, Hendersonville, Fletcher, Waynesville, and all of Western North Carolina at (312) 671-6453, email at palermo@palermolaw.com, or for more information palermolaw.com.