What is an Asset Deal?
An asset deal occurs when a buyer is interested in purchasing the operating assets of a business (instead of stock shares) and is a type of M&A transaction. In these cases, the buyer will complete the transaction by providing the selling company consideration for some or all of the assets they own. In terms of legalese, an asset deal is any transfer of a business that is not in the form of a share acquisition. It means that a transfer of business is largely either a share deal/stock acquisition or an asset deal if it does not meet the criteria for the first.
The buyer’s accounting records must reflect the assets and liabilities at fair market value.
Asset Purchase Agreement
In order to complete the asset deal transaction, an asset purchase agreement (APA) is used. This agreement is between the buyer and the seller, and outlines which specific assets will be purchased. The terms of an APA will also include details like the total consideration, payment structure, timing, representations, warranties, and other standard legal terms.
Types of Assets Purchased
An asset deal purchase can include either tangible or intangible assets. Tangibles include equipment, inventory, and fixtures. Intangibles, on the other hand, may include customer lists or patents. Unlike a stock acquisition, the seller’s company does not cease to exist after the transaction.
Instead, from a balance sheet perspective, the seller will receive no effect on their balance sheet – cash goes up from proceeds of the transaction, but long-term assets go down. The purchaser, on the other hand, will record the acquisition by the value of the investment.
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Benefits of an Asset Deal
An asset deal may have several advantages over a stock deal, especially for the buyer. This transaction allows the buyer to selectively acquire certain assets and not others. Additionally, this also gives the buyer the ability to avoid the assumption of any liabilities it doesn’t need. This would not be the case in a stock acquisition, where full liabilities of the seller may come with the deal. Furthermore, asset deals can be signed in such a way as to provide a tax benefit.
Asset deal structures also provide the buyer with greater power to tie to their own governance, whether it be in the form of reduced risks or oversight of historical obligations of the business being transferred. As a rule of thumb, sellers will retain business-related obligations. In an unstable economic environment, this gives the buyer the ability to divest itself from the responsibility of unfavorable obligations through the structured asset deals.
An asset deal might require a longer preparation and negotiation of all the deal aspects (including assets 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.
This a been a guide to asset deals in mergers and acquisitions. CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful: