Buying Business Assets: What You Should Know
A business is, at its core, a collection of assets. These assets can be physical: property, buildings, merchandise or product; or they can be liquid: bonds, patents, etc. If you are interested in buying a business’ assets, there are a few key details you should be aware of, including any repercussions.
Assets vs. Stocks
Purchasing the assets of a business is a very “no strings attached” type of transaction. Buying the assets does not translate to inheriting other liabilities, such as tax debt. Also, in a typical asset sale, buyers have more control, including the ability to choose the exact assets they are interested in.
During an asset sale, both the buyer and seller must file an Asset Acquisition Statement with the IRS. The buyer is allowed to take depreciation and/or amortization expenses on the assets purchased, which makes the filing of this document extremely important. However, the IRS can challenge the asset allocation outlined within it, so it is crucial that an independent third party conduct the asset appraisal as a precaution.
When purchasing assets, the buyer can be compensated for the depreciation of these assets over time and, in the end, recoup all or most of the purchase price. In a stock purchase, there are no tax write-offs available to the buyer.
Purchasing a company’s assets does not mean that you have purchased the company. Some businesses endeavor to sell off certain assets when looking to refocus their business model or change the type of business they do. This is an important distinction to make, since purchasing a business outright carries with it legal and monetary ramifications.
Agree on Terms
You or your lawyer should draft an Asset Purchase Agreement once you have decided which specific assets you are interested in purchasing. This document will clearly outline the assets and associated liabilities you are agreeing to in the sale; it’ll also state what assets and liabilities will be left to the seller.
Additionally, the agreement puts into writing the date and time for the final asset sale, making it easier to hold all parties accountable.
Disadvantages of an Asset Sale
While asset sales place more control in the hands of the buyer, they can also present more disadvantages.
- Double Taxation - Depending on the type of company the buyer has, asset sales may be taxed twice. If your company is a C-Corporation, then it is eligible for double taxation, an option not beneficial to your shareholders. However, if your organization is an S-Corporation or allows for pass-through taxation (i.e. LLC or partnership), this disadvantage no longer applies.
- More Red Tape - Depending on the sizes of the seller and buyer’s businesses, there may be more need for third-party approvals and consent. This can delay the sale and drag out the process.
- Difficulty in Identification - It may be hard to accurately identify the assets you are most interested in purchasing. Certain assets may be considered “shared” with other divisions or aspects of the organization, and separating these shared assets out can take quite a bit of time and effort.
Hire an Expert
When deciding whether or not to purchase the assets of a business, make sure you consult a business attorney. You’ll want to be well-prepared ahead of the sale and well-informed regarding the seller’s tax history, revenue reporting and existing contracts.
If you are looking for a fairly low-risk method for increasing your business’ worth, the purchase of existing assets may be the best option for you. Just be sure you know what you’re buying, who you’re buying it from and how much it’s really worth.