What A Buyer Buys…when you Buy a Business
**For discussion purposes only.
This is NOT legal or accounting advice.**
The vast majority of business purchases are defined as “asset” purchases. On some occasions a buyer will actually buy the stock of the corporation. For our purposes here we will outline an Asset Purchase transaction.
An asset purchase is a method of acquiring a business that specifically identifies the assets and liabilities that the buyer is purchasing or assuming. Most business owners own their assets inside of a corporation and the business owner actually owns the Stock in the corporation, and does not own the assets directly. The corporation owns the assets and the business owner owns the stock. A buyer typically forms their own legal entity (LLC, S corp, etc) to purchase the assets from the seller’s corporation.
There are two types of assets that are commonly purchased:
- Typical Tangible Assets: Inventory, equipment, machines, vehicles, furniture, computers, fixtures, etc
- Typical Intangible Assets: Business name, goodwill, customer lists, contracts, non-compete agreements, phone numbers, websites, trained employees, etc
Asking prices normally include all the Tangible and Intangible business assets (unless otherwise identified) used by the business except:
- Cash and cash equivalents on hand and in checking or investment accounts
- Accounts receivable
- Prepaid items and deposits
- Any items in the seller’s corporation that are not used by the business (ex., personal cars, vacation homes, etc.)
Business Debt Liabilities, unless specifically identified otherwise, are the responsibility of the seller. Typical liabilities retained by the seller are:
- Accounts Payable and all debts
Liabilities typically assumed by the buyer in an asset purchase:
- Facility Lease – most buyers want the business to remain in the same location and will want to have the facility lease put in the buyers name.
- Any contracts where the future benefit goes to the buyer. For instance, Yellow Page Advertising may be an annual contract to be paid monthly. Buyer would assume remainder of contract payments due after closing. Orders from customers, obviously the buyer wants to keep those sales.
- Often times the business has leases for equipment that the buyer will need to assume. These leases are common. The most common are the facility lease and a postage machine lease but there are many others: Brake machines in auto shops, printing presses in print shops, vehicles in delivery businesses, etc.Buyers should make certain they understand what assets they are buying and what liabilities they are assuming. Buyers should make certain that any liabilities to be assumed or assets not included are clearily identified prior to or at closing.
Sometimes the owner of the business corporation also owns the real estate personally and the corporation pays rent to the owner. This appears to be moving money from one pocket to another but is often done for tax purposes. When the real estate is available for sale from the same owner as the business it should be identified. Should buyer purchase the business and the real estate under these conditions the transaction will actually appear to be two transactions. Concurrently buyer would buy the assets of the business from the seller’s corporation and purchase the real estate from the seller personally.