Asset Deal

An acquisition-like transaction where the purchaser buys specific assets (and liabilities) of a business, as opposed to purchasing the entire company.

What is an Asset Deal?

An asset deal is a transaction where the buyer purchases the operating assets of a business. The purchaser enters into a transaction with the company running the business, and not with the shareholders of the company.

In practice, if a transfer of business does not take the form of capital acquisition (i.e. a share deal), it should likely be regarded as an asset deal. Accounting and tax treatments will apply accordingly on the basis of an asset transfer. From an accounting perspective, the buyer records the assets and liabilities at the fair market value assigned to them as part of the transaction.

An asset sale, contrary to popular belief, does not necessarily mean equipment or liquidation sale. The object of such transaction is the acquisition of certain assets and the assumption of certain liabilities comprising the business. The seller and the purchaser consummate such an acquisition by means of an “Assets Purchase Agreement” (APA). Assets purchased include tangible (fixtures, furniture, equipment, inventory, leaseholds, etc.) as well as intangible (brand name, client list, contracts, etc.). From a balance sheet perspective, the purchaser’s company records the acquisition by the appropriate amount as an investment and lists the acquired assets with their negotiated purchase price. The seller’s company continues its existence post-closing and shows an increase in cash proceeds from the transaction, removing the sold assets from its balance sheet.

Traditionally, buyers’ preference for asset deals is explained by their desire to select the assets to be covered by the sale.  The major advantage from a purchaser’s perspective in executing an asset deal is the clear severance of liabilities (employees, creditors, etc.) associated with the business pre-closing. Another advantage of the asset deal for the purchaser is the possibility to renegotiate the allocation of the purchased assets in a more tax efficient way.

Also, asset deal structures allows the buyer to control, to a greater extent, risks and historical obligations of the business being transferred. Thus, as a general rule, the seller will retain business-related obligations; and in unstable economic environment, buyers can delineate historical responsibility in favor of structured asset deals.

An asset sale might require a longer preparation and negotiation of all the deal aspects (including asset allocated, employment termination and rehiring, lease assignment, contract transferability, creditor payouts, etc). However, once all these issues are addressed, moving to closing and completing the transaction is a formality.