Buying the assets of another business can be a convoluted process. You need an acquisition strategy.
What is an asset purchase?
What is the difference between an ‘Asset Purchase Agreement’ and a ‘Share Purchase Agreement’ I hear you ask (humour me).
There are two ways you can buy a business, you could buy its shares (and by extension all underlying assets, liabilities and obligations), or simply buy its underlying assets. Whilst an asset purchase sounds a great deal simpler, they can become complex affairs and have their own quirks. For example, in the sale of a company’s ‘client list’ there may be a need to assign or novate the client contracts to the buyer.
One of the considerable benefits of an asset purchase, over a share purchase, is that you can avoid the intricacies and complications that come when taking on a target company’s liabilities and obligations, and leave these problems behind with the Seller.
Key asset purchase considerations:
Preliminary Agreements
Confidentiality agreement – consider whether, as the seller, you need an agreement in place before you provide the buyer with significant access to confidential information.
Exclusivity agreement – Typically entered into at the ‘Heads of Terms’ phase (see below), a ‘lock out’ period which restricts each party from negotiating with other parties and will reassure a buyer and seller that the large amount of time, energy and money they have put into a prospective deal will not be wasted within that period.
Heads of terms, memorandum of understanding or letter of intent (these are all different terms but have the same effect) – an initial agreement between parties for the significant terms of the asset acquisition, before the main process commences. Whilst not usually a legally binding document, it is usually considered contentious to breach a heads of terms document and as such can be difficult to negotiate different terms later once heads have been agreed. You should be careful if you are thinking of breaching a term of the Heads as often certain clauses (such as confidentiality) will be legally binding.
Due Diligence
The ‘due diligence’ process is that of the buyer gathering as much information about the assets, intended for purchase, as possible.
Different businesses mean different key assets, for example:
– Property: a bed & breakfast business, their key asset is their property (and by extension its location)
– Employees: an accountancy, a key asset would be their staff
– Intellectual property: any major brand – take ‘McDonalds’, a key asset would be the intellectual property in their brand, like their name or the ‘Big Mac’ / special sauce recipes
– Customers: a subscription service, like Netflix, their key asset would be their client list
– Licence from an authority: a prison, school or dentist, a key asset would be their licence to run their business.
Whilst the information gathering stage seems long, expensive and quickly obsolete, it is imperative that this is done effectively, to compliment the negotiation stage of the asset purchase and so the buyer can put in place appropriate protections should anything undesirable be unearthed.
Approvals
Easily forgotten, but an asset purchase must be instigated and run with the correct approvals.
Corporate asset acquisitions must be approved by the board of directors of both parties. Another fairly typical requirement, should the articles require it, is for each party to also obtain shareholder approval. For any other asset purchase, each party may need to consider obtaining approval from, but not exclusively:
– A landlord
– A lender
– A regulatory authority
– A contract (e.g. a supplier contract).
The asset purchase agreement
The crucial document for the transfer of the assets or business to the buyer. It is conventionally a weighty document, drafted by the buyer, which will lay out the underlying assets and/or liabilities and the terms that the buyer intends to acquire thereon.
Consideration
Consideration, effectively the payment for the assets, the form of consideration, e.g. cash, loan notes, shares etc. and the timeframes for consideration should be considered, e.g. is consideration due immediately or after a certain timeframe or when a certain threshold is achieved.
Other potential points to note, when thinking about consideration, are:
– Would a guarantee from a third party be critical? For example, a parent company guarantee, where its subsidiary, who is the actual party selling the assets, cannot meet its obligations.
– Are there any tax implications? For example, the transfer of a business as a going concern could potentially fall outside the scope of VAT, but the sale of very specific assets only, may be subject to VAT.
– The formal process of transfer, assignment, delivery, etc. and the requirements for each party before and after completion to operate the transfer. For example, where completion is not immediate after exchange, the seller should continue the normal running of the business.
The Payback for having a well drafted asset purchase agreement:
1. Protection, for both the buyer and the seller.
2. Payment, the quantity and conditions will be clear.
3. Performance. You can ensure that obligations are carried out, and not missed.
4. Pace. Avoid slow and expensive contractual enforcement, if instructions and terms are drafted clearly.
How can we help?
We advise companies, company directors and shareholders on their corporate rights and responsibilities. For strategic advice and representation, contact the expert company law solicitors at Herrington Carmichael as early as possible.
