Asset Purchase Transaction

Contact Neufeld Legal PC for corporate transactional and legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

Assisting in acquiring the assets of a business corporation.

Acquiring merely the assets of a corporation, and not the corporate entity itself, is the premise for an asset purchase and sale. It is a process that strives to reduce the assumption of risks and liabilities, by attempting to acquire only specific components of the business. But in undertaking such a partial cleansing of the acquisition, there is invariably a reduction in the purchase price, as the risk has been reduced (as it is intended to remain with the vendor), yet the underlying work still awaits.

Although not necessarily with the frequency associated with share purchases, asset purchases can be quite complex and challenging, especially when they are allowed to become bogged down by differing perspectives and interpretations of the transaction's form and objectives. This can make the process and/or the results extremely expensive, especially when legal counsel is incapable of managing and navigating the process so as to effectively achieve the client's objectives. This is a critical element that is all too frequently in short supply, unless the lawyer has the capacity to understand business and transform theory into a workable and profitable reality.

Key Reasons for pursuing an Asset Purchase Transaction

A. Risk Mitigation and Liability Control

This is often the most compelling reason for a buyer to choose an asset purchase.

• Avoiding Hidden Liabilities: In a share purchase, the buyer acquires the entire corporate entity, which means they assume all of its liabilities, both known and unknown. This can include potential lawsuits, environmental issues, unpaid taxes, or other undisclosed debts. With an asset purchase, the buyer is able to "cherry-pick" the assets they want and explicitly exclude the liabilities they do not want to assume.

• Limiting Exposure: An asset purchase allows a buyer to limit their exposure to a defined set of assets and expressly stated liabilities, providing a much higher degree of certainty and risk control.

B. Tax Advantages for the Buyer

The tax implications of an asset purchase can be very favorable for the acquiring company.

• Depreciation and Amortization: In an asset purchase, the buyer can "step up" the cost basis of the acquired assets to their fair market value at the time of the purchase. This allows the buyer to claim future tax deductions by depreciating or amortizing the purchase price of the assets (e.g., equipment, buildings, intellectual property, and goodwill) over their useful life. This can significantly reduce the buyer's taxable income in the years following the acquisition.

• No Inheritance of Tax History: By purchasing assets, the buyer does not inherit the seller's past tax history or any potential tax liabilities (e.g., unpaid taxes, penalties, or fines). This reduces the scope of tax due diligence required.

C. Selectivity and Customization

An asset purchase provides the buyer with greater flexibility and control over the transaction.

• Choosing Desired Assets: The buyer can select only the specific assets they need to achieve their business goals. For example, a buyer may only be interested in a company's intellectual property, customer lists, or key pieces of equipment, and can leave behind unwanted assets and the legal entity itself.

• Avoiding Unwanted Contracts: Unlike a share purchase where all contracts remain in force, an asset purchase allows the buyer to choose which contracts, licenses, and permits to assume. This is particularly useful for avoiding unfavorable contracts with suppliers, customers, or lessors.

D. Employee Considerations

The handling of employees can be a key driver for an asset purchase.

• Selective Hiring: In an asset purchase, the buyer is not required to take on all of the seller's employees. The buyer can extend offers of employment to the staff they wish to retain, and can negotiate new employment contracts. This allows the buyer to restructure the workforce to fit their business model.

• Managing Severance Costs: By not inheriting the employee liabilities, the responsibility for severance and termination payments for any non-retained employees remains with the seller.

When it comes to the legal component of corporate mergers & acquisitions, that is when the law firm of Neufeld Legal P.C. comes into play. Such that when your company is seeking knowledgeable and experienced legal representation in orchestrating and completing business mergers, acquisitions and divestitures, contact us at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.