ASSET PURCHASE

An Asset Purchase is a transaction in which the purchaser structures the purchase of the business by purchasing only the assets of the business he is looking to acquire. The purchaser is not acquiring the corporate structure or business entity itself.

One reason why an acquisition may be structured as an asset purchase is if the business is owned in a corporate structure or limited liability structure where there may be debts or existing liabilities such as lawsuits that are pending. Also, the purchaser may already have his own corporate structure and may simply want to “merge” the acquired business into his own corporation.

Hedge funds and private equity firms can provide funding for an asset purchase. They can either fund directly or sometimes co-invest or co-fund larger transactions with one or more of their funding partners. Here's some tips on Raising Capital for an Asset Purchase.

In order to avoid the debts and liabilities of an acquired company, the purchaser may just purchase the business. Example: Let's say a Acme Distributing Corporation has machinery, customer accounts, real estate and 1 employee discrimination lawsuit pending. Purchaser wants to buy most of the equipment, customer accounts and the real estate, but does not want the liability of the pending lawsuit. Rather than purchasing Acme Distributing Corporation he decides to do an asset purchase instead of a corporate acquisition. The assets of a business are not just the hard assets such as of the equipment, machinery, furniture and real estate. Other assets which may be even more valuable could include customer accounts, accounts receivable, software, technology, patents and trade secrets.

There may be issues of successor liability and fraudulent conveyance, but if the purchase is made by an unrelated third party purchaser for fair value, it may be hard to prove these claims in court (depending on applicable state and federal laws). Also, as an added precaution, the purchaser could try to have the seller keep a certain amount of money in escrow to pay the claim in the event the lawsuit is successful against the seller.

Another issue to consider is whether or not the corporation selling its assets has built up a loyal customer base, and name recognition that is synonymous with the corporate name. If that is the case, then the purchaser needs to carefully weigh the impact an asset purchase may have on the customer base. If the liability issues are not that significant it may be more beneficial to make a corporate acquisition to maximize the benefits of the brand name recognition, good will and customer loyalty.

Brand name identity is a very important factor to consider. Some companies spend millions of dollars and years of marketing in developing a particular brand awareness and identity for their particular product or service. Don't structure the purchase in such a way that will cause the product or service to lose its brand identity, this may also cause a significant drop-off in business and loss of customers.

In such a situation, a purchaser needs to carefully weigh and evaluate the risks and benefits of a corporate acquisition versus an asset purchase. Extensive due diligence may required by the purchaser’s accountant and attorney, as well as any other experts that can assist in helping the purchaser to make the right decision. Carefully planning and analysis of the proposed acquisition can help maximize the benefits to be gained post closing. It will be much harder to undo or change the transaction once it has closed and seller walks away. Being able to spot the issues is just as important as addressing them prior to the closing of the transaction.