In an asset acquisition, the buyer acquires either all or a selection of the seller’s assets and liabilities. This transaction is most favorable to the buyer, who can record the acquired assets at their fair market value (which is usually an increase from the seller’s tax basis), thereby yielding more depreciation to use as a tax shield. This also results in a smaller gain if the buyer subsequently sells the assets. However, it must also obtain legal title to each asset it acquires, which can require a considerable amount of paperwork. Also, depending on the circumstances, the seller may have to notify its creditors of the impending transaction. For example, if the buyer intends to acquire a seller’s below-market asset lease agreement, the lessor may only agree to the sale if it can increase its lease rate.
An asset sale is not tax-efficient for the seller. Of primary importance is that the seller must pay income taxes on the difference between the consideration received and the seller’s basis in the entity. The situation is more dire if the selling entity is a “C” corporation, due to a dual taxation scenario. First, the “C” corporation must pay taxes to the extent that the total consideration received exceeds its adjusted basis in the assets sold. In addition, assuming that the “C” corporation intends to distribute its remaining assets to stockholders and dissolve, the stockholders must pay taxes to the extent that the distributions received exceed their cost basis in the stock.
Also, if the seller had previously claimed an investment tax credit on an asset that it is now selling, the credit may be recaptured, thereby increasing its income taxes.
An asset acquisition can be used to avoid acquiring unknown or contingent liabilities. For example, if the selling entity is the subject of a lawsuit and the buyer wishes to avoid any liability related to the lawsuit, then it can selectively purchase assets, leaving the selling entity with responsibility for any legal settlement. However, some environmental laws stipulate that the liability for future hazardous waste cleanups can attach to assets. Consequently, the buyer of real estate assets should go to considerable lengths to verify the extent of any environmental contamination prior to purchase.
An asset acquisition is also useful for the partial sale of a business that has multiple products or product lines. For example, a buyer may only want to purchase a single product in order to fill out its product line, leaving the seller with most of its original business intact. Though it is also possible to spin off such assets into a separate legal entity, it is often easier to simply conduct an asset sale.
The form of the purchase agreement varies from that used for an entity purchase. Instead, the parties use a general assignment and bill of sale, with an attached schedule that itemizes each asset or liability being transferred.
Depending upon the proportion of assets sold to the buyer, this transaction can require the direct approval of at least a majority of the seller’s stockholders. The selling entity remains in existence, and continues to be owned by the same stockholders. However, if most or all of its assets are sold, then the seller’s stockholders normally liquidate the entity.
The Asset Purchase