Asset Deal

A purchaser buys specific assets (and liabilities) of a business, as opposed to purchasing the entire company

What is an Asset Deal?

An asset deal occurs when a buyer is interested in purchasing the operating assets of a business. This is a type of M&A transaction. In these cases, the buyer will conduct the transaction with the business operators, and not the shareholders of the company.

In terms of legalese, an asset deal is any transfer of business that is not in the form of a capital acquisition. This 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.

From an accounting perspective, the buyer records the assets and liabilities at the fair market value assigned to them as part of the transaction.

 

asset deal

 

Asset purchase agreement

Though it seems self explanatory, an asset sale does not necessarily constitute a sale of equipment or a liquidation of physical assets. Instead, the transaction consists of acquiring certain assets and inheriting the liabilities that either comprise the business tied to the asset, or are tied to the asset itself. The seller and the purchaser consummate such an acquisition by means of an “Assets Purchase Agreement” (APA).

 

Types of assets purchased

An asset purchase can include either tangible or intangible assets. Tangibles include equipment, inventory, and fixtures. Intangibles, on the other hand, may include client 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 to 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

Asset deals have several advantages over the 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 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 to provide a tax benefit.

Asset deal structures also provide the buyer with a 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 ability gives the buyer to divest itself from responsibility of unfavourable obligations through the 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.

 

Additional Resources

This a been a guide to asset deals in mergers and acquisitions.  To keep learning and developing your skills, these additional resources will be helpful: