What are some of the risks and benefits of an asset purchase in San Diego or anywhere in California? How can you accomplish your business objectives while protecting your business throughout a transaction?
3 Key Reasons You Need an Asset Purchase Attorney in California
- An asset purchase is a common business transactions, but presents risks and benefits for both the seller and the buyer alike.
- You need to make sure the asset(s) you are acquiring are free of encumbrance and have clear title, or only intended liabilities are transferred with an acquired asset
- There are too many risks and potential surprises (such as an adverse action by a shareholder or member of the seller’s company) to acquire business assets without an attorney
When to Consider a Business Asset Purchase
An asset purchase allows your business to acquire specific assets, including but not limited to:
- Real Estate
- Inventory, furniture, and fixtures
- Vehicles, machinery, and equipment
- Customers, accounts receivable,
- Operational Assets, websites and URLs, software,
- Intangible Assets
- Intellectual Property, trademarks, copyrights,
- Goodwill, contractual rights, licenses and permits
An asset purchase should provide not only clear title to the asset(s) in the transaction, but ensure full disclosure of present condition, known defects and a crystal clear definition of the asset(s) to be acquired.
What Are the Most Important Factors in an Asset Purchase?
The structure of the asset purchase contract and comprehensive due diligence are two of the key factors to manage the risks and benefits of an asset purchase in San Diego or anywhere in California. The structure of the transaction itself allows great flexibility for the buyer to acquire needed assets and property without assuming contingent liabilities. In these transactions, the buyer is in a strong position to dictate which specific assets they wish to acquire and which liabilities (if any) are to be assumed during the transaction.
Asset purchases allow your business to take advantage of the major tax advantage of a step up in (tax) basis while developing valuable tax deductions for depreciation and/or amortization of the acquired asset. In addition to tax benefits, the structure of the transaction provides opportunities for important management of other shareholder interests while increasing the power and resources available to your company.
The Watkins Firm has more than 40 years of experience in business asset purchase transactions. We have a substantial proprietary contract library of proven, tested asset purchase agreements we can cost-effectively tailor to your unique application. We work with our clients to efficiently assess all aspects of proposed transaction, and protect their interests throughout the process to a successful profitable conclusion.
What Are Some of the Risks of an Asset Purchase Transaction?
An effective transaction and the contract that governs it should help to balance the risks and benefits of an asset purchase in San Diego or anywhere in California. The primary risks associated with a business asset purchase transaction include a lack of thorough due diligence, hidden or non-disclosed liabilities or encumbrances, lack of clear title, and poorly crafted agreements that expose the parties to unnecessary risk and potential liabilities.
This is why you need an experienced mergers and acquisitions attorney from the Watkins Firm to protect your interests in any business asset purchase. Asset purchases actually present some significant risks. The experienced asset purchase attorneys at the Watkins Firm work with our clients to identify these risks and any potential contingent liability which may not be to our client’s advantage. We help to negotiate terms that protect our clients. It is important to ensure the buyer receives clear and unencumbered title to the assets purchased under the transaction. There may be existing contracts to be assumed or renegotiated. Some assets require the consent of a third party, or a minority owner or investor in the seller’s company.
What approvals are required in the corporate documents such as the shareholders’ agreement or the operating agreement? What risks regarding the fiduciary duty of the seller exist, and how can the Watkins Firm help to mitigate or eliminate these risks? For example, it is not uncommon for a breach of fiduciary duty lawsuit to be brought against a majority interest who sold a business asset well below market value or inappropriately to another business in which the seller also had an interest. Our attorneys work to ensure the final agreement(s) achieve the purchase sought by our client without exposing them to present or future risks or litigation.
Pro-Tip: “The reason you want to do an asset purchase is because you’re buying the actual assets that are being described, and they’re being sold to you in a manner where you don’t have to worry about all the other problems or secrets this corporation and its shareholders may have. An asset purchase, will often entail an escrow. You create an escrow for the company and you send out a notice that I bought this company’s assets. And if you’re a creditor, you have 60 days to come and make a claim. Otherwise, after that I’ll own not only the equipment I’ll own, the goodwill, I’ll own the name, the IP, everything free and clear. When you’re not buying the assets of a business, you’re buying shares or ownership, whatever the shares have power over, and that can be complicated and hard to understand or to even know what you’re really getting. So from that point of view, and also for the tax advantages of depreciating assets and the step-up advantages and other things, most people prefer an asset purchase.
Pro-Tip: “The reason you want to do an asset purchase is because you’re buying the actual assets that are being described, and they’re being sold to you in a manner where you don’t have to worry about all the other problems or secrets this corporation and its shareholders may have. An asset purchase, will often entail an escrow. You create an escrow for the company and you send out a notice that I bought this company’s assets. And if you’re a creditor, you have 60 days to come and make a claim. Otherwise, after that I’ll own not only the equipment I’ll own, the goodwill, I’ll own the name, the IP, everything free and clear. When you’re not buying the assets of a business, you’re buying shares or ownership, whatever the shares have power over, and that can be complicated and hard to understand or to even know what you’re really getting. So from that point of view, and also for the tax advantages of depreciating assets and the step-up advantages and other things, most people prefer an asset purchase.So when an asset is encumbered, is it the responsibility of the seller to disclose that? How are you going to manage any UCCs or encumbrances against an asset you intend to purchase? We get these questions a lot, and this is part of the reason its so important to work with the Watkins Firm in any business asset purchase transactions. In some cases, we provide for what we call carve outs or clauses in the agreement where the money comes in, goes into an escrow account, whether it’s our attorney trust account or an actual commercial escrow company, like Chicago Title or First American Title. And then you put escrow instructions in and say, ‘okay, when the money comes in, the escrow officer’s instructed to pay off this creditor or that creditor,’ or you also have a carve out, you’ll enter into a new agreement with the vendors or the creditors to keep doing business with them. So all those types of things need to be carefully considered and well documented in the purchase contract when you do an asset purchase.
By the way, it’s harder to be a buyer. It’s easy to be a seller. A buyer has the more challenging tasks in an asset purchase transaction. The buyer gives money and the buyer has to verify what they are receiving in return. And that’s when we come up with a term called schedules, depending on how expensive or, large a transaction is, you’re going to have more schedules. For example, you have your real estate schedules, you’ll have a disclosure by the seller of what they own and all the contracts they’ve signed with respect to real estate. You’ll have equipment schedules and they’ll be listed and the seller will have to make disclosures, and you’ll have cash value, and you’ll have accounts, and good will, and taxes, and all the things that you want to do as a buyer in an organized fashion to review. First, you want to make sure you know what you’re getting, and second, you want to make sure you get representations from the seller that ‘this is what I’m selling you’ in case later on, it turns out they weren’t telling the truth.
There’s no guarantees, but we’re always working to protect our client’s interest in a timely, efficient manner. And that’s why some buyers will want to spend a bunch of money. Making sure they have complete due diligence done by our attorneys and CPAs and other professionals, and other buyers who have been in the business and know the other company pretty well. Our clients don’t want to waste money or overspend on investigating and researching, and we don’t either. But we want to make sure our clients can have confidence in what they’re buying.” – Dan Watkins, Founding Partner
Reduce the Risk and Increase the Benefits of an Asset Purchase
It is important to take every step possible to balance the risks and benefits of an asset purchase in San Diego or anywhere in California. Ask for a free consultation or efficient review of the transaction before signing any asset purchase agreement.
We invite you to review our podcast Episode 13 – Mergers and Acquisitions as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.
Learn more about how we can help you to acquire the assets you desire while protecting you from associated risks and liabilities.
