An asset deal occurs when a buyer is interested in purchasing the operating assets of a business instead of stock shares. It is a type of M&A transaction. In these cases, the buyer completes 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 the transfer of a business is largely either a share deal/stock acquisition or an asset deal.
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 outlines which specific assets will be purchased. The terms of an APA also include details such as 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 the case with a stock acquisition, the seller’s company continues as a going concern after the transaction.
Instead, from a balance sheet perspective, the seller will record the sale on their balance sheet – cash goes up from proceeds of the transaction, long-term assets go down, and any difference is recorded as a gain or loss on sale in the income statement. The purchaser, on the other hand, will record the acquisition by the value of the investment in an asset account.
An asset deal may offer several advantages over a stock deal, especially for the buyer. The transaction allows the buyer to selectively acquire certain assets and not others. Additionally, it also gives the buyer the ability to avoid the assumption of any liabilities it doesn’t want. Such would not be the case in a stock acquisition, where all assets and liabilities of the seller come with the deal. Furthermore, asset deals can be designed in such a way as to provide a tax benefit.
As a rule of thumb, sellers will retain business-related obligations. In an unstable economic environment, this gives the buyer the ability to avoid the responsibility of unfavorable obligations through the structured asset deal.
An asset deal might require a longer preparation and negotiation of all the deal conditions (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 little more than a formality.
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