Key Takeaways

  • An asset purchase involves buying specific business assets (and possibly some liabilities) rather than acquiring ownership of the entire company.
  • Buyers can select which assets and liabilities they want, reducing risk compared to a stock purchase.
  • Tax benefits include the ability to “step up” asset values for depreciation and amortization.
  • Contracts with suppliers, landlords, or employees generally must be renegotiated in an asset purchase.
  • Environmental and regulatory obligations tied to assets (like real estate) require careful due diligence.
  • Asset purchases are often preferred by buyers for flexibility, while sellers may favor stock sales for simplicity.

What is an asset purchase of a business? An asset purchase of a business is one of three ways to structure a company's acquisition. A statutory merger, which is also called a share exchange, and buying the shares from current shareholders are the other two company acquisition methods. The one purchasing assets might buy only specific business assets or all of them, and specific business liabilities, if there are any.

Types of Purchased Assets

There are several purchased assets to consider when managing an asset purchase. The list includes:

  • Accounting packages
  • Calculators
  • Cars
  • Computers
  • Customer lists
  • Desks
  • Equipment
  • Fixtures
  • Furniture
  • Inventory
  • Logos
  • Marketing materials
  • Pencils
  • Phone numbers
  • Rights to software
  • Staplers
  • Tools
  • Trade names
  • Trucks
  • Vendor lists
  • Web domains
  • Websites

Advantages of an Asset Purchase

An asset purchase offers buyers greater control over the transaction because they can choose only the assets they want, such as customer contracts, intellectual property, or equipment, while leaving behind liabilities like pending lawsuits or tax debts. This selectivity reduces exposure to hidden risks.

Another advantage is the ability to negotiate the treatment of goodwill, trademarks, or brand recognition separately from physical assets. Buyers may also benefit from a “step-up” in the tax basis of assets, which allows for higher depreciation deductions over time.

Purchasing Assets

Specific assets being purchased are listed on slips of paper. The purchase agreement then specifies that the buyer is purchasing all of the assets that make up the business. The business name is also specified. The buyer is taking ownership of the company when he or she buys up the shares, and all the company's assets and liabilities become the property of the shareholder who takes ownership. Only certain company assets can be purchased, not the liabilities as a way to reduce the potential risk.

Disadvantages of an Asset Purchase

While an asset purchase limits risk, it can also be more complex to execute. Each individual asset must be identified, transferred, and documented. This includes reassigning leases, permits, intellectual property registrations, and customer agreements. If the business operates across multiple jurisdictions, additional filings may be required.

Employees do not automatically transfer in an asset sale, meaning the buyer must extend new job offers and negotiate employment terms. This can create uncertainty in the workforce and lead to the loss of key staff. Additionally, asset purchases may trigger sales taxes or transfer taxes on certain assets, depending on state law.

Allocated Purchase Price

Purchasing assets of a business let buyers allocate the company's purchase price among different assets so they reflect a fair market value. This creates a way to increase the tax basis, which lets owners claim higher depreciation amounts and bigger amortization deductions. It also provides tax savings in the future.

Defining the specific assets the buyer wants to acquire can be challenging. Businesses usually try to sell a single division or subsidiary. So, the assets used in the division or subsidiary in question are typically sold first. Shared assets, however, need to be negotiated, followed by switching licensing to the purchaser, and they need to be recorded in accounting books as part of the purchase price.

Asset Purchase vs. Stock Purchase

An important distinction for business buyers is whether to pursue an asset purchase or a stock purchase. In a stock purchase, the buyer acquires the company as a whole—both assets and liabilities—without renegotiating contracts or transferring titles. This is simpler for the seller and may be less disruptive for employees and operations.

By contrast, an asset purchase allows the buyer to avoid inheriting unwanted liabilities but requires additional legal and administrative work. Sellers often prefer stock sales because they can transfer the business in one step and potentially qualify for favorable capital gains tax treatment.

Contracts Must Be Renegotiated

When the purchaser only buys a seller's assets, the buyer doesn't get any of the original contracts with the company's business partners. Contracts with business partners of the company being acquired can cause trouble for the acquirer if he or she plans to keep doing business with existing customers and suppliers. This is because all contracts have to be renegotiated between the existing suppliers and the new owner.

What Happens With Liabilities in an Asset Purchase

In an asset purchase or acquisition, the buyer only buys the specific assets and liabilities listed in the purchase agreement. So, it's possible for there to be a liability transfer from the seller to the buyer. Undocumented and contingent liabilities, however, are not included. This is something that adds to the appeal of an asset acquisition.

Asset Step-Up

With asset step-up, the buyer accounts for acquired assets at their elevated, or stepped-up, fair market value, then depreciates the values of the assets for tax reasons. If the acquired assets fair market value is lower than their actual book values, the buyer doesn't get the advantage of a tax benefit. The buyer can also use amortization to record goodwill that's associated with the asset purchase for tax reasons.

Asset Titles

The buyer has to get a title for each asset purchased. This can add up to an extensive amount of legal work if the company owns a lot of fixed assets. In addition to that, it might not be an option to separate liability for environmental cleanup from purchases of fixed assets.

Environmental rules, in some cases, state that future costs for hazardous waste cleanups can be attached to a company's assets, as well as a company's legal entity. That means the buyer needs to perform extra due diligence to check for environmental issues if making a plan to purchase a company's real estate holding as part of the asset purchase.

Purchasing stock is a way to almost completely get rid of the need to purchase all of a company's assets. Purchasing is also called a title transfer. A stock purchase also means there is no reason to reapply, renegotiate, or transfer things like employment agreements, permits, facility leases, and utilities.

Due Diligence in Asset Purchases

Thorough due diligence is essential in an asset purchase. Buyers should:

  • Review environmental obligations tied to real estate or equipment.
  • Examine intellectual property registrations to confirm ownership.
  • Verify that liens or security interests on equipment and inventory have been cleared.
  • Ensure regulatory licenses and permits can be transferred or reissued.
  • Assess whether key employees, customers, and vendors will continue after the transaction.

Without a careful review, buyers risk acquiring assets that are encumbered or less valuable than expected.

Frequently Asked Questions

  1. What is the main benefit of an asset purchase?
    It allows buyers to choose which assets and liabilities they want, reducing risk compared to a stock purchase.
  2. Do contracts transfer automatically in an asset purchase?
    No. Most contracts, leases, and agreements must be renegotiated or reassigned to the buyer.
  3. How is an asset purchase taxed?
    Buyers may receive a “step-up” in the tax basis of assets, allowing for higher depreciation and amortization deductions.
  4. Why might a seller prefer a stock purchase instead?
    Stock purchases are simpler, transfer all assets and liabilities at once, and may provide the seller more favorable capital gains treatment.
  5. What due diligence is needed in an asset purchase?
    Buyers should review environmental liabilities, liens, intellectual property rights, permits, and employee obligations before closing the deal.

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