Asset sales: Overview, definition, and example
What are asset sales?
Asset sales refer to the transaction where a business or individual sells its assets, such as property, equipment, inventory, intellectual property, or other resources, rather than selling the entire company or its equity. In an asset sale, the buyer purchases specific assets or a group of assets, leaving the seller’s liabilities and obligations behind, unless otherwise agreed upon. These types of sales are typically used when the buyer wants to acquire certain assets of a business while avoiding inheriting its liabilities.
Asset sales can be used in various situations, including:
- Selling part of a business: A company may decide to sell off non-core assets, such as equipment or real estate, while continuing to operate its primary business.
- Selling an entire business: A company may sell all or most of its assets to another company as part of a larger acquisition or merger.
- Liquidation: In cases of financial distress, a company may sell its assets to pay off creditors.
An asset sale allows the buyer to selectively choose which assets to acquire, while the seller may retain certain assets or liabilities.
Why are asset sales important?
Asset sales are important for both buyers and sellers because they provide flexibility in structuring the transaction, allowing the buyer to acquire specific assets without assuming unwanted liabilities. For sellers, asset sales can help to monetize specific parts of the business without having to sell the entire company, and it can also help avoid inheriting liabilities associated with an equity sale.
For buyers, asset sales can be advantageous because they enable the purchase of assets that have strategic value (such as patents, equipment, or real estate) while leaving behind debts, obligations, or any legal complications associated with the seller’s previous operations.
Additionally, asset sales may provide certain tax benefits, depending on the jurisdiction and the specific assets involved.
Understanding asset sales through an example
Imagine a company in the technology sector that owns both intellectual property and office equipment. The company decides to sell its intellectual property (such as patents) to another company that specializes in licensing patents, while keeping its office equipment and the rest of its operations. In this case, the asset sale allows the buyer to acquire specific assets (patents) and avoid taking on any of the seller’s liabilities, such as ongoing contracts or debts.
In another example, a retail company wishes to sell some of its stores and real estate to a competitor but retains the rest of its business operations. The asset sale includes the sale of specific stores and the properties they occupy, but the seller keeps its brand, inventory, and online store. This allows the buyer to expand its retail footprint without inheriting any of the seller’s non-sale liabilities.
An example of an asset sales clause
Here’s how an asset sale clause might look in a contract:
“The Seller agrees to sell, and the Buyer agrees to purchase, the assets listed in Schedule A of this Agreement, including but not limited to [list of assets], as part of this asset sale transaction. The Buyer shall not assume any liabilities or obligations of the Seller, except for those explicitly set forth in this Agreement. The transaction shall be completed on or before [closing date], subject to the terms and conditions outlined in this Agreement.”
Conclusion
Asset sales provide flexibility for both buyers and sellers by allowing the transfer of specific assets rather than the sale of an entire business or its equity. These types of transactions are beneficial when the buyer seeks to acquire certain assets without assuming unwanted liabilities, while the seller can retain certain assets or operations. For businesses, understanding the mechanics of asset sales is crucial for structuring deals, managing risks, and maximizing the value of specific assets.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.