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Asset purchases - overview
A business may be acquired by way of asset purchase or share purchase.
In an asset purchase, the buyer selects and purchases from the seller only those assets and liabilities it wishes to acquire. By a share purchase, the buyer takes ownership of the company carrying on the business, which comes with all of its assets, obligations and liabilities (whether or not the buyer was aware of them).
This overview provides an insight into acquisitions made by way of asset purchase.
Choice of structure
A decision to proceed with an asset purchase rather than share purchase will be influenced by an assessment of several factors, including:
the nature and quantity of assets employed in the target business
any difficulties associated with acquiring key assets individually (eg where third party consents may be required)
the potential liabilities of the company operating the target business, and
the tax treatment of the alternative structures
A buyer will often prefer to avoid any risk of acquiring unknown or unquantifiable liabilities by careful selection of the assets and liabilities it will purchase. Most contracts and trading arrangements (other than employment contracts in a transfer to which the Transfer of Undertakings (Protection of Employment) Regulations 2006, SI 2006/246 (TUPE Regs 2006) apply) will not transfer automatically on an asset purchase, so the buyer must agree with each of the relevant contracting parties individually, which may add complication.
A seller will generally prefer to sell shares rather than assets, as the former relieves it of all liabilities associated with the target company. The relative bargaining power of the parties may be relevant.
Beginning the sale process
A negotiation for a sale may begin in many different circumstances. An owner may wish to retire from or otherwise realise the value of his business. Alternatively, a potential buyer may initiate an approach to the seller as part of its own expansion strategy.
Preparation for sale
If a seller decides to seek a buyer, he may take steps to reorganise and prepare the target business for sale to make it more attractive to potential buyers. For example, ensuring that up-to-date accounts for the business are available and that the ownership of its assets are adequately documented.
Before being provided with any information about the target business (including the identity of the seller and the target business), a potential buyer should be required to sign a confidentiality agreement.
A potential buyer will wish to invest significant time and resources into investigating the proposed acquisition and may ask for a period of exclusivity, during which it will be the only party with which the seller will negotiate.
Exclusivity can be granted in a stand-alone agreement, but is more commonly incorporated in a heads of agreement, which may become appropriate when a preferred potential buyer has been identified by the seller and an outline commercial deal agreed in principle.
The potential buyer will carry out legal, financial and accounting due diligence into the seller and the target business, in order to obtain information, inform its negotiations and plan for the integration of the target business with its own. In particular, the buyer will require evidence of ownership of assets used in the business and seek to identify any third-party consents necessary for an effective transfer of the business.
The due diligence process is usually co-ordinated by the buyer’s solicitors. They will prepare a due diligence questionnaire and will be assisted by the buyer’s accountants and other appropriate professional advisers. Specialist advisers may be needed to help with employment, pensions, competition, regulatory, intellectual property or environmental issues.
Due diligence must not be confused with disclosure, which is the seller’s principal means of protecting itself against potential liability for breach of warranty.
Purchase agreement and disclosure letter
The seller and buyer (and any guarantor) will enter into a detailed purchase agreement, which sets out the terms on which the sale is to take place, including:
identifying the assets to be acquired
price and payment, including any provision for earn-out consideration, payment by way of loan notes or share consideration, or the preparation of completion accounts
conditions precedent to completion, eg third-party approvals, landlords' consents to assignment of leases and release of bank security over assets
on a sale of a going concern, applying the Value Added Tax (Special Provisions) Order 1995, SI 1995/1268
apportioning liabilities, especially those arising under the TUPE Regs 2006
assignment or novation of contracts of the business
dealing with debtors and creditors of the business after completion
arrangements for completion
post-completion restrictions on the seller
warranties and indemnities, providing for recourse by the buyer against the seller, and
limitations on the seller’s liability, including time limits for making claims and financial limits
The limitations on the seller’s liability under the warranties will include matters disclosed in a disclosure letter, which is negotiated alongside the purchase agreement and given to the buyer at exchange of contracts, together with a disclosure bundle of documents supporting the matters referred to.
In addition to specific conditions precedent, a number of documents will be required to complete an asset purchase, many of which will have been negotiated alongside the principal documents and rendered into an agreed form at exchange. These may include:
assignments of goodwill and intellectual property rights
novation of key contracts
new service contracts for key employees
transfers of any freehold premises
assignments of any leasehold premises, together with relevant landlord’s licence to assign, and
board and shareholder approvals for seller, buyer and any guarantor
The buyer becomes beneficial owner of any individual asset of the target business only after all necessary formalities for completing the transfer of that asset have been complied with. Although many assets may transfer by delivery when the sale becomes unconditional at completion, the buyer takes the risk that some may not transfer until some time afterwards, or at all. The purchase agreement will identify those matters required to be dealt with or waived at completion, including payment of any part of the price then due.
After completion, a number of matters will need to be attended to by the buyer, including:
payment of any stamp duty land tax or VAT
formal assignments or novation of any contracts of the business not dealt with at completion
notices of change of ownership of the business to its customers, suppliers and contacts, and
integration of target business into the buyer’s business
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