Most small business transfers are an "asset sale" rather than a "stock sale." Be aware of the two different uses of the term "asset sale": While most small business deals are in effect a sale of all the assets of the business, the term can also be used to refer to the sale of just the physical/tangible furniture, fixtures, and equipment ("FF&E") of a business that is no longer an open and operating ("going") concern. On BizBen.com, the designation "asset sale" is used to indicate this kind of limited FF&E/tangible asset transfer. SEE ALSO: Asset Purchase Agreement (APA)
There are only two ways to sell a business. As an Asset Sale or as a Stock Sale. A Stock Sale can only occur if the owner has moved the business assets into an LLC, Corporation or similar legal entity and the buyer is willing to buy that asset but do so as a Stock purchase. If you are a buyer there is less risk to do an asset sale. If you are a seller you may prefer to do a Stock sale to avoid having to repay tax benefits you've taken from your ownership over the years.
An Asset Sale is generally a transfer of the tangible and intangible assets at a bulk price that is reflective of the value of the hole. This is often done when a business sells one part or one location of a company apart of the rest.
Business "assets" include everything that a business owns, from tangible personal property such as computers and file cabinets to real property such as any land or buildings it holds, to intangibles, such as intellectual property (patents, trademarks, etc.) and goodwill. In an asset sale, a buyer typically purchases all of the assets of a business, but does not buy the company itself. For example, a buyer purchasing a pizzeria in a deal structured as an asset sale would buy the business equipment, furnishings, inventory, and records, as well as what's known as "goodwill"--the accumulated value of the business' ongoing history with its customers and the business name.
Asset sales are in contrast to Stock sales where a Buyer will purchase a company as a whole and continue to run it as the same business entity. Many Buyers prefer asset sales because they can offer better protection from claims and liabilities of the previous business that a stock sale.
This is a term of some confusion. Almost all small business sales are "asset sales" in that they are not the sale of the corporate entity (Inc. or LLC), but rather of all the business within the corporate entity - name, intellectual property, goodwill, inventory, furniture, fixtures, and equipment (FFE), etc. - except for cash, accounts receivable, and accounts payable. As commonly used in business sales, an 'Asset Sale' refers to a situation where the business has ceased operating and only has certain assets left (generally, the "FFE") and the sale price is based only on the market value of the assets, not on th business as a "going concern."
An asset sale is one of two ways that a business can be sold. It refers to the listing of all the assets included in the deal, as well as the value for each, so that the total of those values is the price at which the business sells. The other method involves the sale of the stock in the corporation that owns those assets. One way a corporate sale is described refers to the entity as a 'basket of assets' along with the basket itself.
The asset sale is preferable for most business buyers for three main reasons:
- Opportunity to choose among the assets the buyer feels are required to operate the business. Included will be tangible assets: equipment, fixtures, furniture, inventory of merchandise for resale; and intangibles, such as trade name, goodwill, leasehold interest, licenses and seller's covenant not to compete. The buyer's offer may omit, or event specifically exclude assets he or she does not want, for example equipment that is obsolete or not working, and inventory that is unlikely to be marketable.
- Ability to set values for the assets--usually negotiated as part of the agreement'provides the buyer the opportunity for depreciation of capital equipment and other assets that can be depreciated or amortized. These values that are paid by the buyer, are likely to be higher, meaning more dollar amounts for write offs, than the depreciated values shown on the books of the corporation.
- Ability to avoid acquisition of corporate liabilities, such as debt and legal problems affecting the corporation. By purchasing only assets, a buyer is deemed not responsible for debts, such as the accounts payables, or for liabilities arising from law suits or fines. These remain with the corporation and probably will be the responsibility of the seller.
There are occasions when a business buyer wants to become owner of the corporation rather than picking among its assets. In some cases, there may be contracts, licenses, permits or other important intangible assets owned by the corporation and non-transferable from the corporation. If it would be difficult for a buyer to obtain rights that are important for the successful operation of the business, the best strategy might be to take ownership of the corporation in order to have use of these valuable assets.
