Business Planning - Asset Sale Agreements

We assist individuals and small businesses with both the purchase and sale of businesses and business assets. Our firm can help with determining what format the sale should take on and assist with the drafting or review of the documents for the entire process from Letter of Intent to Franchise Agreement Review (if applicable) to Sales Contract to Bill of Sale and any Financing Agreements or Documents that need to be drafted in order to effectuate the intent of the parties.

Sales or purchases of businesses involve either the sale of the entire entity or of the assets of the business themselves. While a seller might like to sell the entire entity, the buyer is almost always going to insist on purchase of the assets only. Most of the documents we draft or review for sales or purchases of businesses are in fact Asset Sale Agreements.

What is the difference between the two and why do buyers and sellers most often disagree as to which form to pursue? In an asset sale, the seller’s part of the tax bill may be composed at the ordinary, higher income rate. Thus, sellers are better suited by sale of the entire entity, where they are eligible for capital gains treatment.

In an entity sale, the buyer doesn’t get a step-up in basis and therefore can’t depreciate the assets of the existing entity because most likely they already have been depreciated by the previous owner. Buyers accordingly favor purchase of assets. Additionally, Buyers prefer asset sales over entity sales to avoid the company’s unknown liabilities being transferred to them as the new owner of the entity. Such liabilities might include contract claims, potential product liability claims, or employee lawsuits resulting from the seller's ownership of the company. By insisting on an asset sale, the liabilities remain with the seller.

Often this disagreement between the buyer and seller is resolved by a negotiated adjustment of the selling price or payment terms. Sellers will negotiate a higher sales price to help offset the taxes that will be created by the sale of the assets and buyers will often pay more to avoid taking on the potential or actually liabilities of the seller’s entity. These preferences can be addressed in the sales agreement so that the form of the sale doesn’t have to be a deal breaker. In an asset sale, for instance, the contract can require the buyer to assume certain of the seller’s liabilities and/or in consideration of the fact that third parties will not be bound by the contract’s terms, escrow arrangements or indemnification clauses may be utilized that will eliminate some of the buyer's risks.