When purchasing a business, there are generally two methods available;
- an asset purchase; or
- a share purchase.
This blog explains what asset purchase is. Alternatively you can click here to see more about a share purchase.
What is an asset purchase?
An asset purchase involves the purchase of some or all of the assets owned by an entity and used to carry on the business of that entity. Assets may include fixed assets (land, buildings, machinery, trading stock), and intangible assets such as goodwill or intellectual property. Usually, the assets are specifically identified in the sale and purchase agreement, allowing the buyer more control over which particular assets and liabilities (if any) it wishes to purchase. Sometimes employee liabilities such as accrued annual and long service leave are deducted from the asset price or paid out for tax reasons.
What to consider with an asset purchase
There are a number of issues at stake during an asset purchase, here are the main considerations:
- Employees – an employee’s current employment contract will usually be with the seller or entities controlled by the seller. When purchasing a business or its assets, the employment relationship cannot be ‘transferred’ from the seller to the purchaser, as employment contracts are personal in nature. In this circumstance, the seller would have to to terminate the employment contracts, allowing the purchaser to enter into new employments contract with each employee. The seller will need to consider the treatment of the accrued entitlements, which can vary depending on the terms and conditions of employment of each employee. Similarly, any employee benefit plans may also have to be acquired or assumed. This can be particularly costly in some situations.
- No Assignment – key contracts may need third party consent to be assigned, or may not be assignable at all. This would reduce the value of the business to the buyer. Specific arrangements may be required to vest title in the purchaser. For example, the consent of landlords or finance companies may be required for transfer of any property or plant & equipment leases, where these are subject to mortgages or live purchase agreements.
- Ability to cherry pick – an asset sale provides the purchaser with the ability to choose which assets to acquire and to leave any unwanted assets with the seller.
- Apportionment – the purchase price must be apportioned between various classes of assets, including plant and equipment, land and buildings, stock, and goodwill if applicable. This can cause conflict between a seller’s preference to adopt their book value, and a purchaser’s preference to adopt a higher value to maximise tax benefits. The purchase price can, within relevant parameters, be apportioned between assets sold. This may result in tax advantages for the seller.
- Tax consequences – for a purchaser, the cost of assets can be reset to their market value at the time of purchase. In most instances, this will reduce the capital gains tax that might otherwise arise at a future date and result in a benefit to the purchaser. A seller might gain a benefit by utilising tax losses to offset other tax liabilities arising from the sale.
- Capital Gains Tax (CGT) – where all of the assets of a business are transferred the sale may be classified as the sale of a ‘going concern’. This may result in no CGT being payable on the transaction. Alternatively, where the sale cannot be categorised as a going concern, a CGT liability may arise.
- Duties – Stamp Duty Land Tax (SDLT) is charged on the part of the consideration allocated to land and any inherent goodwill in the land. It is no longer paid on other assets acquired. Stamp Duty is paid at 0%, 1%, 3% or 4% depending on the consideration allocated to the non-residential land. For example, if the sale of the business included a freehold property valued at say £1,000,000, Stamp Duty is paid at 4% i.e. £40,000.
Advantages of selling assets
Here are the main advantages of selling assets:
- Increased negotiating power
- Ability to retain assets
- Personal guarantees
- Allowable losses
- Balancing allowance
Below, we’ve provided additional detail for each of these benefits.
- Negotiating power – In a share purchase the buyer is purchasing the entire entity. This includes all assets, contracts and liabilities, whether they are aware of them or not. Once the transaction is complete, the buyer assumes responsibility for the whole company. For this reason there would usually be greater due diligence and additional professional fee for a share purchase than an asset purchase. The seller may be able to negotiate a better price for relieving the buyer of these matters.
- Retained assets – The seller can choose which assets to sell and which to keep. If there is a share sale and a seller wishes to keep certain assets then these may have to be transferred out of the company prior to the sale of the business, which may lead to additional costs and tax charges. There is no such issue with an asset sale.
- Personal Guarantees – If the seller has given a guarantee to the company´s bank or anyone else it will not be affected by a share sale or by an asset sale. If for any reason the guarantee is not released at the same time as the shares are sold the seller could be liable for future obligations incurred by a company that is no longer under his control.
- Allowable losses – If the capital assets (other than those on which capital allowances have been claimed) are to be sold at a loss, this should result in an allowable loss that can be set against other chargeable gains of the seller. Sale of trading stock for less than cost will give rise to a trading loss.
- Balancing allowance – A sale of assets, which have fallen in value more rapidly than their tax depreciation, may give rise to a capital allowances that would not arise on a share sale. The seller is treated for tax purposes as making a trading loss equal to the difference between the sale price of the asset and its tax written down value. That loss can be set against other income or chargeable gains so as to reduce the seller´s taxable profits
Expert Legal Guidance
Should you require further guidance through the process of buying or selling assets, our team is here to help.
Call us on 0161 969 3131 or leave your details with us and the team will be in touch.