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:

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.

Due diligence

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:

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.

Ancillary documents

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:

Completion

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.

Post-completion

After completion, a number of matters will need to be attended to by the buyer, including: