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What is an Asset Sale and How Does it Work?

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An asset sale is where you sell some of your business’ assets to a third party. Such assets can include tangible assets such as equipment and inventory and intangible assets such as goodwill, intellectual property (IP) and customer lists. This article will explain an asset sale, how it works in practice and the steps you can take when selling your business’ assets.

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Asset Sale vs Business Sale

A business sale agreement involves an entity selling all other assets it needs to carry on its business. An asset sale agreement involves an entity selling certain assets only. Generally, you can still carry on your business following an asset sale because you are only selling specific assets. For example, a rental car company may sell a group of cars via an asset sale contract. The sale of the rental car business itself would involve a business sale agreement under which it would sell all of its assets (or at least all of the assets needed to operate the rental car business).

How Does an Asset Sale Work?

In an asset sale, you retain the business’ legal entity and only sell some of the business’ assets. For example, say Sarah runs a printing business that her company, Smith Prints Pty Ltd, owns. She needs to sell a printer to finance and make space for a new state-of-the-art 3D printer. Once Sarah has found the right buyer, she will need to draft an asset sale contract for the printer. However, Sarah can continue to operate the printing business after selling the printer. 

It is common to see a buyer ask for express warranties regarding the asset. Additionally, they will want to ensure that the printer is free from third-party claims or interests, such as the security interest of a financier who financed the asset purchase.

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Asset Sale Considerations

You can sell most of your business’ assets using an asset sale, whether tangible or intangible. For example, you can use an asset sale contract to transfer assets such as:

It is essential also to consider the tax implications of selling some or all of your business assets. Again, the effects vary depending on your circumstances. Hence, obtaining tax advice is crucial.

Asset Sale Agreement

Once you find a purchaser to buy the selling assets, you must formalise the sale in writing. Generally, the parties will negotiate the key commercial terms and include these in a document called heads of agreement

Be alert to whether or not the heads of agreement are binding. The language used in the agreement and the parties’ intentions are typically indicated by the language used.

Key commercial terms include:

  • the vendor and purchaser’s details;
  • the purchase price deposit and apportionment of sale;
  • payment terms;
  • timeline of the sale;
  • restraint of trade; and
  • a detailed description of the assets.

After agreeing on the key commercial terms of the sale, you need to make sure you understand the contract and ensure it includes all aspects of the sale, as it is final. Aside from the key commercial terms, you should:

  • ensure the agreement outlines all of the assets for purchase;
  • understand that the purchaser may undertake due diligence;
  • include warranties and indemnities for the assets, for example, warranties may include the assets being in good working order and being free from any encumbrances; and
  • include any special conditions you have agreed to, such as transferring any licences necessary for the business to operate.

Key Takeaways

An asset sale occurs when you sell some of your business’ tangible or intangible assets instead of selling the entire business under a business sale agreement. It is common for entities to sell their assets, and you must have a well-drafted asset sale agreement to ensure a smooth transfer and minimise risks. 

If you would like assistance with an asset sale, our experienced business sale lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. So call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

Does the purchaser have to take on my existing employees?

A purchaser is not obligated to take on your employees in a business sale. Whether you will transfer your employees to the purchaser is something you will need to negotiate with the purchaser. If the purchaser is not taking on your employees, you will generally need to pay your employees redundancy payments.

Can the purchaser try to restrain my future activity?

Nothing expressly prohibits the purchaser from negotiating a restraint of trade clause into the business sale agreement. Whether a restraint is necessary will depend on the nature of the asset sale, industry and whether you are in a position to compete with the purchaser once you have sold the assets. A typical restraint clause will prevent you from competing with the purchaser within a geographical limit and for a fixed period. Whether a restraint is enforceable is a question only a court can determine, and the purchaser will have to demonstrate the restraint protects a legitimate business interest.

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