The due diligence of an asset purchase is quite often given less priority and attention than it should (read: must) warrant. An asset purchase transaction is often quite complex financially and legally. The buyer agrees to purchase the specific assets and associated liabilities specified within the asset purchase contract. Are there any existing encumbrances to the asset(s) to be acquired? Are there any existing secured lenders or loans that must be assumed or refinanced?
The benefit of an asset purchase is the ability to acquire specific assets (and any associated acceptable liabilities) to increase the capacity of your company to reach desired business goals. Asset purchase transactions often appear flexible and straightforward on the surface. The due diligence of an asset purchase is usually much more complex than the creation of a simple bill of sale and perhaps a loan assumption.
The specifics of the transaction include the nature of the asset to be acquired, specific reference to identifying numbers or characteristics, and the asset’s condition to be acquired. The seller should disclose known defects or issues. Usually, private asset acquisitions are structured as taxable transactions, and the seller usually experiences a gain or loss that must be reported on associated tax returns.
In the event of existing liens, several potential solutions can be considered. If existing financing is to be assumed, lien holders should be notified early in the acquisition process. The seller could pay off any existing loans or liens, or the buyer could retire the associated debt. The transaction could also include financing. The key is to structure the financing in the most effective way and ensure that the transaction contract removes existing liens from the target of the asset purchase. Additionally, it’s important to explore ways to reduce the tax implications for the seller and establish the most advantageous basis of the newly acquired asset for the buyer.
The due diligence of an asset purchase should verify several important aspects of the transaction. What is the actual value of the asset and any associated liabilities or financing the buyer will assume or retire?
The critical issue often overlooked in these transactions is searching for impediments to the seller’s ability to sell the assets. Are there any pending lawsuits or contingent liabilities that may cause issues for the buyer or even the transaction reversal by a court or creditor down the road? Does the seller have a clear title to the asset? Does the company (and any shareholders or members) have an interest in the asset to be sold that may result in a lawsuit or shareholder dispute down the road?
When the asset to be acquired is part of an operational business, such as a customer base or distribution facility, a substantial investigation is necessary to ensure the past, present, and future likelihood of success. This includes assessing the stability and viability of the associated business niche and customer relationships, as well as identifying any recent changes, market developments, or competitive issues that might impact the value of the target asset(s) now or in the future.
While asset purchase transactions can be as straightforward as a willing seller and a willing buyer conducting a simple business transaction, they also carry significant risks. Both the buyer and the seller have specific responsibilities and risks. This underscores the importance of working with an experienced due diligence team that can provide comprehensive investigation and due diligence, as well as structure a successful asset purchase transaction.
The mergers and acquisitions attorneys at Allen Barron integrate with our tax, accounting and legal teams on these transactions. This allows a buyer to turn to a single source for every aspect of the transaction. This includes the asset purchase contract, financing documentation, tax implications and advice, due diligence, clear title and contingent liability investigation, and forensic accounting examination of all past records and important financial reports.
If you are considering a business asset purchase we invite you to learn more about the integrated tax, legal, accounting and business consulting services of Allen Barron and contact us or call today to schedule a free consultation at 866-631-3470.
We can help to ensure smooth and successful business asset purchase transactions.
