À la Carte Takeover: The Basics of an Asset Acquisition
- November 3rd, 2014
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When tackling most problems, two heads are better than one. The same is often true in business. When one company takes over the business of another company, a sleeker more efficient business model can result. Below is a discussion of the essential terms of an asset acquisition, which we have distinguished from mergers and stock acquisitions.
Three Most Popular Options:
The three most common ways to acquire another business are by merger, stock acquisition, and asset acquisition. Merger is like marriage; two companies become one and they both acquire all of the other’s baggage—for better or for worse. Stock acquisition is when one company buys enough stock in a corporation, that the company becomes the controlling shareholder and can run the business of the corporation. Both merger and stock acquisition entail the acquiring business to become responsible for all of the assets and liabilities of the other company. The acquiring company gets all the “good,” but they also get all of the “bad.”
In contrast, asset acquisition is when a buyer acquires specific assets of a seller company. This enables the acquiring company to take over specific streams of commerce or components and avoid redundancy in assets. Due to the customization, asset acquisition is the most complex of the three.
Assets can be tangible like inventory or can consist of supply or customer contracts. Unlike the other two methods of taking over a business, asset acquisition does not require the buyer to acquire all of the seller’s assets and liabilities. Instead the two companies make an asset acquisition agreement. The buyer only acquires the assets and liabilities specifically named and agreed to in the acquisition agreement.
There are many steps in executing an asset acquisition, but there are two components that are particularly important: Due Diligence and Disclosures.
An important part of preparing for the negotiating of the asset acquisition agreement is due diligence. The purpose of the due diligence is for the buyer to learn about the seller’s business and to determine relevant issues to the acquisition.
Issues often involve the fact that not only must the agreement identify each asset to be acquired, but each asset and liability must be transferred separately. For example, transferring real property requires transferring the deed, transferring a contract may require assignments or assumptions, and transferring other property requires transferring title.
A holistic approach should be used while crafting an asset acquisition agreement. You need to keep an eye on the entire system, while also zooming in on making sure that all the smaller parts work. An effective business model is like a chain, if one of the links is not transferred, the acquiring company is missing that link and the chain falls apart. Due diligence is the process of taking inventory of the each of the links in the chain.
Within the asset acquisition agreement there is a disclosure schedule. The disclosure schedule is the fine print of an asset acquisition agreement. In the asset acquisition agreement the seller makes certain promises to the buyer about the assets being transferred. Disclosure schedules are useful because they provide information to the buyer about the assets and liabilities and they detail exceptions to the promises about the assets. Disclosures are important because any information included in the disclosure is deemed to have been provided to the buyer. Thus, it protects the seller from the buyer claiming that the seller misrepresented the asset.
In the end this elaborate process pays off. Because, while mergers and stock acquisitions are like purchasing a fully furnished house, an asset acquisition is like an estate sale, where the buyer and seller can pick and choose what goes and what stays. This gives both parties a lot of flexibility and room for both parties to arrive at creative solutions.
If you have questions regarding this article, or any other business needs, please do not hesitate to contact Matthew Wagoner at Wagoner | Selchick, PLLC for a free consultation. Matthew can be reached at [email protected] or (518) 400-0955.
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